The retirement village industry is in for some big changes but will have its basic business model left intact.
Reforms have been proposed by the Government which address issues such as old people moving from self-sufficiency to full or part-time care, or the maintenance of chattels within a residence.
But they do not undermine the essential operating business model of retirement villages.
To make retirement villages viable, the companies that run them retain the capital gain that accrues after residents move in and before they die or move elsewhere.
The companies then dip further into the initial capital sum and take a Deferred Management Fee (DFM), which is typically 20% or 25% of the original purchase price.
This practice has been widely criticised in public debate, with some people saying it takes away the value of an old person’s nest egg.
But the retirement companies in return charge residents a price for rates, insurance and maintenance of a unit that is usually lower than the fixed costs of maintaining a house in the suburbs.
In addition, that cost is either set permanently or will only go up by the rate of inflation.
The agreement to maintain this basic funding system is welcomed by the main industry lobby group, the Retirement Villages Association (RVA).
It is also welcomed by a body set up to argue for the people who live in them, the Retirement Villages Residents Association (RVRNZ).
“The basic structure doesn’t change,” says the chief executive of the RVRNZ Nigel Matthews.
“We are not trying to reinvent the model, but what we are wanting is some consistency, some fairness and added consumer protection.”
These developments are the latest chapter in a story of reform that dates back some years. They “balance fairness for consumers with ensuring the sector is supported,” according to the Associate Housing Minister Barbara Edmonds.
There are currently over 450 retirement villages housing 48,000 people. That is 16% of the over 75s, and the number is forecast to increase to 81,000 people in the next 10 years.
The Government says it is determined to make sure these people enjoy a high level of certainty about their rights. So, while keeping the basic format, it is it is proposing many changes.
One is to make sure the fees people pay for rates, insurance and maintenance should stop soon after a unit is vacated. This would make sure the estates of deceased people do not have to keep on paying for the upkeep of the property.
In addition, they should get back their original capital minus the DFM in a reasonable space of time, and not have to wait for months while a unit is rennovated and re-licensed.
There should also be standardised and easy-to-understand occupancy agreements, and a better disputes resolution scheme.
In another Government proposal, retirement village operators should have to pay the cost of maintaining maintain chattels, as private landlords do.
There should also be proper disclosure documents relating to the question of transferring within a village to aged residential care.
“We welcome these proposals and we really appreciate the Government getting these pushed through before the election,” says Matthews.
He says there are several really important things here.
“There is currently no mandated timeframe for the return of capital when a person exits a retirement village,” he says.
“Most operators wait until they have relicensed the vacated unit before they pay back the original sum…..this proposal would require potentially a six month mandatory timeframe for the money to be paid back.
“The onus will now be on the operator to ensure that a unit is refurbished quickly and relicensed quickly.”
Matthews says this puts the responsibility of property management back on the owner.
Matthews adds some retirement villages do not maintain chattels such as a dishwasher and ask the resident to pay for repairs and maintenance instead. He says this practice would change under the latest proposals.
A third question relates to people who live independently for many years in a retirement village, whose health deteriorates, forcing them to go into care.
Many people enter a retirement village because it has a residential care unit attached to it, and they expect they might move to that unit when they become infirm. Around two thirds of retirement villages offer care facilities, totalling 19,300 beds, based on statistics from last year.
But a problem can arise when residents have been living independently for long period of time before moving to care. That means their initial capital has been squeezed by property inflation and they may not have the money available to buy into a new care unit at a higher price.
“When a resident has been living in an independent room for a long time, the capital payment they receive might not be enough to cover a second occupational right, which will have increased over time,” the Government report says.
“This may require the occupant to have access to other financial resources.”
Some companies allow people to shift their deposit ‘sideways’ so the same initial capital that bought their initial unit can be transferred to their new, care unit.
But the Government proposals say this is not always reliable when there are no units available at the time when they needed. The paper is seeking more information on this problem. However, it does come up with several suggestions.
One of them is retain the current requirement that agreements with residents state carefully that transferring to aged residential care is dependent on the availability of a suitable room. In addition, operators would have to provide comprehensive information on the financial and care implications of transferring into aged residential care.
Alongside all this is a call by the Government to have all contracts relating to retirement villages written clearly and succinctly.
In a response to all this, the RVA says it has some support for the overall thrust of the Government reforms.
“It is important that the integrity of the system is maintained,” says the executive director of the RVA, John CollIns.
“It is very successful, very popular, people move in there every week, so it is important that we get it right."
Collins adds some of the changes proposed by the Government have been anticipated by retirement villages anyway.
The range of retirement villages varies a lot, from small, community facilities, run by trusts or church groups, to large chains of villages, run by big share market listed companies, such as Arvida or Ryman.
Most of these companies made money from rising house prices, over long periods within the last two decades.
Typically, they would sell their units at a slight discount to normal house prices, thereby ensuring newcomers could easily get in. In fact, there were long waiting lists at the most popular villages.
The housing downturn brought a change to that, since some people had trouble selling their home to get the money for a retirement unit.
Ryman’s share price has more than halved in the past two years, though it is now inching back up again. Arvida went through a similar process, as did Summerset.
But in their most recent reports, company managers have sounded bullish about the future.
The Government's reform agenda is open to submissions.
20 Comments
Much of it makes sense. Community services & companionship, support, security, little maintenance. On the other hand it is acknowledgment, tacit or otherwise, that this is the start of a one way journey and understandably some seniors are reluctant to take that first step. Rest homes etc do though seem to be an industry that has grown like topsy in recent years for sure.
