The retirement village model explained following Fairfax/ABC Four Corners
Recently Fairfax Media and the ABC Four Corners conducted an investigation into the retirement village sector.
It created a lot of anxiety by the information it provided. A lot of it we have to say it was not entirely accurate. We'd like to take the opportunity to answer the questions that have been raised so that you can make up your own mind about the retirement village sector.
In this brief video we are going to answer the three questions we are most asked:
- How does the retirement village model work?
- Are residents protected? and;
- Is it a good idea to move into a retirement village?
These are questions we asked ourselves when we assisted of one of our family members into a retirement village and I'm pleased to say we had a very good outcome.
How does the retirement village financial model work?
The first thing we all need to understand is that when you move into a retirement village you're not actually taking ownership of the home that you're going to reside in. You are in effect a tenant. So you actually leasing the home or you're going to have a licence to occupy. To get that licence you pay an amount up front. It's like a bond in a normal tenancy situation. So you pay that upfront and you get your lease or licence to reside in the village and you can be there for 6, 7, 8, 9 or 10 years or longer. And there are no further amounts that you have to put forward for your accommodation. When it's time for you to leave the village then the operator will go back to your contract and identify that you have an amount to pay for your accommodation during that 8, 9, or 10 years and then they deduct that from the deposit that you gave at the beginning they hand the remainder of the money back to you. This is sometimes called an 'exit fee' or a 'deferred management fee' (DMF). It is actually an amount for the rent that for the time you have been in the village.
How is that rent calculated?
Well it'll be detailed in the contract that you signed when you first move into the village and across the sector it is usually done on a per cent per year that you are in the village and it's also capped. So you should be there for 25 years, you're not going to be hit with 25 years worth of rent and take up all your capital. It'll always be capped at a certain amount.
Historically that amount could be 5 percent a year or 7 percent a year. But the sector works on 30 to 35 percent for the entire time you've been in the village So if you've been in the village for 10 years then it will build up to 35 percent if it's 12 years it is still 35 percent. The cap is normally reached within 3 to 5 to 7 years of you being in the village. So that gives you certainty as to how much it's going to cost you in the village and how much you or your estate is going to receive when you leave the village.
Let's look at an example of a deferred management fee or exit fee.
Across Australia average price of a retirement village home the bond, the deposit you make when you enter is around $350,000. If it has a 30 percent exit fee and you're paying that after 5 years (you're leaving the village after 5 years) you will have paid out $105,000. Sounds like a lot, but actually that's $400 a week rental you've paid for your two bedroom home. If you stay for 10 years in the village you will still have only paid out $105,000 and that equates to $200 a week.
You will also be asked to contribute to the weekly running costs of the village. That's the electricity for the pathways. the gardeners who do look after all the landscaping, the cost of the village manager his wages and so on but all of these are charged to you at cost. That means that the village operator has no opportunity by law to mark up those costs and therefore these costs are quite attractive. For instance, across Australia, they vary between $50 and $100 a week and that is all. And between those two fees your departure fee at the end when you leave the village and the weekly fees that is all your outgoings for living in the retirement village.
The question is asked - Why do retirement villages have to be different from other forms of accommodation like apartment buildings?
The answer is quite simple really. One-third of the construction cost of a retirement village are the community facilities; the landscaping, the community halls, the heated swimming pools, the bowling greens, special lighting, safe driveways and so on. These have to be maintained for the next 30 to 35 years whilst the residents are only going to be joining the village for 10 or 12 years. They do not want to be responsible for buying all these facilities and they don't want to be responsible for paying for them. So the operator maintains ownership of them and they also maintain the cost of looking after them over that 30 to 35 years.
It is also important to understand the major benefit of having the operator being involved with the Village for that extended period of time. Imagine if you buy into an apartment building and you are a 75-year-old hale and healthy. But by the time you're 85, you may be needing support and somebody who understands your situation. With an apartment building, you don't have that with the retirement village the operator is required to actually stay with you for your full journey and has a responsibility to keep an eye on your welfare. This is a significant benefit of the retirement village model.
It is important that I also mention strata villages because they were covered in their Four Corners report. Across Australia There are approximately 200 villages that are strata or title village meaning that the resident actually does take title and ownership of the home that they move into in the village. However, in every other respect, it is identical to the operation of a lease or licence village.
Meaning that when they leave they will still be paying an exit fee and when they go to sell their home it will be in a similar fashion to a lease or licence village.
So is it a good financial decision to move into a retirement village?
In 2013 we surveyed 4,900 people across 230 villages and 90 percent said yes it was a good financial decision for them.
Am I protected when I move into a village - financially and my rights?
In every state and territory, there is a retirement village act that is designed to protect residents of retirement villages and also the operators of retirement villages. You enter a contract which has rights and obligations on both sides. And that contract is largely prescribed by the legislation.The legislation and the regulations have been developed over a period of 30 years and will cover all the aspects you would expect of a tenancy agreement from dispute resolution to the way the contracts are presented to budgeting and the costs of the operations. Central to all of this is the contract that you enter with the village operator. You need to have that contract reviewed by a solicitor and you have to read it. You would be surprised at how many residents don't take either of those steps.
In the same manner that you would have a contract for purchasing a home thoroughly checked by a solicitor. You need to do the same with your retirement village contract and you also need to make sure that you and your family thoroughly understand the terms and conditions.
Is living in a village a good idea?
The first question we have to ask is - Why would we wish to move to a retirement village?
And invariably it's because an event has occurred in our life and we wish to take action. We wish to plan ahead and secure our future. Those events usually revolve around one of three things. It's either:
- a physical event
- a financial event or;
- an emotional event.
The physical event could be that the family home is no longer safe to live in. We've had a fall and we can't go back.
A financial event can simply be that we need money to live on and so to downsize.
And an emotional event could be the loss of a partner or isolation and loneliness and we seek a community around us for the next 10 years of our life.
Retirement villages are communities that are specifically designed to support us as we age. So is it a good idea? Well again in our McCrindle Baynes village census 96 percent of people said yes it was a good idea and that if they had to make the decision again - yes, they would move into a retirement village.
I hope this brief video has given you a better understanding of the retirement village model in Australia.