Has Aveo Killed The Golden Goose?

Has Aveo killed the Goose that lays the Golden Egg?

Recent ABC 4 Corners presentation and Fairfax media articles drew attention to problems within the retirement village industry and highlighted issues within some Aveo villages. Since these presentations aired there has been public outcry for reforms with state governments, regulators, and even the commonwealth government making noises about immediate and long term reforms to the industry. Ongoing fees, complex contracts and the complexity of the Deferred Management Fee calculations have now come to the attention of legislators through television, newsprint, and the public response to them.

The focus on the industry has been so strong that welcome reform may now come to the Deferred Management Fee model used by most retirement village operators. The Deferred Management Fee model of retiree living was initially designed for charitable groups where residential accommodation for retirees was made available at an entry cost below general values, the deferred payment being part 2 of a two step payment plan. The concept works well so long as retirees obtain accommodation at an initial cost well below market values. Today the DMF model is still used but retirees now pay an entry amount more commensurate with a purchase price but without obtaining ownership of the property.

In 2007 a House of Representatives Committee report into Older people and the law recommended that the matter of exit fees be fully reviewed including consideration as to whether they should be abolished. In light of current industry revelations and how far the Deferred Management Fee model has moved from the original çharity organisation concept, it is clear an opportunity was missed by legislators and regulators to improve protections for retirement village residents from as far back as 2007.



 

The amount of attention drawn to the plight of Australian retirees in retirement villages by the Aveo exposure begs the very question, why the deferred management fee model is still permitted given the accelerated transfer of capital value from retirees to operators as a result of this model.

Australia generally uses the well understood property ownership or property rental models, both these models of residential accommodation deliver dramatically better financial outcomes for retirees.



The table below quantifies the capital value lost by the retiree and the capital value gained by the operator in just one 7 year occupancy period. Just one unit in one village plus the operator has the capacity to repeat this scenario over multiple occupancies of this one unit during the life of the village. The average occupancy of a retirement village unit is around 8 years.

The Deferred Management Fee model is truly the goose that lays the golden egg for the retirement village industry.

The following table quantifies the options for a retiree of staying in the family home or renting residential accommodation and compares them to entering a retirement village using the deferred management fee model. The numbers speak for themselves but of course each retiree has to consider issues outside of just dollars and cents when giving consideration to entering a retirement village. The tables show that there is a substantial cost to living in a retirement village beyond just the entry price. Many retirees who have entered retirement villages now consider this cost to be far too high and claim they and/or their professional advisers were unable to identify these punishing impacts before entering.



 

SUMMARY.

The question for legislators and regulators is:

• 
  

  Continue to make reforms to retirement village legislation, regulation, contractural, explanatory information, consumer protections. Reforms made in the hope that retirees will eventually identify the impacts of the deferred management fee model and the sizeable negative impact it will have on the value of their capital base.

  
  


• 
  

  OR

  
  


• 
  

  Create retirement villages that are the same as any other residential accommodation where you either buy it to own outright or you rent it. A residential accommodation model already fully understood by the great majority of retirees with existing legislative and regulatory frameworks and consumer protection mechanisms.

  
  


• 
  

  OR

  
  


• 
  

  Totally reform the current legislative framework that facilitates the deferred management fee model while at the same time prohibiting the rental of retirement accommodation within a legally defined retirement village.

  
  

 

Macquarie Uni Launches RV Calculator

22 AUGUST 2017

MACQUARIE UNIVERSITY LAUNCHES NEW RETIREMENT VILLAGES CALCULATOR

Official News release:-

"The challenges of comparing the cost of retirement villages will get much easier with today’s launch of Macquarie University’s retirement village calculator, the first of its kind in Australia.

The free calculator, available at www.rvcalculator.org takes the complex range of fees (entry fee, ongoing fee, exit fee) and calculates  simple ‘equivalent monthly rent’ for the years of residence, simplifying an often-complex fee structure and helping consumers to easily compare the costs of different retirement villages.

Dr Tim Kyng from Macquarie University developed the retirement village comparison calculator after a frustrating experience when endeavouring to assist his mother in choosing between retirement villages, identifying a genuine need to highlight to consumers the size of the cost differences when comparing villages.

“It is important that consumers are able to compare the cost of retirement housing, as well as the facilities and the social environment. To help comparison shopping, consumers should be able to get key cost information in clear language, when they are first looking around. Some retirement villages are withholding key cost information or only giving it in complex documents."

“As an expert in complex financial products, I didn’t expect to struggle to analyse retirement village contracts. I found great variation in the entry fees, ongoing fees and particularly the “deferred management fees” or exit fees across the retirement village industry,” said Dr Kyng.

Users of the calculator will need to input the retirement village’s ingoing fee, ongoing fee and outgoing fee as well as information regarding the sharing of profits or losses on the resale of their apartment. The calculator then analyses this data to provide the user with an easily digestible comparison rent per month.

