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Investing

Why Are Retirement Village Stocks So Cheap Right Now?

Retirement village stocks in NZ are notably cheaper than their previous highs despite announcing positive results.

In my opinion there are a few reasons for this, which I will explore in this article.

Firstly the OCR increases have meant that the Risk Free Cash rate has increased, so sticks need to earn a higher yield to earn their valuation. In layman’s terms, you can get a higher return for your money in the bank, so stocks need to be cheaper to lure you to buy them.

Secondly, inflation has increased building costs, which affects retirement village company’s ability to grow. Again, this negatively affects the stock price.

Thirdly increasing OCR increases borrowing rates. This is a problem for what is essentially a property development company. As anyone with experience in the rental property industry knows, the whole thing is built on debt. Borrowing money, acquiring property and selling or renting it out to cover the cost of borrowing, then using the equity in the property assets to borrow more money is the game. Increasing those borrowing costs affects growth rates and more importantly adds business risk.

Lastly (and possibly least importantly), the increasing OCR has increased mortgages, which has decreased the price of houses. This means that retirement village unit’s prices must decrease, meaning revenue could drop. Naturally, this risk causes retirement village stock prices to drop.

With inflation failing to abate, more OCR increases seem likely, which could put further downwards pressure on retirement village stocks.

As usual, I’ll be waiting for the right time to reenter this market, but it doesn’t suit me to do so yet.