The intricacies of valuing a retirement village

The writer is fortunate to have access to accumulated information, having been in the industry for more than 30 years, and working with various stakeholders such as bankers, buyers, sellers, investors, brokers, researchers and many others. Given this accessibility to relevant and practical information, sensitised for confidentiality, some general guidelines and notes can be shared as to the valuation approach and methodology to be used in valuing the frail care, food and catering, and assisted living units within a retirement village.

When valuing a frail care within a retirement village, the following will generally be considered influential on the final value:

  • The profits or accounts method of valuation is suggested for frail care valuations and includes reviewing:
    • The gross monthly rental/income per bed; and
    • The operational costs; which delivers
    • The net income;
    • The net income, in turn, is divided by the amount of beds, delivering a profit per bed ratio that is capitalised at an asset specific market rate;
    • The minimum monthly bed rate tend to vary depending on the risk and projected bed occupancies;
    • A feasible frail care facility normally consists of a minimum of 25 beds.
    • Generally, the facilities are leased from the landlord by a management company who runs it;
    • An interesting phenomenon in this industry, practised by developers, is to use frail care facilities as a drawing card for initial potential residents. For example, a developer after having developed a track of land into a retirement village, will market the living units with access to the frail care facilities at a reduced bed rate. This deal is offered to the first generation of residents in order to induce them to buying into the retirement village. During the first number of years and until the first generation of residents passes away, the frail care facilities will run at a business loss. The second generation of residents moving in, will pay the full frail care rates and from then the frail care unit will start delivering profits;
    • Given this subjective business arrangement, sometimes Council over-values frail care facilities in the first few years of operation. For example, we have successfully motivated and reduced the municipal valuation of a frail care facility, for a private client, from R 12 368 400 to R 1000 based on this subjective arrangement with residents. Council will not always be aware of these arrangements and we can represent investors in their municipal objections and potentially obtain lucrative rates and taxes savings for those initial years of investment.

Forming part of the frail care service offering is food and catering for the residents/patients. When valuing the food and catering business, the following will generally be considered and influential on the final value:

  • The profits or accounts method of valuation is suggested for the food and catering unit and includes reviewing:
    • Revenue, cost of sales and gross profit per plate of food; and
    • Rent payable for the kitchen facilities among other expenses; which delivers
    • The net profit per plate of food multiplied by the amount of plates per annum and divided by a market related yield to deliver the final value.
    • Yields for these enterprises tend to vary between 10%-13%;
    • Allowance is also to be made for common area rentals;
    • Kitchen equipment can often be on lease, this should be noted in the valuation.

Finally, there is the assisted living business unit within a retirement village:

  • The general idea is to purchase a life right and not a residential unit i.e. purchasing the use of the unit until the resident passes away;
  • The original purchase price is repayable on death;
  • The retirement village receives the capital growth on the resale of the residential unit i.e. the difference between the original purchase price and the present day selling price which is considered a future payable rental;
  • For the resident to share in the medical benefits of the frail care facility, a monthly levy is payable;
  • The residential units tend to be, on average, 30m² in extent.

Business knowledge as well as the preferred age group compilation, gender and national health statistics, will assist the property specialist in his or her assumptions and conclusions. Always remember that the quality of the valuation is as good as the data it is based on.

Please contact us for more information.