When comparing two retirement villages in Sydney with an entry fees of $775,000 (village A) and $750,000 (village B) the village with the lower entry fee and lower monthly fee might look cheaper, however a consumer may be shocked to discover it is costing them an extra $1,100 a month over the course of seven years.

Most retirement village contracts are very complex arrangements. Many consumers think it is like buying your own apartment. It usually isn’t, and you don’t own it. Residents only have the right to live there until they become too sick, voluntarily relocate, or die.

“It is difficult and time-consuming to get the details of how the contracts work and even more difficult to compare one with the other. In fact, some operators in NSW demand a $1,000 deposit for the privilege of looking at a contract. They will give you the money back if you decide not to proceed, but it really inhibits comparison shopping.”

Dr Kyng launched the retirement villages calculator at the Macquarie University Lighthouse Series today."

CALC Fair Retirement Campaign

The Victorian Consumer Action Law Centre is asking all Victorians to support their campaign for action on the reforms recommended by the Victorian Legislative Council Standing Committee on Legal and Social Issues.

Victorians are asked to take the link and send an email to Victorian Premier Daniel Andrews seeking his commitment to implementing the recommendations of the Inquiry into the Retirement Housing Sector.

Email the Premier by taking this link:- Email the Premier Daniel Andrews

Industry 8 Point Plan Fails Retirees

Industry 8 Point Plan Fails Retirees - The announced Retirement Village industry 8 point plan fails retirees as it masks the retention of the most powerful of all tools available to the industry, the deferred management fee business model. This deferred management fee business model is the goose that lays the golden egg for the industry. See table below:- Click Here

The retirement village industry 8-point improvement plan and why it fails retirees

• Support nationally consistent retirement village legislation and contracts.


• Retvill.net comment - A singular legislative framework under the auspices of the federal government together with a singular model contract is the only outcome that will truly protect consumers. State governments despite the best intentions of some have succumbed to the slick presentations of the industry and shown a lack of desire to protect retirees from the financial ravages of a deferred management fee business model.


• Ensure there are transparent and easy-to-understand descriptions in contracts of entry pricing, ongoing service fees, reinstatement costs and fees and payments relating to departure, so residents have certainty about the costs associated with living in a retirement village.


• 
  

  Retvill.net comment - Transparency and easy-to-understand descriptions although important are not the primary issue here, the primary issue is the very existence of an entry cost (lease/licence) rather than an outright purchase cost or rental. Service fees, maintenance costs on a property not owned by the village resident, reinstatement costs on a property not owned by the village resident, a 'deferred management' fee effectively paid on entry not on exit, the decimation by inflation over time of the refundable portion of the entry cost. All this permitted by government legislation through a deferred management fee model of residential occupancy for older Australians.

  
  


• Encourage all potential residents to seek independent legal advice before signing a contract, and work together with government and the legal profession to make this happen. We will also encourage potential residents to share this information with family members and trusted advisers.  


• Retvill.net comment - Many, many prospective retirement village residents do seek professional advice. Many lawyers, accountants, financial advisers simply do not have a sound knowledge of the longer term impacts of the deferred management fee business model. Encourage is  a word  chosen by the industry because the fear is the use of the word legislated. It is unlikely any lawyer, accountant, financial adviser anywhere in Australia who understands this industry and the deferred fee model would recommend to a client to proceed without a deep understanding and expectation of the financial consequences.


• Improve training and professional support for village managers, sales people and other staff who engage directly with current and potential residents.


• Retvill.net comment - This area is essential if consumers are to be truly protected, however  mandates are required  from legislators and regulators as self regulation, codes of conduct, in-house industry standards have a poor record.  It It is a relatively simple proposition, is the objective of governments and regulators to protect retirees from the worst aspect of the industry and indeed for some from themselves.. If the answer is yes then the actions should be to truly protect them at all levels. 


• Commit to improve industry village accreditation standards and coverage, and support government initiatives to make accreditation a mandatory requirement for operating a village.  


• Retvill.net comment - Accreditation is an essential element  required in the retirement village industry, the very nature of the deferred management fee business model demands it. The markets for outright purchase of residential accommodation or the rental of residential accommodation are competitive and well understood by all parties. The very weakness of the retirement village industry is the fact that deferred management fee model is so little understood by legislators, regulators, professional advisers and particularly retirees.


• Commit to working with the Australian Retirement Village Residents Association to implement an industry Code of Conduct to set and maintain high standards about the marketing and operation of villages, as well as dispute management procedures for all operators and residents.    


• Retvill.net comment - Sorry but a Code of Conduct simply does not work. You only have to look at the Consumer Affairs Victoria retirement village industry code of conduct and the submissions by retirees to the Victorian Government enquiry into the retirement living industry to see the failure of it. Mandated requirements are a necessity together with a framework for compliance enforcement readily available to village residents.


