The question here is - Why does the Victorian government not only allow it but openly encourages it.
Victorian retirees living in retirement villages as defined by the Victorian Retirement Villages Act 1986 (the Act) are paying demonstrably higher costs as opposed to a standard residential tenancy. Whilst it can be argued that a retirement village may have a few ‘bells and whistles’ more than the average residential tenancy, not every village does and not every resident makes use of them. Can these ‘bells and whistles’ justify the magnitude of the cost discrepancy. This current and successive Victorian governments have continued to be seduced by the industry, allowing Victorian retirees to pay an unjustifiable ‘premium’ for what is the same basic product, residential accommodation.
The primary features of a Residential Tenancy -
The resident pays a weekly rental for a conditional lease of a residential property.
The landlord pays all the costs - the capital cost, the insurance, the maintenance, the property management, the chattel replacements, the reinstatement/renovation, the selling.
As the landlord pays the capital cost, the resident can retain their life savings to invest as they wish.
Long term security of tenure can be an issue although there are some protections within the Residential Tenancies Act.
The primary features of a Loan/Lease Retirement Village -
The resident provides the village owner with capital, effectively a loan at 0% interest cost to the owner. This money is often a large proportion of the entire life savings of the retiree.
The $ value of this working capital is often commensurate with or near to the $ value for outright ownership of a similar property with the general community.
The provision of this substantial working capital, referred to as the ingoing amount, is for a conditional Lease, never ownership of a village unit.
The resident pays all property costs - the capital cost, the insurance, the maintenance, the property management, the chattel replacements, the renovation, the selling, the long term maintenance.
On top of all this the resident makes a contribution to the village long term maintenance fund, generally an amount of 5% of the $ value of the working capital amount provided to the owner on entry.
Further the resident pays on permanent departure from the village what is called a ‘deferred management fee’, this can be up to 40% of the original working capital amount provided by the resident to the owner.
On permanent departure form the village the resident will be, in this example, refunded 60% of the original working capital provided to the owner on entry.
The present day value of this 60% of the original working capital, provided to the owner on entry and refunded on exit, has been devalued over the term of the occupancy by inflation.
Long term security of tenure is assured but subject to living within the rules of the village and prior to being assessed as requiring an aged care facility
The retirement village industry was well summed up by Tom Gait, a past president of the NSW Retirement Village Residents Association.
“Families need to be aware that what we are talking about here is the transfer of intergenerational wealth, not to families, but into the pockets of large multinationals. Shame about elderly people not having enough money for aged care”
The Primary Issue -
Village residents have all the costs of property ownership without the ownership.
Village owners have the all benefits of ownership without the costs.
Why do retirees do it, because they cannot see the ‘real’ cost, only the entry cost.
Would a businessman pay for a car at or near to an ‘ownership’ price but be granted only a ‘lease’, pay all the running/maintenance/repair/damage costs, then at the end of the lease pay for the car to be brought back to ‘as new’ condition, pay a balloon payment of up to 40% of the initial lease cost, even pay the costs of the Lessor to sell the car.
More importantly would a Government allow that to happen given the obvious deception. Even if a section of the community fell for it, would a Government not legislate against it to protect the consumer from themselves.
Is the Retirement Village industry any different from the scenario outlined above. What is this ‘premium’ that retirees commit so much of their life savings to, this for simply a lease but not ownership in a retirement village.
Chart 1
The calculations that substantiate Chart 1 above Table 1 and 2 at the end of the document, show that where a retiree spends only 5 years in a retirement village, they have paid a demonstrative extra $818 per week ‘premium’ above a standard residential tenancy. This simply for the ‘privilege’ of retirement village living as opposed to residential tenancy retirement living. For a 9 year occupancy in a retirement village this ‘premium’ is still a whopping $490 per week. Industry data shows the average occupancy in a retirement village is between 8 and 9 years.
