CDL & CDI ... Another Great Result

[Beagle]

Snoopy, here is a question for you to ponder to further your education in retirement stocks..
Which development business model has a higher chance of being very successful for its shareholders.
1. Company A buys land and develops houses and sells them once, pays full tax on the profit and all future gains pass to the buyers.
2. Company B buys land and develops houses and sells them over and over and over and over again and over again, clipping a development / refurbishment margin on them every time and all gains stay with company and because its structured as a licence to occupy the company never pays tax on the overall increase in the value of the houses over time.

Which sounds like a better business plan to you mate ?

[Snoopy]

Snoopy, here is a question for you to ponder to further your education in retirement stocks..
Which development business model has a higher chance of being very successful for its shareholders.
1. Company A buys land and develops houses and sells them once, pays full tax on the profit and all future gains pass to the buyers.
2. Company B buys land and develops houses and sells them over and over and over and over again and over again, clipping a development / refurbishment margin on them every time and all gains stay with company and because its structured as a licence to occupy the company never pays tax on the overall increase in the value of the houses over time.

Which sounds like a better business plan to you mate ?

Taking the recent historical viewpoint the answer is 'Company B' obviously.

However, what would happen if:

1/ The appreciation in property prices slowed to the extent that maintenance upkeep costs exceeded the underlying property capital gains into the future? IOW owning a property became a net liability.
2/ The government seeing the tax free status of most the retirement village profits decided to restrict funding to the care side of the business so that retirement villages would be forced to divert some of their 'property profits' to subsidize the care units? (this is already happening now as a result of funding not being available to cover the cost of well deserved pay increases to retirement village carers).
3/ Discretionary movement to an own your right to occupy villa in a retirement village slowed as the price of the retirement village units caught up with the wider property market? IOW those making the move no longer had that incremental pile of capital gain to play with after selling their house on the outside and moving to a retirement village and so put off their decision to move. The effect of this could be that the demand for care units becomes much higher in proportion than the demand for independent living in villas. That could severely impact the profitability of retirement villages.

Under those circumstances, I can imagine a situation where 'Company A' would look better.

SNOOPY

[mfd]

A further point - which business model is likely to attract significant competition, ultimately reducing returns? There are now 6 listed companies chasing model B, each busily growing as fast as they are able, together with numerous private and charitable competitors. I wouldn't want all my eggs in that basket (although I do have a few in there).

[beetills]

Just wondering..would it be worth CDI taking on debt and purchasing large holdings of land for the future eg a dairy farm and continue to run it until needed for developing.
I know they purchase land already but i was thinking large tracts of land.

[Beagle]

Taking the recent historical viewpoint the answer is 'Company B' obviously.

However, what would happen if:

1/ The appreciation in property prices slowed to the extent that maintenance upkeep costs exceeded the underlying property capital gains into the future? IOW owning a property became a net liability. Even during the greatest financial challenge of our lifetimes the GFC, Ryman's underlying profits still went up every year.
2/ The government seeing the tax free status of most the retirement village profits decided to restrict funding to the care side of the business so that retirement villages would be forced to divert some of their 'property profits' to subsidize the care units? (this is already happening now as a result of funding not being available to cover the cost of well deserved pay increases to retirement village carers). Allready happening to some extent as you point out but I don't think its the major drain on profitability you imply.
3/ Discretionary movement to an own your right to occupy villa in a retirement village slowed as the price of the retirement village units caught up with the wider property market? IOW those making the move no longer had that incremental pile of capital gain to play with after selling their house on the outside and moving to a retirement village and so put off their decision to move. The effect of this could be that the demand for care units becomes much higher in proportion than the demand for independent living in villas. That could severely impact the profitability of retirement villages. Illogical that this would happen as ostensibly construction costs for either a retirement unit or a house are not dissimilar and retirement units are generally considerably smaller than people's houses, i.e .a natural downsizing usually occurs as part of the shift

Under those circumstances, I can imagine a situation where 'Company A' would look better.

SNOOPY

Of course if all the planets line up against model B they will do worse but on the balance of probabilities the point I am making should be clear enough for anyone with their head screwed on that's thinking objectivly

[percy]

Snoopy, here is a question for you to ponder to further your education in retirement stocks..
Which development business model has a higher chance of being very successful for its shareholders.
1. Company A buys land and develops houses and sells them once, pays full tax on the profit and all future gains pass to the buyers.
2. Company B buys land and develops houses and sells them over and over and over and over again and over again, clipping a development / refurbishment margin on them every time and all gains stay with company and because its structured as a licence to occupy the company never pays tax on the overall increase in the value of the houses over time.