• Commit to the establishment of an efficient and cost-effective government-backed independent dispute resolution process, such as an Ombudsman or Advocate, for disputes that are unable to be solved at a village level.  


• Retvill.net comment - Together with the removal of the legislated blueprint for the deferred management fee business model this is an essential retirement village industry reform. If the cop on the beat can't or won't enforce the law then a new cop is required. A new cop with the capacity to make decisions in a timely manner and sweeping powers to enforce those decisions. Anything less will be a failure of governments to act in the best interests of their citizens.


• Maintain and strengthen the relationship between industry and the Australian Retirement Village Residents Association to make sure resident issues are clearly identified and addressed.    


• Retvill.net comment - Ideal in a perfect world but sadly we do not live in a perfect world however any stronger relationship between owners/operators and retirement village residents is welcome.  The relationship should be between the industry and the representative body from each state. There should be a mandated annual report from each state body representing retirement village residents to the respective state or a national retirement village ombudsman/advocate as a means of helping to ensure matters raised from grass roots level are confirmed as receiving attention at the industry level.

Nothing in the eight point plan as outlined by the industry will save retirement village residents from the substantial negative financial impacts of the deferred management fee business model.

Until there is a 9 point plan with point 9 outlining reforms to the deferred management fee model, retirees will still suffer the decimation of their capital base as outlined in the example below.


See table below:- 




Industry 8 Point Plan Fails Retirees.

Retirement Industry 8 Point Plan

Retirement Living announced that there has been a meeting between retirement village operators and village resident association leaders, the industry has announced an eight point plan that in their words is "designed to lead to greater transparency and higher standards across the industry"

The 8 point plan can be summarised as:-

• Nationally consistent retirement village legislation and contracts


• Transparent and easy to understand descriptions re the various cost components of living in a retirement village


• Encouragement for all prospective residents to seek independent legal advice


• Improve training and professional support for village managers and sales staff.


• Commit to improve industry accreditation standards and industry coverage and support madatory accreditation.


• Work with Village Residents Associations to implement an industry Code of Conduct.


• Commit to the establishment of an industry Ombudsman or Advocate for disputes that cannot be settled at village level.


• Maintain and strengthen the relationship between industry and the Australian Retirement Village Residents Associations.

Although improvements for retirement village residents is welcome and long overdue the above steps will not change the financial damage done to retirees by the Deferred Management Fee business model.

The table below shows the transfer of capital from a retirement village resident to a develop/operator over a period of 10 years. Not one of the steps in the above 8 point plan will stop this from happening. The missing link in all this discussion about reform in the industry is the absolute necessity to reform or discard the deferred management fee business model.



 

Deferred Management Fee Problem

Deferred Management Fee Problem - Retirement Village operators love the Deferred Management Fee business model and although likely to concede some changes to the industry after the AVEO 4 Corners revelations the likelihood of changes to the DMF model is low.

One of the main reasons there is unlikely to be any changes to the model is that legislators and industry regulators simply do not understand the impact the model has on the capital base of retirees over time.

The table below highlights the negative impact on retirees of the Deferred Management Fee model for retirement villages and the gains in capital value to a retirement village developer/operator.



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Vic Retirement Villages Safety Issue

Victorian Retirement Villages Safety Issue

Safety and Emergency.

Advocate for Retirement Village legislative reforms Mr. Les Scobie claims there is a safety issue for residents in Retirement Villages in Victoria. He states that there is no legislative requirement in Victoria for a retirement village operator to have a safety, emergency plan. Mr. Scobie made this point in his submission (read submission) to the Victorian Parliament’s Legal and Social Issues Committee enquiry into the Retirement Housing Sector.

Safety and Emergency Procedures or lack thereof – The village operator has made it very clear in correspondence to myself and other residents of the
village that in their view they have zero responsibilty to us in the case of an emergency or evacuation  New South Wales has provided greater clarity as to
the retirement village operator responsibilities in an emergency or village evacuation.""

The graphic below shows the NSW Act which places a legislative requirement upon a retirement village operator in the interest of the safety of residents.

Consumer Vic hiding behind fine print?

Advocate for Retirement Village legislative reforms Mr. Les Scobie claims Consumer Affairs Victoria are using the fine print in their booklet Guide to choosing and living in a retirement village to step aside the issue that information in their booklet can and does mislead prospective retirement village residents.

On Page 15 of the booklet Consumer Affairs Victoria makes the definitive statement in regard to the charging of deferred management fees, "how not-for-profit villages improve their services or subsidise maintenance charges" 

Mr. Scobie has lived in a not-for-profit retirement village since 2007 and states that from his lived experience the statement is not correct certainly for the village in which he resides and potentially many others. That the statement led himself and his wife into believing that there would be some financial advantage from a not-for-profit village generally not available from a private enterprise village and this influenced the ultimate decision they made.

On recently advising Consumer Affairs Victoria that the statement is not correct in every case and that it has the capacity to mislead, Consumer Affairs Victoria simply advised that he should have read the disclaimer in their booklet. 

