OCA - Oceania Group - retirement villages

[Ferg]

Ferg replied at the time that the likes OCA is using 'discount rates' to measure the values of future cashflows, where as those other property companies that were using 'capitalisation rates'. So Lyall's spiel is not applicable to retirement villages. I am afraid I do not fully buy that argument. All of these valuations come down to cashflows anyway. So whether you choose to:

a/ discount the cashflows to get a representative present day earnings stream or
b/ capitalise them to get a representative present day asset value,

These two techniques are really two sides of the same cashflow coin (is how I see things anyway).

I thought I gave you this link at the time:
https://propertymetrics.com/blog/dif...discount-rate/
If you still think a cap rate and a discount rate are the same thing, then you are barking up the wrong tree.

[ronaldson]

The prospects of interest rate cuts in short order is getting increasingly diminished. Bad data today, from the RBNZ's point of view.

All things equal domestic asset prices will stay under pressure for longer.

The problem for both the RBNZ and the new Government is that turning the "ship" around takes longer than the proverbial 100 days, and the real achievement of then travelling in the new intended direction takes significantly longer than that. It is human nature to underestimate the timeline and effort involved in the implementation of better policy, and the "lag" effect inherent.

So I agree the likelihood of near term interest rate reduction is much slimmer than the optimists calculation. The media are guilty here of misjudgement, raising expectations of early relief on behalf of borrowers under stress, when the evidence is less than compelling and the narrative is actually counterproductive.

[winner69]

I thought I gave you this link at the time:
https://propertymetrics.com/blog/dif...discount-rate/
If you still think a cap rate and a discount rate are the same thing, then you are barking up the wrong tree.

I think Snoops knows full well what the difference …..if he appears confused it’s probable because Oceania themselves confuse the issue by not being that clear in their reporting ….one gets the impression that ‘discount rate’ and ‘capitalisation rate’ are interchangeable

[Daytr]

Aye, and with a bunch more developers going bust or on the verge of…

Just so expensive to build now, and high interest rates acting like gravity on asset prices, reducing demand etc.

You can get a sense of why retirement villages are priced in a way that may appear statistically low.

The more developers go bust, the less supply, which will see houses prices rise more than they would of.

[bull....]

OCA would use a discount rate

[winner69]

OCA would use a discount rate

You’d think so but it appears as if care suites are on cap rates

They not very clear when explaining things

[Balance]

The more developers go bust, the less supply, which will see houses prices rise more than they would of.

Not that simplistic.

Developers go broke because of the weak state of the market (poor sales and low demand) and/or they have overpaid (like OCA) for land & development costs are too high.

Land becomes cheaper as is already happening out there. Next lot of developers take over.

Many tradesmen out there now desperately looking work on the next project so they are starting to reduce their rates.

[mistaTea]

Not that simplistic.

Developers go broke because of the weak state of the market (poor sales and low demand) and/or they have overpaid (like OCA) for land & development costs are too high.

Many tradesmen out there now desperately looking work on the next project so they are starting to reduce their rates.

Yeah, the reduction in supply ‘should’ over time sort itself when it hits an equilibrium with demand.

But none of this happens over night. And right now development costs are only going up and up.

Nobody knows how long the pain will last for, which is probably why Mr Market has set the market caps of companies like OCA the way it has.

Doesn’t mean OCA is a bad investment. But it does mean that you are likely paying a fair price for any shares you buy now, given the macro environment and the amount of uncertainty.

[Snoopy]

I thought I gave you this link at the time:
https://propertymetrics.com/blog/dif...discount-rate/
If you still think a cap rate and a discount rate are the same thing, then you are barking up the wrong tree.

Thanks for the link Ferg. I may have been a bit loose with my terms in some posts. So, just to make sure everyone is on the same page here, I will expand a bit on how I use these terms

The 'capitalisation rate' is defined as the current year's yield on investment in that reference article. It is implicit in that definition that 'capitalisation rate' is a no growth earnings assumption, because you are only including earnings for one year. But what happens when the rent income goes up (or down)? That means the capitalisation rate goes up (or down) in sympathy with the rent income being adjusted. To me this means the 'capitalisation rate' as defined in that article is not that useful..Because I want to know how a property will perform over a business cycle, not just over one year. A one year snapshot could be a freak event or it could be typical. It is always dangerous taking a sample of 1. You just don't know. I would prefer to use the term 'current yield' over 'capitalisation rate'. But that is a side argument to my point.

I am much more interested in the 'business cycle yield', which incorporates a sample of 'capitalisation rates' over many years. Thus when I work out a capitalisation rate I still use a single number. But it is an average number, typically worked out over five years in my case. I realise playing loose with the definition of 'capitalisation rate' in this article will irk some people. But I am much more interested in a definition that is useful for business valuation purposes, rather than pandering to some textbook scholar. I am still using essentially the same concept though: Assuming a fixed income that does not change. All I am doing is picking a different (and I would say more realistic) fixed income number.

Right, so we have established I am using a fixed income number. How valuable that income is to me is a judgement call. Again I tend to look across the business cycle when making these judgements. For I good quality commercial property with a stable tenancy my 'happy yield' number is 7.5%. I need to emphasise I am not making out that this 7.5% is some kind of grand key number that I expect everyone else to accept. Whether readers agree or disagree with me, that is fine. We can all choose our own return rate that we find is acceptable. But for me if I can find a high quality property company that gives me a gross yield of 7.5%, then that ticks the box. So if we have a representative dollar income in dollars, and an acceptable yield in percentage terms, then we can 'capitalise' that income to calculate a price we would be prepared to pay to acquire that yield, thus:

(Representative single year income) / 0.075 = 'Capitalised Property Value'

'Capital', to me, has the connotation of a fixed asset and the 'Capitalised Property Value' is the number measuring the value of that fixed property asset. However the term 'Capitalisation Rate' is, according to the definition in the article, a term for income, which I think is confusing in this context. So why call it 'Capitalisation Rate'? Just call the number 'Current Yield', then everyone knows what we are talking about.

SNOOPY

[winner69]

Yeah, the reduction in supply ‘should’ over time sort itself when it hits an equilibrium with demand.

But none of this happens over night. And right now development costs are only going up and up.

Nobody knows how long the pain will last for, which is probably why Mr Market has set the market caps of companies like OCA the way it has.

Doesn’t mean OCA is a bad investment. But it does mean that you are likely paying a fair price for any shares you buy now, given the macro environment and the amount of uncertainty.

And banks now worried about the reckless lending they did a few years ago when rates were low