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.
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