Retirement villages are banking on the grey tsunami. Can consumers bank on them?
Retirement villages offer a desirable lifestyle choice for some. But what protection do you have if things go wrong? We look at what you need to consider, plus we've developed a free downloadable checklist for assessing a retirement village: Retirement villages checklist (47.2 KB)
Promises were plenty at Wanaka Bay Village in New Plymouth. Over 100 luxury villas were planned, complete with swimming pool, spa, all-weather tennis court, bowling green and gym. But when the retirement village folded in September 2012, 5 years after it opened, only 9 of the villas had been built.
Residents of the village have since moved out. A buy-out deal involving another operator has seen them finally able to get on with their lives after months of financial uncertainty. The 9 brick-and-tile units have been advertised on TradeMe for rent at $360 a week each.
Industry commentators say Wanaka Bay's demise is unfortunate but doesn't indicate wider troubles in the sector. The Retirement Villages Association, which represents 80 percent of villages, says companies fail from time to time in any industry and the sector is still geared for growth.
Receivership may be a worst case but the Wanaka Bay saga exposes the risks consumers face when a village fails to deliver on its grandiose plans. While you can check in any time you like, it's hard to get out without taking a financial hit if the reality doesn't match the rhetoric.
Retirement villages have grown rapidly over the last decade. Data from the Companies Office show there are 348 registered villages.
Around a third are run by 1 of 5 big operators – Bupa Care, Metlifecare, Oceania Group, Ryman Healthcare, and the Summerset Group. Collectively, these companies earn revenue of over $600 million a year from their village and rest home operations. See our table below.
Non-profit providers make up less than a quarter of the industry. Their share of the market is expected to decline as bigger players continue to expand.
The industry is banking on the coming grey tsunami to fill future villages. But there's speculation that baby boomers may be more resistant to the retirement-village business model than their predecessors. Operators may be forced to revise what they offer in response.
Around 80 percent of villages offer a "licence to occupy". This is the right to live in a unit but without any ownership rights. On top of the sum you pay for the occupation licence, you usually pay a weekly fee to cover the village's operating costs. The average is around $124.
It's a business model based largely on churn. Profit projections are forecast on income from selling a licence to occupy for the same unit several times within a relatively short period. The average tenure of villas is 7 to 8 years. For apartments, it's 5 years.
When you leave the village, the operator usually retains a sizeable chunk of what you originally paid for your unit as a deferred-management fee – the bigger operators charge a maximum deferred-management fee of 20 to 30 percent.
In most cases, the village also keeps any capital gain from "reselling" the unit. Some providers, including Bupa Care and Metlifecare, also hold you liable for any capital loss.
Depending on the terms of your agreement, you could incur other fees. Oceania and Ryman Healthcare both require you to meet their legal costs when the unit is resold. Oceania also charges an administration fee to cover its marketing expenses.
Whether there's any opportunity to negotiate these fees will depend on the operator and market conditions. In a slow market, operators may be more willing to strike a deal.
Around 5 percent of Kiwis over 65 have moved to a retirement village. Research indicates most believe it was the right thing for them. Bill Atkinson from the Association of Residents of Retirement Villages calls it the "best move" he ever made.
But it's not all beer and bowling greens. Bill says the Retirement Villages Act, introduced in 2003 in an effort to protect residents in the rapidly expanding market, is "far too open to interpretation". He says standards vary as a result and residents bear the brunt of poor performers.
His concerns are echoed in a 2011 report prepared for the Retirement Commissioner, who is responsible for monitoring the Act. Among the 293 residents interviewed for the report, common concerns were raised about unexpected fee increases, reductions in village services, inappropriate management of sales, and lack of consultation.
Kay Saville-Smith, who co-authored the report, says residents were often reluctant to complain when problems arose. While the Act establishes a formal dispute-resolution process, it's seen as too adversarial. Residents can also have costs awarded against them if their case fails. Since 2007, just 10 cases have been heard.