Mr. Scobie stated "I am deeply disappointed that an organisation with a charter such as Consumer Affairs Victoria of protecting consumers would hide behind the disclaimer in their booklet rather than address the issue.  The issue being does a definitive printed statement by Consumer Affairs Victoria have the capacity to or actually does mislead older Australians in their assessment process of which style of village, a for profit or a not-for-profit retirement village, in which to obtain residential accommodation for their retirement years."

Mr. Scobie stated that "even the addition of the word 'some' such as 'how some not-for-profit villages' would make the statement less definitive, provide less opportunity to mislead."

 

Retirement Village but at what cost?

As the baby boomer generation moves through that phase of their lives where they consider their retirement options, many will consider life in a retirement village. In fact governments are incentivising the move to downsizing from the family home with a retirement village well in the frame as one of the options to be considered.

For the boomer generation of property owners where values have increased year on year many will be shocked by the deferred management fee model highly promoted by village developers and favoured by governments and regulators. This deferred management fee model has many features contrary to what this generation has been used to, features unique to this sector of the residential accommodation industry.

Some of these negative features are:-

• Losing up to 35% of the amount paid to enter the village.


• The operator uses the remaining 65% of the amount paid to enter the village interest free until refunded on your departure from the village.


• No ownership only a conditional lease of the property, despite paying an amount commensurate with ownership values of a similar unit within the general community.


• Capital gain provisions are determined by the terms of the contract.


• The payment for all unit maintenance despite no ownership the property.


• The payment for full refurbishment of the unit on departure from the village .despite no ownership the property


• The payment along with the other village residents for the maintenance of the common areas and any recreational facilities despite no ownership the property.

As the industry points out the baby boomers are buying a lifestyle not real estate and whilst this is true the real question is but at what cost to the capital savings of this sector of the Australian population.

The table below takes the example of a retirement village with an in-going cost of $850,000.00.

It clearly shows what happens to the capital savings of older Australians over a relatively short period and the commercial values transferred to the village owner/operator within this period. The matter for governments and regulators to address is whether this $ amount as shown in the table for just one resident, for one short period, in just one village, is both reasonable and of course just.



 

Retirement Accommodation but at what cost?

Retirement Accommodation – Would you pay the $ amounts being asked by the industry not for ownership but simply conditional occupancy of residential accommodation in a Retirement Village?

Don't answer now - answer at the end.

What is the cost of moving into this Retirement Village? The in-going amount in his village is $850,000.00. Commensurate with those in the freehold development next door where you would obtain ownership but here you get a lifestyle in addition to the conditional right to occupy. I don’t actually get ownership for $850,000.00, all I get is a conditional right to occupy? Correct.

Is there a Deferred Management Fee and what is the amount? Yes, the Deferred Management Fee payable to this operator is 35% or $297,500.00 of that in-going price of $850,000.00. I don’t get all my money back when I leave the property even though I don't have ownership only a conditional right to occupy? Correct.

Why do I lose 35% of my in-going amount if I don't have ownership? That 35% or $297,500.00 amount helps pay for the $2.5m communal recreational facilities and helps the operator make a profit so they can continue to provide this type of accommodation which is well liked by both State and Federal Governments. You want me to believe that the developer has made no profit over development costs at the $850,000.00 per unit price point.  You have over 100 units here so that $297,500.00 taken per unit totals $29.7m for a once only communal and recreation facility cost of $2.5M. Retirement village units turnover around every 7 years or so, you will get at least $29.7m now at the start of the village and then again around every 7 years over the entire life of the village for a once only communal and recreation facility cost of $2.5M. Correct.

When do I get the 65% or $552,500.00 of that total in-going payment refunded? On your departure from the village after say 5, 10, 15 years of occupancy.  But inflation will have decimated the present day value of my money by that time, I will struggle to have enough capital value to return to the property market or afford a nursing home placement. This has the capacity to put me into what many describe as the retirement village financial or poverty trap where the present day value of that 65% of the in-going amount refundable to me on departure is decimated in by inflation, rising housing costs and rising nursing home entry costs. Correct.

What happens to my 65% or $552,500.00 of that in-going payment while I reside in the village? The operator can use that 65% or $552,500.00 of that in-going payment interest free for their working capital needs or to repay their commercial borrowings or simply to invest for a profit until repayment to you on your exit. You have over 100 units here, that would generate an interest free cash pool of over $55.0m million dollars increasing over time as each unit increases in price. Correct.

I paid an in-going amount commensurate with a purchase price do I get any capital gain? No, under this particular occupancy contract 100% of the capital gain goes to the operator.

Are there any other costs associated with this conditional occupancy agreement? Yes, you pay all the maintenance costs of the unit. Yes, you pay any selling costs of the unit on your departure. Yes, you pay an administration fee on your departure. Yes, you pay the full refurbishment cost of the unit on your departure, around $60,000.00 at present day values. Yes, you and your fellow residents pay all the maintenance costs associated with the common areas and the recreational facilities. But I don't get ownership of the property only conditional occupancy! Correct.

