Retirement Village Residents Decimated Financially

Retirement Village Residents Decimated Financially

Differing Financial Impacts on Retirees of Four Retirement Village Residential Occupancy Models.

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

• 21% of retirees offered a retirement village occupancy model that has the capacity to completely decimate the amount due for repayment to the resident on departure.

• 20% of retirees 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 departure.

The longer the period of occupancy the greater the damage done. 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 caused by the combination of factors:-

• The deferred management fee calculated on the exit price of the unit rather than the entry price.


• The 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) retained by the operator for their own use until refunded to the resident on departure.


• Fees paid to maintain an asset owned by the village operator.  A resident pays an ingoing amount often commensurate with an ownership cost but only obtains conditional occupancy.

Differing financial outcomes of four retirees over the four occupancy models.

The Property Council Census records the average occupancy period in a retirement village as 7 years. Table 3 below examines the financial journey of 4 retirees over this 7 year period, each choose a different occupancy model being offered by retirement village operators:-

1. 21% of Retirement Villages offer this accommodation model - Deferred Management Fee on the EXIT Price, Capital Gain to the Operator.  Financial outcome - Capital base of Retiree at Ingoing - $500,000.00 down to $ -2938.00 after 7 years. A weekly cost of $1377.91 for conditional residential accommodation.


2. 20% of Retirement Villages offer this accommodation model - Deferred Management Fee on the ENTRY Price, Capital Gain to the Operator.  Financial outcome - Capital base of Retiree at Ingoing - $500,000.00, down to $ 81,043.00 after 7 years. A weekly cost of $1150.98 for conditional residential accommodation.


3. 14% of Retirement Villages offer this accommodation model - Deferred Management Fee on the EXIT Price, Capital Gain to the Resident.  Financial outcome - Capital base of Retiree at Ingoing - $500,000.00, down to $237,094.00.00 after 7 years. A weekly cost of $ 722.26 for conditional residential accommodation.


4. 45% of Retirement Villages offer this accommodation model  - Deferred Management Fee on the ENTRY Price, Capital Gain to the Resident.  Financial outcome - Capital base of Retiree at Ingoing - $500,000.00, down to $321,121.00 after 7 years. A weekly cost of $ 491.42 for conditional residential accommodation.

Note:- A residential rental of a commensurate value property within the general community would be in the order of $480.76, a 5% per annum return to the landlord.

Table .

Currently there is no legislated protection for retirees against outcomes 1 and 2.

Retirement Village Residents Decimated Financially

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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.



 

Loss of Capital in Retirement Villages

The Melbourne Age reports in an article regarding a class action against prominent retirement village operator Aveo:-

"Professor Murray Gillin is one of 200 retirees who have signed up for the Levitt Robinson claim.

Professor Gillin, who lectured in entrepreneurship and innovation at Swinburne University, told Fairfax Media his decision to sell his townhouse and move into a retirement village at Sackville Grange in Melbourne's blue ribbon suburb of Kew, ultimately cost him hundreds of thousands of dollars in exit fees, foregone capital gains and other fees including maintenance fees.

He bought the freehold property in March 2010 for $850,000 and walked away after six years with $669,076, after the various fees were deducted."

This experience is highlighted in the chart below showing 4 different paths a retiree can take 1. Retain or obtain ownership of residential accommodation, 2. Rent residential accommodation, 3. Lease/licence residential accommodation in a retirement village with 100% capital gain but with the deferred management fee calculated on the exit price, 4.  Lease/licence residential accommodation in a retirement village with 0% capital gain but with the deferred management fee calculated on the entry price.

Retiree Capital Wealth Smashed by Deferred Fee

The capital wealth of Australian retirees is being smashed by the deferred management fee business model used by a large part of the retirement village industry.



Both the retiree and the village operator bring identical capital wealth to the transaction, the retiree $850,00.00 in capital and the village operator a unit with an asking price of $850,00.00 for the right to occupy it but not own it.

The graph and the table below illustrate the dramatic reduction in capital wealth of the retiree over just a 7 year occupancy period within the retirement village.  Also illustrated is the even more dramatic increase in capital wealth gained by the village operator using the deferred management fee business model.

Two scenarios are illustrated using standard retirement industry parameters:-

Scenario 1.

• Deferred Management Fee of 35% on the in-going value of village unit.


• 100% of the capital gain to the village operator.


• Maintenance fees


• Unit refurbishment cost.

Results Scenario 1 -

Village Operator  Start - $850,000.00  Finish - $1,990,697.00

Village Resident   Start - $850,000.00  Finish - $242.773.00

 

Scenario 2.

• Deferred Management fee of 35% on the out-going value of village unit.


• 100% of the capital gain to the village resident.


• Maintenance fees.


• Unit refurbishment cost.

Results Scenario 2 -

Village Operator  Start - $850,000.00  Finish - $1,725,362.00

Village Resident   Start - $850,000.00  Finish - $508,107.00

 

Graph 1

 

Table 1

 

 

Capital Value Lost Percentage

Capital Value Lost Percentage - The table below show the loss of capital value suffered by a retirement village resident expressed as a percentage of the in-going amount paid.