After 13 years of occupancy the ‘premium’ is almost gone but as stated the average occupancy in a retirement village is 8 to 9 years with a $490 per week premium. Industry data shows the average age of retirees residing in retirement villages is 80 years old, the average age of retirees entering a village is 75 years old. Do the maths, government data shows the average life expectancy in Australia is 83.3 years.
Barack Obama stated in 2006, “If the people cannot trust their Government to do the job for which it exists – to protect them and promote their common welfare – all else is lost”
This ‘Premium’ situation cannot exist without a government providing the legislative framework for the industry to not only exist, but to flourish and flourish handsomely. Is the function of government to create an environment for commerce to exist, or is it as seems to be the case with the retirement village industry, the function of government is to ensure an environment where a favoured industry not only succeeds but succeeds handsomely.
How does this all happen -
Lack of industry oversight.
Misleading contracts.
Contracts that make the village operator ‘all powerful’.
Lack of retirement village understanding by professional advisors.
Retirees surrendering property ownership and the benefits that come from that.
The ‘real’ cost of the product not identified on entry, only the entry cost.
Governments that listen to the industry and dismiss the consumers and consumer advocates who have an understanding of what is actually happening.
What is the long term solution whilst still encouraging development of retirement villages -
Remove the conflict of interest that comes from a village developer becoming the village owner then forming a sub entity to be the village manager.
Mandate villages that grant full outright unit ownership to the residents and/or
Villages that operate only on a Residential tenancy basis but with security of tenure.
Further develop a sub industry of independent ‘management’ for owners corporations.
Ensure strong industry oversight, there is truth to the claim - “Without a feared regulator, people with questionable ethics will push the line’’.
The following statements were made about the retirement village industry -
"A considerable number of submissions to the review raised concerns about the potential for financial loss when residents exit a village. Contracts that respond to the range of legal structures, services, facilities and fee are complex and residents find them difficult to understand. The problem is compounded by the large proportion of residents who are making a one-off decision, of significant financial nature, to enter a retirement village. Many of the legal and fee arrangements they must consider are unfamiliar to them and information and advice to help them make an informed decision appears to be limited."
"Possible negative consequences for residents and prospective residents are also increased because of the effects of age-related characteristics on their ability to make informed and knowledgeable decisions about retirement village services. Secondary markets that respond to the complex information requirements of the retirement village market (solicitors, financial planners, accountants and the like) have not developed to a level which adequately responds to market needs. Consequently, the potential for consumer detriment is enhanced."
"Analysis of the retirement village market has revealed evidence for potential substantial consumer detriment arising from information asymmetry / the position where village owner/operators have superior knowledge of the services provided than do prospective residents."
Given the number of negative stories about the retirement village industry in the past, one would think these statements are at the forefront of the current review into the industry. The distressing thing is that they are from the Victorian Government’s review of 2002. Has anything really changed?
Industry
data shows villages where residents gain no access to any capital
gain constitute 50% of the marketplace.Table Parameters -
In going cost $800,000.00.
Resident receives zero access to any capital gain in unit value. 100% goes to village owner.
Resident pays a maximum 36% Deferred Management Fee calculated on the value of the ingoing cost rising at 4% per year over the first nine years.
Resident maintenance/management fees set @ $150.00 per week with annual cpi increases.
Resident unit refurbishment cost set @ $50,000.00 with annual cpi increases.
Sinking fund contribution set @ 5% calculated on the value of the ingoing cost.
Selling cost set @ 3% calculated on the value of the ingoing cost with annual cpi increases.
Residential Tenancy Cost -
Table 2
With
a residential tenancy the retiree retains the $800,000 capital to
invest as they desire.Table Parameters -
Value of the property being rented (leased), $800,000.00.
Initial rental return to landlord @ 5%.
Annual increases in rental return to landlord @ 5%pa.
After tax return to resident set at 3%pa on retained capital.
The initial $800,000.00 retained capital diminishes over time from the net impact of rent paid and investment income earned.
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