Should Be Outlawed

The 2017 PwC/Property Council Retirement Census shows that:-

1. 21% of interested retirees are being offered a retirement village occupancy model that has the capacity to completely decimate the amount due for repayment to the resident on their departure from the village.

1. 20% of interested retirees are being offered a retirement village occupancy model that has the capacity to drastically reduce the ‘present day value’ of the amount due for repayment to the resident on their departure from the village.

The longer the period of occupancy the greater the damage done to the refundable amount. It is quite possible for residents with a longer term occupancy period to actually have a debt to the operator on departure from the village.

All this is caused by a combination of factors:-

• A deferred management fee calculated on the outgoing price of the unit rather than the in-going price.


• 100% of any increase in the value of the unit occupied (capital gain) retained by the village operator.


• The devaluing effect of inflation on the refundable amount (ingoing amount minus the deferred management fee) which is retained by the operator for their own use until the resident departs the village.

Issue 1.  Deferred Management Fee calculated on the exit price, 100% of the capital gain to the operator.

Table 1 below shows that as the capital value of the unit increases, the deferred management fee charged increases, the refundable amount due to the village resident on departure decreases.

Should the capital gain over the length of the occupancy be high enough the outgoing resident could lose up to 100% of the refundable amount or worse still be in a position where they owe the operator money.

Note: Currently there is no legislated protection for retirees against this business model.

Table 1



Table 1 above does not include unit refurbishment costs or exit fees which would make the financial situation of the retiree even worse.

This Retirement Village Model Should Be Outlawed - The retiree in the occupancy model above (35% DMF on EXIT price, 100% capital gain to operator) has been subjected to a reducing refundable amount (possibly negative) over the period of the occupancy plus exit costs whilst the operator has seen a growth in capital value of the asset from $500,000.00 to in the order of $2,000,000.00. The industry is stating that 21% of all contracts are issued in this form.

Retirees should be given legislated protection against the business model detailed above.

For those who feel the above scenario will never come to pass, eg: a 300% increase in unit value, please examine the recorded increase in real estate values in Table 3 and Table 4.

 

Issue 2.  Deferred Management Fee calculated on the entry price, 100% of the capital gain to the operator.

Table 2 below compares the retirement village occupancy model with three other models offered in the market place. Occupancy model 2 shows the adverse financial position of the village resident on leaving the village as opposed to the occupancy models in option 3 and option 4.

Note: Currently there is no legislated protection for retirees against this business model.

Table 2.



Table 2 above does not include unit refurbishment costs or exit fees which would make the financial situation of the retiree even worse.

The retiree in occupancy model 2 above (35% DMF on ENTRY price, 100% capital gain to operator) has been subjected to a stagnant refundable amount of $325,000.00 ravaged by inflation over the occupancy period plus exit costs whilst the operator has seen a growth in capital value of the asset from $500,000.00 to in the order of $2,000,000.00. The industry is stating that 20% of all contracts are issued in this form.

Retirees should be given legislated protection against the business model detailed in occupancy model 1 and occupancy model 2.

For those who feel the above scenario will never come to pass, eg: a 300% increase in unit value, please examine the recorded increase in real estate values in Table 3 and Table 4.

 

Table 3 below shows the capital growth in the Melbourne housing market for the period 1985-2015.  Melbourne Property Market 1985 - 2015.

Table 3.

[caption id="attachment_325" align="alignnone" width="667"] Melbourne Residential Propoerty[/caption]

 

Table 4 below shows the capital growth in the Australian housing market.

Table 4.