What do you think now, would you pay the $ amounts being asked by the industry not for ownership of a unit but simply the conditional right to occupy a unit in a Retirement Village?

 

Consumer Vic Responds to Criticism

Consumer Vic Responds to Criticism - Consumer Vic has responded to criticism from retirement village resident Mr. Les Scobie who claimed CAV were asleep at the wheel in relation to a matter he had raised with the department.

The full story can be read here (full story) but the outline is that the village operator breached the provisions of the Retirement Villages Act 1986. The result being that a group of village residents will be collectively out of pocket to the tune of 1.5 to 2.0 million dollars over time. The village operator will receive the financial benefit of this money by way of increased revenues.

Mr. Scobie lodged a complaint with Consumer Vic over the matter in 2016 and they advised in 2017 that they had looked into the matter but would not be taking action that would redress the matter on behalf of the 30 to 40 village residents affected. The impact of this decision is that each of these residents will pay in the order of $60,000.00 at present day values for the refurbishment cost of their units when the initial advice from the village operator was either non-existent or to the contrary. These actions contravened the provisions of the Retirement Villages Act 1986.

Consumer Affairs Victoria have advised Mr. Scobie that they will review their processes in this matter and seek further legal advice as to their powers of enforcement.

Mr. Scobie is hopeful of a positive outcome for these retirement village residents, he is seeking that given the breaches of the Act by the operator the applicable provision requiring payment of this $60,000.00 be struck from their contracts.

Consumer Vic Responds to Criticism.

Retirement Village Legislative Reform Essential

Advocate for Retirement Village legislative reforms Mr. Les Scobie claims the following at times whimsical but none the less pointed outline of a prospective purchase in a retirement village shows the need for a major amendment to the laws governing retirement villages.

An initial enquiry process for entering a retirement village may go something like this:-

• Selling Agent - The unit price is $850,000.00, close to those in the freehold development next door where you would obtain ownership but here you just get a conditional right to occupy.


• Enquirer -  What, I don't actually get ownership for $850,000.00, all I get is a conditional right to occupy!


• The Deferred Management Fee payable to this operator is 35% or $297,500.00 of that in-going price of $850,000.00.


• What, I don't get all my money back when I leave the property even though I only have conditional occupancy!


• Why do they call it a 'deferred' fee. Because you don't pay it until you leave.  But I will give it to you on entry in the $850,000.00.  No you don't pay it until you leave. But I will give it to you on entry in the $850,000.00.  No you don't pay it until you leave.  Can we move on!


• That 35% or $297,500.00 amount helps pay for the $2.5m communal recreational facilities and helps the operator make a profit so they can continue to provide this type of accommodation which is well liked by both State and Federal Governments.


• What!  You want me to believe you have made no profit over development costs at the $850,000 per unit price point.


• You have over 100 units here so that $297,500.00 taken per unit totals $29.7m for a once only communal and recreation facility cost of $2.5M.


• Retirement village units turnover around every 8 years so you will get at least $29.7m now at the start of the village and then again around every 8 year period over the entire life of the village. Yes but we don't like to draw attention to that.


• You get 65% or $552,500.00 of that $850,000.00 in-going payment refunded but not until you depart the unit after say 5, 10, 15 years. 


• What!  But inflation will have decimated the present day value of my money by that time, I will struggle to have enough capital value to return to the property market or afford a nursing home placement.


• This has the capacity to put me into what people describe as the retirement village financial or poverty trap. Yes but we don't like to draw attention to that.


• The operator gets to use that 65% or $552,500.00 of that in-going payment interest free for their working capital needs or to repay their commercial borrowings or simply to invest for a profit until repayment on your exit.


• What!  But you have over 100 units here, that would generate an interest free cash pool of over $55.0m million dollars increasing over time as each unit increases in price.  Yes but we don't like to draw attention to that.


• Because the unit is owned by the operator, the operator keeps any capital gain.


• What!  I pay an in-going amount in the order of a purchase price but I do not share in any capital gain. Yes under this contract 100% of the capital gain goes to the operator.


• Although the unit is owned by the operator you must pay all the maintenance costs of the unit.


• What!  But you said I don't have ownership only conditional occupancy!


• Although the unit is owned by the operator you pay the full refurbishment cost of the unit on your departure, currently around $60,000.00.


• What!  $60,000.00 to refurbish the unit that I do not have ownership only conditional occupancy.  Yes that is the cost today but of course it will likely be more in 5, 10, 15 years time.


• Although all the units are owned by the operator you and your fellow residents pay all the maintenance costs associated with the common areas and the recreational facilities.


• What!  But you said I don't have ownership only conditional occupancy!


