If you’re thinking about moving into a retirement village it is crucial that you understand your contract. The recent results of the PWC/Property council 2022 Retirement Living Census shine a light on how retirement village contracts are changing. The census shows a significant swing towards contracts that base the exit fee on the purchase price and don’t share capital gain with the resident. Almost three quarters (73%) of the industry is now using this form of contract, up from around half (55%) of contracts in the previous year and more than triple what it was in 2017 (20%). This change is likely to be a result of residents preferring certainty and recent legislative changes.
In most states retirement villages are now required to provide a guaranteed buyback to residents if their home in the village has not sold within a certain period. The timeframe varies across the states and does not apply to all contracts. For example, in New South Wales the buybacks are 12 months in regional areas and 6 months in metropolitan but do not apply to strata, company title or community title contracts.
While a move away from contracts that share capital gain with residents may appear to be a huge disadvantage it’s important to understand the distinct differences between retirement villages and the broader property market. The census shows that the average cost of a two-bedroom Independent Living Unit (ILU) in a retirement village grew by 6.6 per cent over the 18 months to December 2022 to $516,000, while national house prices over the same period rose by 26 per cent to $831,900. If we look at the longer-term numbers the price of a two-bedroom unit in a retirement village increased from $398,000 in 2016, with no negative years, so retirement village properties are averaging a steady gain of around 4%p.a.
Retirement village contracts that give you some or all of the capital gain normally require you to meet some or all of the costs associated with achieving it. Such costs typically include renovation costs, marketing expenses and selling fees. The biggest of these is normally renovation costs. The census showed that almost half (49%) of renovations for retirement village units more than 15 years old cost at least $40,000 with 6% exceeding $80,000.
Interestingly the reason for residents leaving a village changed significantly over the 12 months. In the previous census the most common reason for leaving a village was to enter aged care (44%). In this census, entering aged care and moving to another village were the most common reasons for leaving (31% and 30% respectively). The increase in residents moving to another village was the highest ever recorded and a staggering 600% greater than the previous year (5%). The removal of the costs and uncertainty inherent in contracts that share capital gain has seen a number of village operators give residents the option to move between villages without restarting their exit fee calculation. This flexibility enables residents to move between villages within the same organisation to be closer to family or to change their accommodation, perhaps from independent living to a service apartment, as their circumstances change.
While not captured by the census the move to contracts without capital gain has also enabled greater flexibility around how and when residents pay their management fee. Many of the new contracts offer residents the choice of paying their management fee upfront (for a discount), when they leave or in some case paying a higher purchase price and not paying a management fee at all. Such payment options give residents the ability to pay in a way that suits them.
What you are losing on the merry-go-round of capital gain can be more than offset by what you pick up on the swings of certainty and flexibility. Ultimately your retirement village contract is a balance of rights, responsibilities and costs, you need to look at it through those three lenses and make sure it works for you.
A Village Guru Report can take the headache out of crunching all the numbers by showing you the village costs upfront, while you live and when you leave combines with an estimate of your Age Pension and rent assistance entitlements and home care package costs. It can show up to 3 options side by side enabling you to easily compare different homes, villages or payment options.
For more info, go to the Village Guru website