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Are retirement villages milking the elderly for profit?

NOTED logo NOTED 10/07/2018 Diana Clement

© Getty Images Retirement villages – country clubs for “active retirees” or milking the elderly for profit? Diana Clement investigates the industry and asks if villages deliver value for money.

Retirement villages are a booming industry. Since 2008, the number of New Zealanders aged over 75 who are living in one has risen by 33%. And demand for these ready-made communities for the “active retiree” – as the marketing goes – is yet to reach its peak, as baby boomers start thinking about selling up the family home.

Many who make the move are very happy with their choice, says Di Cooper, a spokesperson for the Retirement Village Residents Association. Instead of feeling isolated as they age, or struggling to look after a larger property, they have the companionship of the village community, and no longer need to worry about repairs, maintenance, gardening and security. “It’s a safe, secure environment.”

But that comes at a cost. Retirement villages are big business… and that’s how they’re run. Nationwide, five private operators – Ryman Healthcare, Summerset, BUPA, Metlifecare and Oceania – now dominate the sector, controlling more than 50% of the market.

Instead of owning the units outright, residents typically “buy” a licence to occupy, with prices starting at less than $150,000 for a one-bedroom apartment in some small provincial centres and reaching $1.5 million for an upmarket three-bedroom villa in Auckland. A weekly fee is also charged to cover the day-to-day running of the village, ranging from $90 to $170, depending on the facilities and services offered.

As well as the social benefits, the Retirement Villages Association of New Zealand (representing the operators) claims there are some real financial advantages. A 2016 survey showed that by selling their home and buying a village unit, 62% of residents released more than $100,000 of their capital, says executive director John Collyns.

Of course, communal living doesn’t suit everyone. Some people don’t like the restrictions of a retirement village; they may not be allowed to keep pets or invite friends and family to stay.

However, one of the biggest “buts” is the business model followed by most of the main players. Under a licence to occupy, the value of the unit will still rise (or fall) with the market, but – unlike ordinary freehold or leasehold home ownership – it’s the operator, not the resident, who pockets any capital gain.

Not only do residents miss out on the profits, their investment starts losing value as soon as they move in. Most exit the village with at least 20-30% less capital than when they arrived, through what’s known as deferred management fees; these are deducted when the occupancy is terminated (on the resident’s death or when they move, typically into rest-home or hospital care).

Units are also generally refurbished at the resident’s cost, so that comes out of the final payout, too. Residents or their estates may be charged for damage beyond what’s deemed to be fair wear and tear, as well as charges for the removal of alterations made due to disability. Also added to the bill may be the operator’s marketing costs to re-sell the unit, and fees for a new legal title and valuation, if required.

For one Hawke’s Bay resident, who bought her two-bedroom villa 15 years ago for $180,000, that’s meant walking away with only $110,000 from her initial investment – a quarter of what the village has onsold her unit for. And if the property market has fallen, so the re-sale value is less than the original purchase price? Some contracts require the operator to be recompensed for any capital loss.

In Australia, there’s been push-back from financially savvy baby boomers putting pressure on operators to rethink the existing model and give residents a fairer share of the returns. Here, signs of revolt are reflected in this comment posted online, as part of a discussion on the pros and cons of retirement villages: “When I consider all the costs of living in a retirement village, I can only draw the conclusion that it is extremely expensive rent that erodes your estate at an alarming rate.”

A community of old people

With New Zealand’s rapidly ageing population, the profile of a typical retirement village resident is also changing. Until recently, someone as young as 55 or 60 could buy a licence to occupy. But in the past few years, operators such as Metlifecare have increased the minimum entry age to 70 or 75. Cynics say that’s because older residents won’t live as long, which means the units can be cashed out more quickly.

The change has caused some disquiet in villages where residents who moved in at a younger age feel the raised limit creates an environment filled with frail old folk on walkers. The operators argue most new residents are 70-plus anyway.