• To summarise, you and other residents pay an in-going amount near to or commensurate with an ownership cost but the operator retains ownership and you get only conditional occupancy. The operator keeps 35% of this in-going amount for their purposes and uses the other 65% interest free until refunded to you on exit.  The residents pay all maintenance costs on the units and on both the communal property and the recreation facilities. The residents pay the full refurbishment cost of the unit they occupied upon departure from the village. The operator as owner of the unit keeps the value of any capital gain on the unit. 


• Isn't this form of retirement accommodation just an outdated system originally designed for not for profit entities but is now dominated by private enterprise. It simply accelerates the transfer of the lifetime savings of older Australians into the hands of private enterprise under the guise of buying a lifestyle not real estate.  Perhaps but we don't like to draw attention to that.


• Property developers in capital cities and areas like the Gold Coast can build a large unit complex with communal recreational facilities then market them to owner occupiers or rental market investors, they make their profit and move on to their next development. Wouldn't this system better protect the capital value of older Australians?   Yes but we don't like to draw attention to that.


• Are you really sure this is all legal.


• Oh yes it is all clearly enshrined in State Government legislation.


• Isn't it the role of governments to protect it's citizens, not to continue an outdated residential accommodation scheme that actually generates financial harm to these citizens.  Perhaps but we don't make the rules, the State Governments do!


• How long can this go on for.


• Oh they propose tinkering with common contracts, pre-sale information, perhaps a new watchdog, industry protocols, industry accreditation but until governments fix the heart of the legislation nothing will stop this, but we don't like to draw attention to that.


• What do you mean by fix the heart of the legislation. 


• In the Victorian legislation for the property to be officially termed a 'retirement village' you can only purchase a right to become a resident, the developer although obtaining a price in the order of a purchase price does not by law have to transfer ownership nor can they rent it to you. 


• This hardly seems fair on older Australians compared to other forms of residential accommodation does it?   Perhaps but we don't make the rules, the State Governments do!


• These State Governments and the Federal Government don't really understand how this system works do they and particularly what it does to the hard earned life savings of older Australians.      Perhaps but we don't make the rules, the State Governments do!                                                                                                           

Despite a range of terms and conditions as described above, an increasing number of older Australians choose to live in a retirement village..

A Retirement Village unit, would you pay to live in one?

Choice asked to do more

Long time activist for reforms to the Victorian Retirement Village Act 1986 Mr. Charles Adams has written to Choice asking them to do more to protect older Australians from the negative aspects of the Retirement Village industry. Choice is promoted as Australia's leading consumer advocacy group.

In a recent letter to Choice Mr. Adams wrote:-

"Virtually all Australasian Retirement village contracts are heavily skewed to hide the price and more importantly the price rate from the retiree lessees until typically four months after termination.

Termination occurs when the lessee is no longer able to support him or herself independently and by then it is far far too late to do anything about what they never understood in the first place.

 

If Choice does not think that makes these contracts unconscionable then nothing will change.

 

How the developers were able to get this contract model started is irrelevant. It is now standard across Australasia and the legal profession accept it, oblivious.

Until every Australian state legislation is changed to mandate that every prospective retiree lessee must be offered  a conventional residential tenancy with secure tenure, nothing will change. That is the only way to get "free market competition".

 

Residential tenancy with secure tenure is the norm in the most competitive market place, the USA, though the Australian developer/operators are endeavoring to get the more lucrative loan lease system adopted there too.

Choice is the most influential consumer representative in the country, and until you/it understands the above, and publicizes it adequately aged retiree consumers will continue in blissful ignorance to pay grossly excessive prices to downsize into what are conceptually excellent physical and socially supportive group managed housing.

This issue, originating in 1986, is now so immersed in irrelevant documents, hearing, opinions and experts as to present as incomprehensible and insoluble which is all the developer/operators need."

Retirement Village has Powerful Persuasion.

The words RETIREMENT VILLAGE have a powerful persuasion on older Australians.

An initial enquiry process for entering a retirement village may go something like this:-

• Selling Agent - The unit price is $850,000.00, close to those in the freehold development next door where you would obtain ownership but here you just get a conditional right to occupy.


• Enquirer -  What, I don't actually get ownership for $850,000.00, all I get is a conditional right to occupy!


• The Deferred Management Fee payable to this operator is 35% or $297,500.00 of that in-going price of $850,000.00.


• What, I don't get all my money back when I leave the property even though I only have conditional occupancy!


• Why do they call it a 'deferred' fee. Because you don't pay it until you leave.  But I will give it to you on entry in the $850,000.00.  No you don't pay it until you leave. But I will give it to you on entry in the $850,000.00.  No you don't pay it until you leave.  Can we move on!


• That 35% or $297,500.00 amount helps pay for the $2.5m communal recreational facilities and helps the operator make a profit so they can continue to provide this type of accommodation which is well liked by both State and Federal Governments.


• What!  You want me to believe you have made no profit over development costs at the $850,000 per unit price point. 