Also shown is a comparison calculated at an identical growth rate in property value for those who may remain in the family home.

Governments through incentives and legislation encourage older Australians to make the move from the traditional family home into retirement accommodation such as a retirement village. Although there are aspects of life in a retirement village that are beneficial to the retiree, the reduction in capital value is clearly excessive and does not represent fair and reasonable value for those intangible benefits as claimed by the industry.





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Retiree Loss of Capital Wealth

Capital wealth transfer comes from the Deferred Management Fee model used in the Retirement Village industry and is financially damaging to Australian retirees. The Deferred Management Fee model creates an accelerated transfer of wealth from retirees to village owner/developers. Table 1 below, inclusive of inflationary adjustments, shows the capital wealth transferred from a retiree to a village owner / developer over a 7 year period, this is for just one unit in just one retirement village.

The table uses common contractural parameters within the industry although there can be variations.

The capital value reduction to the retiree is at the rate of -$1,668.21 per week of occupancy.

The capital value gain to the owner / developer is at the rate of +$3133.78 per week.

The major problem with the DMF model is that it was created decades ago for not-for-profit organisations to enable retirees with limited financial resources to obtain affordable retirement accommodation, accommodation at a price much lower than a commensurate cost within the general community.

Today in these private enterprise times the in-going amount required to enter a retirement village is often commensurate with a similar property within the general community. This in-going amount being above development costs and higher than can be justified to warrant the use of the historic Deferred Management Fee model.

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 Village Unit, Rent or Home Ownership

There are two primary issues impacting older Australians in relation to retirement villages:-

1. The reduction in value of the capital base of older Australians having entered a retirement village.


2. The visible and the not so visible transfer of capital value from older Australians to retirement village operators.

Which option has the largest negative impact on my capital base?    A Retirement Village Unit, Renting or Home Ownership.

The following table gives an example of the potential financial impact over three different residential accommodation scenarios.

This is the view for a potential resident proposing to lease (not own) a unit in a retirement village governed by the retirement villages act, the following table compares three popular options for older Australians.

1. Sell the family home and enter a Retirement Village under a lease arrangement,


2. Sell the family home, invest the capital amount received from the sale and rent a unit within the community,


3. Stay in the family home.

After the first 7 year period the table shows the impact on the original Capital Value of $500,000.00:-
Column 1. Retirement Village – the impact is minus $275,000.00 capital to a lower value of $225,000.00
Column 2. Rental Unit – the impact is minus $70,000.00 capital to a lower value of $430,000.00
Column 3. Family Home – the impact is an increase of $210,000.00 capital to a higher value of $710,000.00

The parameters for the table above are:-
Deferred Fee Period – 3 years
Deferred Fee Rate – 35%
Capital Gain Rate – 42% flat over 7 year period
Capital Gain Share– 100% to operator
Unit Turnover Period – 7 Year Average



 

Capital Gain Value Surrendered by Village Residents

Capital Gain values surrendered by retirement village residents can be substantial over the life of a village. Some of the large operators in the retirement village industry do not grant any of the capital gain in the value of the units to the resident.

This has a negative impact on residents over time should they choose or need to return to the property market or as a result of an aged care assessment they wish to enter an aged care facility of their choice. The only option may be to accept a government funded placement which can be geographically away from family and loved ones.



The table above shows that for a village of 100 units and a modest annual capital gain increase of 2.85% the capital benefit lost to residents as a result of their contract can be in the order of ten plus million dollars per 7 year occupancy cycle. (The industry average retirement village occupancy period is 7 years)



 

Retirement Village Units and Capital Gain

Would you sign a retirement village contract where you DO NOT receive the capital gain from the change in value of the unit from when you entered the village to when you leave the village?

There are many different types of retirement village contract provisions when it comes to capital gain, some with 100% to the resident, some shared between the operator and the resident and some with 100% going to the operator.

The table below shows 4 different variations and the differing impacts it can have on the capital base of a resident leaving a village, whether wanting to re-enter the property market or enter an aged care facility of choice. Each example starts with the same capital base of $560,000.00 and the same deferred management fee rate of 35%, the variations are whether the deferred fee is calculated on the ENTRY price or the EXIT price and what is the capital gain treatment at departure. Each contract variation produces 4 very different results that many older Australians do not envisage on entry to the village and unfortunately nor do some legal and financial advisors.



Although a Fact Sheet (it is compulsory in some states for the operator to give you a fact sheet) may say 100% of the capital gain goes to the outgoing resident, the impact of the deferred fee calculated on the sale price is such that the outgoing resident will get only that percentage left after the percentage of the deferred fee is taken.

For example :-

25% deferred fee calculated on sale price / only 75% of the capital gain $ goes to the resident.

35% deferred fee calculated on sale price / only 65% of the capital gain $ goes to the resident. (see example 3 in the table above)

Warning:- Contracts with a capital ‘gain’ provision can include a capital ‘loss’ provision.