At one of Metlifecare’s Auckland villages, residents have called for a reduction of the minimum age of entry to 55 years, as it was when most current residents bought their licence to occupy. Graham Mackenzie says some of his village neighbours don’t want to invite family and friends to visit because they’re embarrassed at living in what now resembles a rest home.

The industry argues times have moved on since the early days, when councils granted resource consents to “elderly persons’ housing, being over 55”. That’s no longer a requirement for consent in most cases. While some village contracts still have the “over-55” terminology, others have bumped up the minimum age, says Retirement Villages Association president Graham Wilkinson. “Commercially, that’s their right and it probably makes sense… And isn’t 70 today what 55 once was?”

Still, it’s a sticking point that puts semi-retired journalist Rod Pascoe off moving into a retirement village. “It seems to be totally profit-focused,” he says. “I find that a bit of a turn-off. Am I going to be comfortable being associated with a company that really only wants to screw me for money? That’s the issue for me.”

For the past 20 years, Pascoe, 65, has visited his sister and brother-in-law regularly in their retirement village, Acacia Cove in South Auckland. “I’ve never heard them say anything negative about being in the village,” he says. “They’ve never once told me they regretted it.”

Pascoe is struck, however, by the fact there are only ever grey-haired residents in sight. “There are no younger people around… to create a more stimulating environment.”

Another fish hook in the retirement village model is that once a resident has moved on, in most cases they (or their estates) have to keep paying the weekly fee until the unit is re-sold, and generally their capital isn’t released until a deal has been finalised. Current legislation demands village owners must reduce the fee by 50% after six months, but Troy Churton, national manager of retirement villages at the Commission for Financial Capability (CFFC), says that isn’t always incentive enough for the village to prioritise re-selling the unit.

The Retirement Villages Act 2003 requires prospective residents to take independent legal advice to ensure they understand the financial implications of the contracts they are signing. Even so, some feel the power still lies with the operators. “[Mostly] you pick your retirement village from the area you’re in and they are all pretty much the same,” says Di Cooper.

While most people are happy with village life, the residents’ group believes the contracts are often unfair. “The legislation is a bit one-sided,” she says. Both the Act and the Retirement Villages Code of Practice 2008 came in before there was a collective voice for residents, “so they didn’t have any input”. What residents want, according to Cooper, is this:

  1. A standardised, plain English licence to occupy agreement. “It’s currently written in legalese.”
  2. Capital gain – losing all the capital gain to the operators is an unfair condition of a contract, she says.
  3. Cost-free complaints. Residents who lose a complaint risk being hit with the village operator’s legal costs, so few cases are taken past the internal complaints stage to the independent disputes panel run by the Commission for Financial Capability, says Cooper. Residents argue the licence to occupy is more like a landlord/tenant relationship and they should have access to a low-cost complaints service similar to the Tenancy Tribunal or a financial services ombudsman.
  4. Input into how their weekly fees are spent. “In retirement villages, residents are just presented with [a bill] and have to accept it.” Yet many residents are on fixed incomes that have not kept pace with costs, as interest on investments has fallen steadily over the past decade.
  5. More rest-home care on site. Even if there are care facilities, village residents aren’t guaranteed automatic entry, as there may not be rooms available when needed, says Cooper. Short-term respite care, after an accident or illness, is also generally charged at a hefty day rate.

Troy Churton says the commission fields calls from residents complaining their contracts are unclear or downright confusing about this aspect of villages. “The CFFC would just like more clarity for intending residents and those already there, and for all [villages] to play with a straight bat.”

Cooper acknowledges contracts vary between operators. “We know, however, these are issues in some villages,” she says.

Doing business

Commercial retirement villages are based on a shrewd business model that’s primarily about property development, not aged care. They’ve even been described by critics as “farming the elderly” for profit.

