Retirement Villages: The Destruction of Retiree Capital

From Michael West Media -

 "New research from retirement village analyst Les Scobie shows the dominant financial model for retirement villages, the loan/lease model, is causing a significant transfer of capital from retirees to retirement village operators. In many cases, elderly Australians would be considerably better off if they just stayed at home". 

 Read the full article- Retirement Villages : The Destruction of Retiree Capital

40% of People in Retirement Villages Experienced Abuse.

 A report from the NSW Retirement Village Residents Association shows over 40% of people in retirement villages have experienced abuse.

"The Retirement Village Residents Association (RVRA) developed and distributed a survey on psychological abuse to all its members and some 120 retirement villages throughout NSW. The RVRA is not aware of any previous studies of the impact of psychological abuse solely within retirement villages that excluded external triggers such as financial abuse and neglect. Other studies psychological abuse with a broader range of elder abuse topics, and cover the broader senior cohort of aged care, community housing and general over55 living situations. 

Over 40% (n=512) of the respondents reported experiencing at least one type of abuse. The proportion of females reporting abuse was higher (44%) than for males (34%). The percentage of the younger age groups in the sample reporting abuse was much higher (48%) when compared with the older groups (28%)."

See the full report here - https://www.rvra.org.au/news/news-articles/2023-06-15

Fee Danger for Retirement Village Residents

 

Many residents in retirement villages are being taken advantage of for items in their units where they are arbitrarily being made responsible to pay for repair and/or replacement. Retirement Villages come under Victorian law whereas aged care facilities come under commonwealth law. Regulation 11(1h) under Victorian law requires a village operator to list the relevant fixtures, fittings and furnishings in the contract before the contract is signed. If you are a resident in a Victorian retirement village paying for repair or replacement of fixtures, fittings or furnishings not listed in your contract, seek advice now from a local free legal advice service, your solicitor or Consumer Affairs. 

The current Retirement Villages Act 1986 is under review by the State Government, if this matter is applicable to you or there is another matter of concern to you make those concerns known to your local State Government representative.

Transfer of Intergenerational Wealth

Retirement Villages = 'The transfer on intergenerational wealth, not to families, but into the hands of corporations. Shame about elderly people not having enough money for Aged Care.' - Tom Gait

Retirement Villages Destroy Retiree Capital

 Retirement Villages and the Destruction of Retiree Capital

A primary feature of Loan/Lease Retirement Villages (74% of the marketplace) is that despite the payment of an ingoing amount, an amount often commensurate with or near to an outright purchase price, the retiree never obtains ownership. Note below the dramatic negative financial impact this aspect has on retiree capital as opposed to outright property ownership. Retirement villages are the least understood of residential property by retirees and their professional advisors. Governments have the obligation to continually improve protections for retirees and their hard earned life savings, including those who choose a retirement village as their preferred retirement living option. The solution is clearly in an outright property ownership model.

Model 1. Loan/Lease retirement village with Deferred Management Fee calculated on the ingoing value of the unit. No share of any capital gain is provided to the retiree.  (49% of loan/lease marketplace)           

1. Industry average occupancy period 7 years                                                               
2. Retirement Village Living over 7 Year Lease Period                                                   
3. Retiree Capital = $800,000.00                                                                                      
4. Ingoing Payment/Loan to Operator = $800,000.00                                                      
5. Deferred Management Fee of 36% on the unit ingoing amount = $288.000.00 (6%pa over first 6 years)          
6. 5% Sinking Fund Contribution on the unit ingoing amount = $40,000.00                      
7. Retiree Capital Cost = -$328,000.00                                                                            
8. Resident Refundable before any exit costs after 7 years = $472,000.00                                            
9. Unit Value after 7 years = $1,194,983.00                                                                   
10. Capital Gain at 5.9%pa to Operator = $394,983.00.00                                                              

After just 7 years the above Loan/Lease retirement village resident is $1,194,983.00 – $472,000.00 = $722,983.00 worse off than a retiree with outright property ownership. A reduction rate of some $1,984.56 per week of village occupancy.                  

Model 2. Loan/Lease retirement village with Deferred Management Fee (DMF) calculated on the outgoing value of the unit. A share of any capital gain is provided to the retiree. (51% of loan/lease marketplace)                                                      

1. Industry average occupancy period 7 years                                                               
2. Retirement Village Living over 7 Year Lease Period                                                   
3. Retiree Capital = $800,000.00                                                                                      
4. Ingoing Payment/Loan to Operator = $800,000.00                                                      
5. Deferred Management Fee of 36% on the unit outgoing value = $430,194.00 (6%pa over first 6 years)          
6. 5% Sinking Fund Contribution on the unit outgoing value = $59,749.00                      
7. Retiree Capital Cost = -$489,943.00    
8. Unit Value after 7 years = $1,194,983.00
9. Capital Gain at 5.9%pa = $394,983.00.00 - (Net Capital Gain to Retiree 64%  = $252,789.00) - (Net Capital Gain to Landlord 36%  = $142,194.00                                              
10. Resident Refundable before any exit costs after 7 years = $705,040.00                                            

After just 7 years the above Loan/Lease retirement village resident is $1,194,983.00 – $705,040.00 = $489,943.00 worse off than a retiree with outright property ownership. A reduction rate rate of some $1,346.00 per week of village occupancy.

