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.

Retirement Villages - No Financial U-turn

For many older Australians retirement villages can be a financial disaster by creating a no U-turn situation. The ability to leave a retirement village by choice or a change in circumstance weakens as each year passes due to deferred fees, exit costs, inflation, rising property prices and rising nursing home entry costs.

This can result in a retirement village resident entering a financial trap not forseen or explained at entry by the ever reducing $ value of their original capital base.

The higher the percentage of their total capital base used to pay the entry cost into a retirement village the more certain it will be that they will find themselves financially trapped should a change of circumstance be desired or required.

The following table illustrates what can and is experienced by many of the nations older citizens living in retirement villages.