The retirement sector is the NZX’s second best performing sector this year with a return of 50% compared with 22% for the NZX Gross Index. The retirement sector consists of Ryman Healthcare, Metlifecare and Summerset which are up 54%, 36% and 60% respectively. The IT stocks are the best performers with Xero and Diligent up 132% and 129% respectively.
What has driven such strong performance from retirement stocks this year? The major drivers have been the retiring baby boomer population, strong house prices and the relative attractiveness of this sector compared with other NZX stocks.
As New Zealand’s baby boom population reaches retirement years a wave of demand is expected to hit the retirement village industry. The number of people over the age of 65 is expected to increase from 600k in 2012 to around 1,200k by 2036. This wave of demand makes for an attractive long-term outlook for retirement village operators.
In conjunction with a positive long-term outlook the current environment is constructive. NZ house prices have risen 5.8% since October last year which has both immediate and longer term benefits for retirement companies. The immediate benefit is greater village unit sales volumes as retirees use the strong housing market to sell their homes and fund the purchase of retirement village units. The longer term benefits include the ability of retirement village operators to raise their retirement village build rate, an increase in gain on resale of retirement units due to higher prices and increased management fees (which are typically charged as percentage of the unit sales price).
Continued strength in the housing market can underpin earnings growth for the next three to five years due to the nature of unit resale gains and deferred management fees.
All three retirement operators have reported strong sales volume of both new and existing units and this has given them the confidence to increase the build rate. Ryman has increased its build rate from 550 units per annum to 700 and this week Summerset increased its target build rate for 2015 to 300 units per annum from previously guided 250 units per annum by 2016.
The New Zealand economy remains subdued as it struggles to recover from the Global Financial Crisis. This has created a challenging environment for most companies and has made earnings growth difficult for listed stocks. The retirement sector’s attractive long-term outlook and favourable present condition make earnings growth achievable and gives the retirement sector a very attractive outlook relative to other listed companies. As such the market has put a premium valuation on retirement stocks and there has been strong stock price appreciation this year.
William Curtayne
Senior Analyst
Disclosure: Milford Funds own shares in Diligent and Ryman Healthcare on behalf of clients.