• You have over 100 units here so that $297,500.00 taken per unit totals $29.7m for a once only communal and recreation facility cost of $2.5M.


• Retirement village units turnover around every 8 years so you will get at least $29.7m now at the start of the village and then again around every 8 year period over the entire life of the village. Yes but we don't like to draw attention to that.


• You get 65% or $552,500.00 of that $850,000.00 in-going payment refunded but not until you depart the unit after say 5, 10, 15 years. 


• What!  But inflation will have decimated the present day value of my money by that time, I will struggle to have enough capital value to return to the property market or afford a nursing home placement.


• This has the capacity to put me into what people describe as the retirement village financial or poverty trap. Yes but we don't like to draw attention to that.


• The operator gets to use that 65% or $552,500.00 of that in-going payment interest free for their working capital needs or to repay their commercial borrowings or simply to invest for a profit until repayment on your exit.


• What!  But you have over 100 units here, that would generate an interest free cash pool of over $55.0m million dollars increasing over time as each unit increases in price.  Yes but we don't like to draw attention to that.


• Because the unit is owned by the operator, the operator keeps any capital gain.


• What!  I pay an in-going amount in the order of a purchase price but I do not share in any capital gain. Yes under this contract 100% of the capital gain goes to the operator.


• Although the unit is owned by the operator you must pay all the maintenance costs of the unit.


• What!  But you said I don't have ownership only conditional occupancy!


• Although the unit is owned by the operator you pay the full refurbishment cost of the unit on your departure, currently around $60,000.00.


• What!  $60,000.00 to refurbish the unit that I do not have ownership only conditional occupancy.  Yes that is the cost today but of course it will likely be more in 5, 10, 15 years time.


• Although all the units are owned by the operator you and your fellow residents pay all the maintenance costs associated with the common areas and the recreational facilities.


• What!  But you said I don't have ownership only conditional occupancy!


• To summarise, you and other residents pay an in-going amount near to or commensurate with an ownership cost but the operator retains ownership and you get only conditional occupancy. The operator keeps 35% of this in-going amount for their purposes and uses the other 65% interest free until refunded to you on exit.  The residents pay all maintenance costs on the units and on both the communal property and the recreation facilities. The residents pay the full refurbishment cost of the unit they occupied upon departure from the village. The operator as owner of the unit keeps the value of any capital gain on the unit. 


• Isn't this form of retirement accommodation just an outdated system originally designed for not for profit entities but is now dominated by private enterprise. It simply accelerates the transfer of the lifetime savings of older Australians into the hands of private enterprise under the guise of buying a lifestyle not real estate.  Perhaps but we don't like to draw attention to that.


• Property developers in capital cities and areas like the Gold Coast can build a large unit complex with communal recreational facilities then market them to owner occupiers or rental market investors, they make their profit and move on to their next development. Wouldn't this system better protect the capital value of older Australians?   Yes but we don't like to draw attention to that.


• Are you really sure this is all legal.


• Oh yes it is all clearly enshrined in State Government legislation.


• Isn't it the role of governments to protect it's citizens, not to continue an outdated residential accommodation scheme that actually generates financial harm to these citizens.  Perhaps but we don't make the rules, the State Governments do!


• How long can this go on for.


• Oh they propose tinkering with common contracts, pre-sale information, perhaps a new watchdog, industry protocols, industry accreditation but until governments fix the heart of the legislation nothing will stop this, but we don't like to draw attention to that.


• What do you mean by fix the heart of the legislation. 


• In the Victorian legislation for the property to be officially termed a 'retirement village' you can only purchase a right to become a resident, the developer although obtaining a price in the order of a purchase price does not by law have to transfer ownership nor can they rent it to you. 


• This hardly seems fair on older Australians compared to other forms of residential accommodation does it?   Perhaps but we don't make the rules, the State Governments do!


• These State Governments and the Federal Government don't really understand how this system works do they and particularly what it does to the hard earned life savings of older Australians.      Perhaps but we don't make the rules, the State Governments do!                                                                                                           

Despite a range of terms and conditions as described above, an increasing number of older Australians choose to live in a retirement village..

A Retirement Village unit, would you pay to live in one?

 

Downsizing Policy Hurts Older Australians

The federal government is introducing incentives for older Australians downsizing from their family home into accommodation such as retirement villages.

The table below indicates what a financial disaster downsizing to a retirement village could be as retirement village deferred management fees, maintenance fees, selling fees and unit refurbishment costs have a negative impact on the original capital base of these retirees.

This could lead these retirees into what is called the retirement village poverty trap for longer term residents of the village.

This so named retirement village poverty or financial trap is where the $ value of the refundable amount payable on departure is so diminished over time by inflation that it places you at a point where you can no longer afford to leave the village and re-enter the property market or have sufficient money to enter a nursing home of choice as a result of an Aged Care Assessment.  

The higher the percentage of total life savings used to pay the entry cost of the village –

1. the higher the likelihood of being in the so named ‘poverty trap’ on departure.