Which sounds like a better business plan to you mate ?

Can't be put any simpler than that.

[Beagle]

Can't be put any simpler than that.

The real secret is that every time Company B clips the ticket its on the higher updated capital value thereby creating a virtuous circle of ever increasing wealth for shareholders.

[Snoopy]

Illogical that this would happen as ostensibly construction costs for either a retirement unit or a house are not dissimilar and retirement units are generally considerably smaller than people's houses, i.e .a natural downsizing usually occurs as part of the shift

Yes, but most people would not move from a brand new three bedroom house to a brand new two retirement village bedroom unit. You might be surprised by how many people downsize from their quarter acre section bungalow and end up paying all their proceeds towards a smaller brand new house on half the land.

Of course if all the planets line up against model B they will do worse but on the balance of probabilities the point I am making should be clear enough for anyone with their head screwed on that's thinking objectively

'All the planets lined up' against? I could imagine a much worse case for retirement village operators than the one I outlined. A case where property values fall and the retirement company starts to stack up a future depreciation bomb: a spectre of future losses , a collection that would be realised some years down the track when the losses on those 'licences to occupy' were forced through at a low price at sale time.

I first looked at Ryman around the year 2000 and decided that it might be worth looking into once the crazy Auckland property market settled down. Eighteen years later the correction came, although it wasn't really a correction in my book. How long do you think Auckland property prices can keep rising Beagle? Relative to incomes we are about the highest priced property market in the world already. I don't think we can get away without a proper price correction in NZ soon.

SNOOPY

[Beagle]

I would argue that we have probably lived through the greatest financial challenge of our lifetimes, the GFC which unquestionably was the biggest challenge to the financial system, including housing since the great depression. As I have said before, RYM grew underlying earnings throughout the GFC when property prices went backwards.

The model as I have succinctly spelled it out for you works Snoopy. Its not about Auckland prices, its about the national average because the best retirement companies invest throughout N.Z.

If you're determined to see the negatives and risks, that's what you'll see.

[Snoopy]

I would argue that we have probably lived through the greatest financial challenge of our lifetimes, the GFC which unquestionably was the biggest challenge to the financial system, including housing since the great depression. As I have said before, RYM grew underlying earnings throughout the GFC when property prices went backwards.

The model as I have succinctly spelled it out for you works Snoopy. Its not about Auckland prices, its about the national average because the best retirement companies invest throughout N.Z.

If you're determined to see the negatives and risks, that's what you'll see.

I would contend that with the rise in national average prices outstripping Auckland over the last few years, this is a symptom of Auckland prices having hit the ceiling. A neighbour of mine with a young family recently moved from Christchurch to Auckland. He is currently paying $590 per week to rent a three bedroom house. If my maths is right that equates to:

$590- x 52 = $30,680 per year.

If his average tax rate is 25% he will need an income of:

$30,680/ 0.75 = $40,906

just to pay his rent. Now factor in 'luxuries' like filling up the car to drive to work, paying for food, and power and I wonder what sort of income he needs to earn to survive? The answer will no doubt go up with another little one on the way. This is the reality of the working man in Auckland Beagle. This fellow is congenial, hard working but not particularly well qualified academically. He was working as a senior storeman in the firms Christchurch branch before he was sent up to Auckland by the firm. Needless to say he is already plotting his return down south!

Yet you still see house prices in general rising further in Auckland? House price average rises that have been driven in the past by building larger houses, financed by lower and lower interest rates? You think this trend can continue indefinitely just because we came through the GFC when I should remind you house prices were materially lower, particularly in Auckland, than they are today? I guess those of you who live in Auckland can't see the inevitable? You are like frogs in a slowly warming pot. Can you not see the wisdom for other people in jumping out before it boils? Not everyone in Auckland lives in a multi-million dollar mansion.

I think the lower profit model of CDI is looking much more sustainable into he future than the retirement village model who have for too long relied on free loans by their licence to occupy holders to fund their capital growth. It works if the property market keeps growing. But what happens if it doesn't?

SNOOPY