Just put Mum in a hospital care resthome. $1540 p.w. She is 90, Dad is 93 with dementia and will soon have to go into care too. Luckily they have enough money to last for several years. Resthomes are a business not a charity. Too many people expect the government to look after them from the cradle to the grave. This mentality needs to change.
Except if someone didn't sacrifice and save, but spent their money before retirement, they get looked after by the tax payer. We already have user pays for most things now, as much is asset tested. If you want good healthcare you have to get insurance or pay out of your pocket, unless you don't mind being on a waiting list etc. I think this retirement village model is ok. If it wasn't people wouldn't be buying licenses to live in these units. But there are many other options, including granny flats on childrens properties which is quite common , especially in multi-generational households
Loneliness is the big medical danger for the retired. Doctors prescribe membership of gyms for the physical health of the elderly; retirement villages perform much the same benefit for mental health. With nuclear families becoming ever more nuclear we should be encouraging retirement villages.
Fair comment. Those that save and pay for this aspect of their retirement and also pay health insurance take responsibility for themselves and at the same time take the burden for that care off the tax payer. There is in our society scarce acknowledgment, let alone appreciation of that. For instance when it was suggested to Finance Minister Cullen, in order to encourage this, that health insurance premiums be a tax deductible expense he retorted something like - if you can afford health insurance you don’t need a tax break.
The Deferred Management Fee (DFM), which is typically 20% or 25% of the original purchase price would encourage owners of villages to look for ever older new inhabitants. So instead of a vibrant mix of 55 to 105 year olds playing tennis and bowls they will end up with elderly in armchairs being driven demented by TV.
https://www.smh.com.au/politics/federal/government-mulling-superannuati…
excerpts;
The federal government is considering using the $3.5 trillion superannuation system as a way out of Australia’s aged care funding crisis.
Assistant Treasurer Stephen Jones called on Thursday for a national conversation about drawing on superannuation balances – one-third of which are projected to be passed on as inheritances by the middle of the century – to support people in aged care.
A discussion paper published this week by the Aged and Community Care Providers Association said older Australians had been reluctant to spend their own funds on their retirement needs because they feared running out of money, wanted to preserve the family home or treated superannuation as a way to increase capital.
“Since retirees are not drawing down on their capital, large chunks of super tax concessions are inflating the size of inheritances,” it said.
“There will always be bequests in the system. No doubt about that. [But] it’s not the purpose of superannuation to have a tax-preferred estate-planning mechanism. It’s for providing for people in their retirement,” he said on the ABC on Thursday.
“We’ve got a crisis of funding in aged care. At the same time we have one-third of the value of funds being written out in bequests. That doesn’t square ... It’s a conversation that we need to have ... I don’t think we can carve superannuation out of it.”
He said one way of leveraging superannuation would be to set aside a portion to pay for aged care, known as “ring-fencing”.
Industry Super Australia chief executive Bernie Dean said there was an important conversation to be had about caring for older Australians, but ring-fencing a portion of super was not the answer.
“Commandeering a portion of super guarantee for aged care is unfair to those who won’t need it and diminishes the ability for many Australians to save for other things they need in retirement,” he said.
The Australian Super scheme has been so spectacularly successful that many people now have far more money than they need in old age. That's why they have moved to cap contributions at $1.9M and the concessional taxes at $3M. It would make sense to start means testing aged care like they do the pension, with provision for Super capital payments to be drawn down by aged care providers. As the Aussie Govt says "Super wasnt meant to be an inheritance scheme".
Meanwhile, the NZ political parties are thinking up ways that young people can raid their Kiwisaver, to buy houses and now rent them. Which completely destroys the ability of that money to compound away so that there is something to actually retire on. A 20 year old who contributes for 10 years and then stops, will still end up with more money at retirement than someone the same age who doesnt contribute for 10 years and then starts contributions for the next 30 years.
https://windgatewealth.com/the-power-of-compound-interest-and-why-it-pa…
Maybe the state should provide funding for people to take care of their relatives in their own homes instead? I suspect that would be infinitely more cost effective and family orientated.
Before someone objects with a story of dementia or other heartbreaking condition, the reality is people need to die at that time. As with a tale, so is life, not how long it is but how good it is. The immense cost of keeping nearly dead elderly people alive for a few more months is an immense burden.
We spend infinitely more money on the elderly who can vote than on the young who can not.
"The days of our years are threescore years and ten; and if by reason of strength they be fourscore years, yet is their strength labour and sorrow; for it is soon cut off, and we fly away." Psalm 90:10 KJV
How? Who is going to give up their job to stay home and look after their parents? Especially people in their prime earning years, who are desperately trying to save for their own retirement and pay off their massive mortgages. Its not really practical to expect people to stop working to become personal nurses of the elderly.
When looking at retirement villages recently I noticed that some of them were advertising second hand villas at the same price, or even higher(!) than the price of brand new villas in the same village. There were also cash back incentives offered to buy the brand new ones. So nobody is going to buy a second hand unit when they can buy a brand new one cheaper. This is why people are waiting months/years to get their money back. There needs to be a rule around price equivalency of units to prevent this.
The people who have bought in to a village where development is ongoing (or within a large group where they are continuously building new villages) are always going to have major problems getting their money back, as the operators will always preference the sale of new units over old ones, as they make more money. If the repayment was immediately callable on exit this would prevent this problem - but its been suggested that 6-12 months should be the maximum, but even waiting for 6 months is a long time when someone has a lot of health expenses to pay, or the Estate has a funeral to pay for.
Just got licence fee back less the DFM from Ryman. The new occupants own place took long time to sell so we had to wait the max time which Ryman sets at 6 months ( ie they pay us at 6 mths regardless) which is fair enough. In this market hard for new entrants to sell the family home fast.
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