2. the higher the likelihood of requiring family assistance due to a lack of capital.

3. the higher the likelihood of being dependent on a government funded nursing home placement rather than a placement of choice.

For more reading on the retirement village poverty/financial trap go to - http://www.retvill.net/poverty-trap/

Retirement Options

Retirement options for older Australians can be varied and sometimes complex. The table below shows a comparison between two popular options among retirees, a retirement village unit or for example a unit on the Gold Coast. The point made in the table is the dramatic negative impact a retirement village will have on the life savings of the retiree over time as compared to say a Gold Coast unit or unit ownership anywhere. In Option B the retiree continues to move forward in terms of a capital base whereas in Option A the retiree suffers an ever decreasing capital base.

Of course in the end a retiree is free to choose an option that suits their personal circumstances best.

Consumer Affairs Victoria asleep at the wheel?

A retirement village resident Mr. Les Sobie in Wangaratta Victoria claims Consumer Affairs Victoria have been asleep at the wheel when it comes to a matter raised by him with the authority. Mr. Scobie claims that inaction by Consumer Affairs Victoria will cost residents in the village where he resides in the order of $1.5 to $2.0 million dollars at today's values, the village operator however will benefit from increased revenues to the tune of this $1.5m to $2.0m dollars despite breaching the provisions of the Act.

At July 1 2014 the Victorian Government introduced new provisions making it compulsory for retirement village operators to issue a fact sheet to prospective residents which outlined certain provisions of the occupancy contract they would be offered for execution. One such point of clarification was who was responsible to pay for the refurbishment cost of the unit upon departure of the resident. The legislators felt strongly about this new provision and provided for a financial penalty in the order of $30,000.00 for each occasion that the village operator failed to issue such a fact sheet. Legislators also provided consumer protection provisions in the Act should a fact sheet with a material difference to the contract be issued.

Mr. Scobie states "For approximately 18 months after the introduction of these new legislative requirements the operator failed to issue a fact sheet to prospective residents as required by the Act. For the subsequent 18 month period the village operator issued a fact sheet with a material difference. The fact sheet advised prospective residents that they would not be responsible for the refurbishment cost of the unit they occupied upon their departure from the village whereas the occupancy contract they were subsequently given for execution states that the resident is responsible for this cost."

Refurbishment of units, the cost and who pays for it was highlighted at the Parliament of Victoria Legislative Council Legal and Social Issues Committee inquiry into the retirement housing sector . On page 55 of the report (see report) the committee was advised that refurbishment costs are in the order of $60,000.00 per unit at present day values.



In August 2016 Mr. Scobie wrote to Consumer Affairs Victoria advising them of the matter as outlined and as they had been charged by the Victorian Government with the responsibility and authority of administering the provisions of the Retirement Villages Act 1986 to step in and protect these consumers. Mr. Scobie states that he was subsequently advised in mid 2017 by the regional manager of Consumer Affairs Victoria that the matter had been looked at by Consumer Affairs but no action would be taken to redress the situation retrospectively on behalf of those residents impacted at a cost of $60,000.00 per resident.  In the Legislative Council Legal and Social Issues Committee inquiry into the retirement housing sector recommendation 2 was for the government to review the provisions of the Retirement village Act 1986, Mr. Scobie questioned "what is the the point of changing the law if the policeman can't or won't enforce that law, that is not consumer protection."

Recommendation 15 of the Legislative Council Legal and Social Issues Committee report was that the government consider the appointment of an ombudsman to oversee the retirement living industry in Victoria. Consumer Affairs Victoria was criticised amongst submissions (see submissions) to the enquiry, Mr. Scobie states he is of the firm belief that "examples such as above together with the industry revelations contained in the ABC 4 Corners program bleed them dry until they die are a clear indication that a new body with powers to act and a commitment to act is needed in Victoria.''

Government downsizing policy ill-founded?

The federal government has announced financial incentives for older Australians to sell their family home.

To downsize to a retirement village is where the value of their original capital base will be reduced and merely transferred to the retirement village operator.

For many occupants they will be taken to the point where they will need to go back to the federal government for increased financial support for the next phase of their life.

This seems at odds with other government policies of enabling older Australians to remain longer in the family home and thereby reduce pressure on aged care funding requirements.

The retirement village deferred fee business model increases the demand for aged care funding as it produces citizens that no longer have the capital base necessary to either return to the property market or to contribute to an aged care placement. A large portion of the capital base of older Australians is now in the hands of retirement village developers/operators.

Industry spruikers always advise that when you enter a retirement village it is not a property investment but a lifestyle investment. True but how expensive does that lifestyle have to be, in the example below (Option A) the lifestyle cost is $350,000.00 over just 7 years.

The following table shows that a retirement village (Option A) has the capacity to severely diminish the capital base of the occupant. Why would a legislator or regulator openly encourage an older Australian to go down this path given the likely financial outcome.