There’s gold in housing the old
PUBLISHED : 13 Apr 2011 11:42:57 | Anthony Sibillin
Housing choice: Lifestyle Communities’ James Kelly says demand is growing strongly.
Since appearing on the BRW Fast Starters list in 2008 Lifestyle Communities has “stuck to its knitting”, according to co-founder and managing director James Kelly.
The Australian Securities Exchange-listed builder and manager of units for the over-55s market in Victoria was rewarded with a near-tripling of revenue to $24 million between the 2006-07 and 2009-10 financial years.
The bottom line is now on a tear, with pre-tax profit up 43 per cent in the first half of 2010-11.
But Kelly, who ran one of the country’s biggest house builders, Dennis Family Corporation, before starting LC with financier Bruce Carter and information technology executive Dael Perlov eight years ago, admits the Melbourne-based company is knitting with fewer needles than he anticipated having before the global financial crisis.
By constricting the flow of fresh loans to LC to buy land and build units, the crisis has pushed out Kelly’s target of 2500 units under management or development from 2011 to the middle of the decade.
“We weren’t able to have an acquisition strategy,” Kelly recalls. “Now, as the debt market starts to ease up a bit, we are acquiring new land again.”
Because banks are still reluctant to lend LC the full whack, it is having to acquire jointly with others.
For example, the land beneath a 219-unit development in Cranbourne, in Melbourne’s outer south-east, is owned by a joint venture with its previous outright owner.
The same is true of LC’s newest development in the south-eastern suburb of Chelsea.
While the GFC slowed the supply of new units, the demand for them from baby boomers remained strong throughout, Kelly says.
LC’s innovative land lease model is one reason.
Under the model, residents own their unit outright but lease the land beneath it.
This slashes the upfront cost of a unit in one of LC’s four existing outer-Melbourne villages to between $220,000 and $340,000 – which makes them within reach of the 800,000 over-65s with less than $450,000 in funds.
“Being at the most affordable end of the market always helps,” Kelly says.
“When things get hard, you tend to inherit people from higher price-brackets.
“LC’s older, outer-surburban target market were also less affected by the crisis’s decimation of superannuation savings exposed to the sharemarket.
“I don’t think the [global crisis] had as big an impact on people in the outer suburbs and regions of Victoria. They still owned the house and still got the age pension.”
The age pension, because it funds the land lease fee for many residents, is critical to LC’s business model.
The weekly fee for a couple in the established Brookfield village west of the Victorian capital is almost $160 a week (or just over $100 for those eligible for rental assistance).
Lifestyle Communities also makes money when a resident (or the executor of his or her estate) sells up. The exit fee is 4 per cent of the sale value for every year of ownership, up to a maximum of 20 per cent.
If this sounds steep, Kelly insists it “aligns” the interests of LC and residents and avoids the running down of units found in North American villages that do not charge an exit fee.
In the meantime, LC is benefiting from one of the country’s hottest property markets as rising Melbourne land and property values generate paper profits for shareholders.
But Kelly insists low debt, combined with a business model that trades off development profits (LC makes little, if anything, on the sale of new units) for an ongoing revenue stream, means the company is not dependent on frothy property markets.
“The land lease model has really proven itself,” he says.
“We don’t necessarily make money on the units. Our aim is to deliver them at a price point that works within the constraints of what our customers are selling their existing homes for.
“Instead, we are getting access to an annuity income stream.”
While putting off for now earlier plans to expand into Tasmania and South Australia, Kelly says the ageing of just Victoria’s population means there is “plenty to keep us more than busy for the next five to 10 years”.
As well as sticking to the knitting and not over-borrowing, Kelly advises aspiring entrepreneurs to listen closely to customers.
“Research your customer. Learn from them,” he says.
“We’ve put that into our model and into our villages, and adjusted our model and approach accordingly.”
BRW
Anthony Sibillin
ContributorMelbourne
Anthony Sibillin is a reporter with the Australian Financial Review and has worked as a business journalist in England and Australia. He has been an adviser to government on budget policy and to commercial and government clients on infrastructure projects.
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