John Collyns from the Retirement Villages Association agrees the disputes process "leaves much to be desired". But he argues market pressures provide an incentive for village operators to respond to residents' concerns: "It is essential that we have happy residents in our villages because if we do not, we don't have a business."
However, he concedes there's room for improvement. He says the association is aware the Retirement Commissioner has highlighted "operators' perceived deficiencies in communication and consultation" and it's been running seminars for members to deal with the problem.
Several reports for the Retirement Commissioner have also flagged concerns about the financial oversight of villages and the role of the statutory supervisor. The Act requires all villages (unless they have an exemption) to appoint a statutory supervisor to monitor their financial position.
Given villages often have complex financial and ownership structures, external supervision is crucial. The joint-venture company behind Wanaka Bay Village involved 12 trusts, 7 limited liability companies, as well as a clutch of individual investors.
The statutory supervisor has the power to intervene if they believe either the finances or management of the village is "inadequate". But a 2009 report for the Commissioner found that supervisors had varying interpretations of what they considered to be inadequate and some were comfortable with a certain level of financial inadequacy.
It also found "some distinct variations" in the level of financial analysis undertaken by supervisors.
Bill Atkinson also singles out statutory supervisors for criticism: "When the Act was introduced, residents were assured the supervisor would be there to safeguard their interests and assist with any problems. We were soon disillusioned of that." He says many residents don't regard the supervisor as good value for money.
Changes that came in late 2012 now require statutory supervisors to be licensed by the Financial Markets Authority (FMA). Licences have been granted to 8 companies, subject to conditions. Supervisors are required to report regularly to the FMA, with the first reports due at the end of March 2013.
Retirement Commissioner Diana Crossan says there's still more that can be done to clarify the supervisor's role, including the extent to which they act as advocates for residents. She says this should be considered in a review of the legislation. The issue of an independent advocate for residents also warrants "more thinking".
Kay Saville-Smith believes consumers would benefit from an independent advice service and has suggested villages should be rated on performance. "[Consumers are] faced with making choices in an extremely complex market. Yet there are currently few avenues of independent advice," she says.
Intending residents are required to get legal advice before they enter into a contract with a retirement village. But the quality of this advice has been variable. Lengthy and complex contracts – which can run to 50 pages – also make it difficult to compare villages.
In the current climate, any changes to legislation look unlikely. Speaking at the Retirement Villages Association conference in June 2012, Minister of Building and Construction Maurice Williamson said the Act was "not a priority for review".
Consumers may get some relief if proposed changes to the Fair Trading Act are passed. The changes will ban unfair terms in consumer contracts. These include terms that unreasonably favour one party over the other. Given the one-sided nature of some retirement village contracts, operators could find they fall foul of the new law.
We're not suggesting you should only go into a village where the answer to every question is "yes". Rather, be aware of the issues raised by our checklist and decide what's best for you.
Retirement villages checklist (47.2 KB)
The checklist is presented as a PDF document. To view this document you will need Adobe Acrobat Reader software installed on your computer. This is available free from Adobe.
|Operators||Number of villages||Base weekly fee range ($)||Maximum deferred-management fee (%)||Capital gain payable to resident?||Capital loss paid by resident?||Legal & marketing costs on re-sale?|
|Bupa Care||22||96 to 131||28||No||Yes||No|
|MetlifecareA||23B||107 to 150D||30||No||Yes||No|
|Oceania Group||27||69 to 141||20 to 30 (depending on village)||No||No||Resident pays operator's legal fees plus marketing costs of 1.5-2.5% of the original capital sum.|
|Ryman HealthcareA||25||99 to 129||20||No||No||Resident pays operator's legal fees.|
|Summerset GroupA||15C||99 to 139||25E||No||No||No|
Guide to the table: Our data is from villages’ websites and disclosure statements. Base weekly fee is for villas.