Model 3. Outright Property Ownership - Well understood by retirees and their professional advisors.          

1. Outright Property Ownership over 7 years  
2. Retiree Capital = $800,000.00                                                                                      
3. Ingoing Payment/Loan to Operator = $800,000.00                                                      
4. Deferred Management Fee = n/a          
5. Unit/Home Value after 7 years = $1,194,983.00
6. Capital Gain at 5.9%pa to Retiree = $394,983.00                                            
7. Retiree Capital after 7 years = $1,194,983.00
8. Retiree Capital Increase = +$394,983.00

After just 7 years the above Retiree is $1,194,983.00 – $800,000.00 = $394,983.00 better off through outright property ownership. An increase rate of some $1,085.11 per week of occupancy.

Property ownership delivers superior financial security to retirees, it enables them to -     

• Move to another retirement living property by maintaining pace with rising property values. 
• Better fund their own Aged Care requirements rather than the taxpayer.                               
• Enable a higher allocation of funds to family/beneficiaries.                                     
• Enables access to the Federal Government Home Equity Scheme, denied to them by loan/lease retirement village occupancy.

Real retirement village reform is desperately needed before many, many more retirees are condemned to the destruction of their life savings. Destruction over just a few years of their retirement by a single fateful decision, a decision to enter a loan/lease retirement village.

“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 corporations. Shame about elderly people not having enough money for aged care” – Tom Galt, President – NSW Retirement Village Residents Association.

Which retirement living model would you choose?

1. -$722,983.00 – 7 years of occupancy in a Loan/Lease Retirement Village no capital gain

2. -$489,943.00 – 7 years of occupancy in a Loan/Lease Retirement Village with capital gain

3. +$394,983.00 – 7 years of occupancy with Outright Property Ownership

Note – The tables behind these calculations are included below for reference.  

• Industry Data shows average occupancy period in a retirement village is between 7 and 8 years.
• Corelogic data shows last 25 years residential unit housing capital gain rates at 5.9%.  
• Industry Data shows only 16 per cent of retirement village units are occupied on a freehold basis.

Model 1 - Loan/Lease retirement village with Deferred Management Fee calculated on the ingoing value of the unit. No share of capital gain to retiree.

Model 2 - Loan/Lease retirement village with Deferred Management Fee (DMF) calculated on the outgoing value of the unit. Share of capital gain is provided to the retiree.

Retirement Village Deception

The great retirement village deception, the use of words like 'buy' and 'purchase' deceive the retiree
into believing an exchange of ownership will take place. In fact the retiree has merely made a 'loan' to the operator at 0% interest. This loan on far too many occasions is equivalent to or near to equivalent to the purchase value of a similar standard unit with the generally community.

The loan has three key features all detrimental to the retiree,

1. Village residents can lose as much as 40% of the original 0% loan amount through a poorly named 'Deferred Management Fee', this fee is accumulated over the initial years of occupancy.
2. Inflation over the period of occupancy can devastate the $ value of the refundable amount of the original loan. (The refundable amount being the value of the initial loan minus the value of the deferred management fee.)
3. Outgoing residents can wait weeks, months to get back the refundable portion of their loan after their departure from the village.

Loan/Lease Retirement Village - Resident Funded – 74% of the marketplace

• Development of the village funded by the retirees with 0% loans to developer/owner.


• Retiree loans a $ sum, in the order of a 'buy' price, at 0% interest to the developer/owner in exchange for conditional occupancy, not ownership.


• Village residents despite only occupancy not ownership, pay all the management costs, maintenance costs, municipal rates, renovation costs, selling costs.


• Village residents despite only occupancy not ownership, can lose as much as 40% of the original 0% loan amount through a poorly named 'Deferred Management Fee', this fee is accumulated over the initial years of occupancy.


• The shorter the occupancy period the more devastating the Deferred Management Fee becomes on the $ amount of the refundable portion of the 0% loan.


• The longer the occupancy the more devastating inflation becomes on the $ value of the refundable portion of the 0% loan.


• In the order of 50% of developers/owners deny retirees access to any unit capital gain.


• Enforced by legislation retirees can wait weeks, months to get back the refundable portion of their loan after their departure from the village.

Fundamental Problems With Retirement Income System

YourLifeChoices reports - Biggest trap for retirees? Our entire retirement income system

YourLifeChoices states, "Australia must confront fundamental problems with its retirement income system."


Noting in their article the following major points -

• "Of the 36 OECD (developed) countries, Australia has the sixth highest rate of poverty in retirement."

• "Super tax concessions are worth $41 billion per year. The richest 20 per cent of retirees get 60 per cent. The bottom half get just 11 per cent."

• "The cost of super tax concessions will soon be larger than the cost of the Age Pension."

See full article here at this link - https://www.yourlifechoices.com.au/retirement/retirement-income/money-going-to-the-wrong-people