Government ministers and councils see mostly positives, however, as they struggle to provide housing for a growing population. While opening a new retirement village in Auckland last year, then-Prime Minister Bill English noted its higher-density model would free up houses in the city’s tight property market as older people moved out of large family homes and into units.

But the retirement village model has also allowed the likes of Ryman, Metlifecare and Summerset to pay surprisingly little tax (although dividends paid to shareholders are taxed). Operators have four main income streams, says Stephen Ridgewell, an analyst at Craigs Investment Partners: rest home and hospital fees, retirement village management fees, resale gains when a new resident buys in, and profits from new developments.

Aged care and management fees are fully taxable, says Ridgewell. However, resale gains are not; nor usually are development profits. “This chiefly reflects that the operator is not selling the unit, but a right to occupy,” he says. The reason these companies pay little or no tax currently is that their operating expenses are higher than their income from aged care and management fees, and depreciation can be claimed on their assets.

Barrister Iain Blakeley, who’s worked in taxation with retirement village and aged care providers for 20 years, says retirement villages operate under the same tax regime as other businesses. While their profits look good, the cash surpluses they’re taxed on are lower.

“Retirement villages are taxed on deferred management fees. However, unrealised revaluation gains are not subject to income tax because they are not income. That can explain why a business that reports a profit for accounting purposes may not pay tax on all of that profit.”

The businesses are also able to claim deductions for expenses incurred in operating the villages, which can reduce the net taxable income to zero or less. These include salaries/wages, rates, insurance, food, medical supplies, interest and repayments to residents when buying back occupation rights.

Comparing profitability with other industries is problematic, says Jeremy Simpson, a senior analyst at Forsyth Barr. He says Ryman’s return on assets, for example, is around 4.5% currently and its return on equity is around 11%. “By way of comparison, The Warehouse Group returns are slightly higher, Tourism Holdings returns at its last result were around 10% and 16% [assets and equity] respectively, Fisher and Paykel Healthcare returns are in the mid-20% range, while A2 Milk returns [peaked] around the 40% level.”

Residents have made some advances in their demands in recent years as operators bow to pressure and/or make concessions in the interest of gaining a market advantage, says Churton. Metlifecare and Generus Living Group, for example, no longer charge weekly service fees once the unit is vacated – which he considers would be the ideal standard for all villages. Competition has also seen some operators such as Ryman and Summerset offering fixed weekly fees for life, so residents don’t face budget blowouts in the future.

In an interview with interest.co.nz, Churton said the “strong indications” to the CFFC were that most residents are happy with the offering they’ve entered into. “On the surface of it, it’s a very well-performing industry... Certainly it’s clear to me that operators are very aware of the need to innovate and not to fall too heavily on the laurels of the current profitable arrangements that they’ve got.”

A different village

Boomers doing it for themselves.

Baby boomers Greig Buckley and Catherine Smith watched their respective parents move into retirement villages and can see some of the benefits. “As the eldest sibling, it gives me reassurance knowing my parents are somewhere safe,” says Buckley, whose parents went into Poynton Retirement Village on Auckland’s North Shore.

Smith’s mother moved into the Anglican-run Selwyn Oaks village, near Papakura, and surprised the family by saying she was relieved to no longer have the burden of caring for her garden – they’d thought she loved gardening.

However, the couple want something different when their time comes. “You can rationalise the advantages of retirement villlages,” says Buckley. “But they are real-estate companies – they just plan for the churn and make the money. It’s economies of scale.”

He and Smith would prefer to live in a smaller, more intimate environment with people more like them, and are investigating alternatives such as co-housing. “I’m not saying it has to be cheaper,” he says. “Just different.”

The problem is that by the time most people reach the age where they need to move out of the family home, it’s too late to initiate a co-housing project, unless a template is there already or they can buy into an existing one.

According to a survey for Finding the Best Fit, a three-year research programme looking at downsizing in mid-life and in retirement, many who move into retirement villages do so because of this lack of alternatives.  

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