The retirement village industry, particularly the large national operators, have come under much scrutiny in recent years, criticised both for having complex contracts and a lack of choice around payment options.
The deferred management fee (DMF) model has typically formed the basis of most retirement village contracts, having been developed as a way for the original operators of retirement villages – churches, charities and not-for-profit organisations as well as commercial developers – to provide an affordable housing model.
While the DMF payment option may have suited the needs of retirees decades ago, today’s Baby Boomer retirees are demanding more choice and transparency than ever, as they consider moving into a retirement village.
Following research to better understand the needs of this growing generation of retirees, national retirement village operator, Lendlease shook up the industry with its recent announcement of three additional financial models.
As well as the deferred management fee option, Lendlease will now offer prepaid, refundable contribution and pay-as-you-go options to residents moving into 54 of its 71 retirement villages around the country.
“We spent a lot of time talking to rejecters – people who were interested, and maybe even paid a deposit, but then said no,” Tony Randello, managing director of Lendlease’s Retirement Living business said. “The reasons weren’t always financial but for the ones that were, they said they didn’t need to defer their payment and they’re concerned about what they leave behind for their children.”
Prepaid Plan
Under the prepaid plan, residents have the choice of paying full price for their retirement village accommodation plus an upfront management fee. When it comes to leaving the village, the resident pockets the full sale price, including the capital gain. The only costs at exit, are selling costs and reinstatement costs.
“People are retiring with more super than they had previously, they’re more investment savvy than they used to be and may even choose effectively to invest some of their money and pay less,” Randello said.
Refundable Contribution
The refundable contribution option gives residents the security of knowing their money is guaranteed by paying more upfront, with no additional management fee at exit. This option removes the hassle and pressure of selling the property.
Under this model, the resident pays the price of the accommodation upfront plus an additional 30 per cent (totalling the refundable contribution) plus a three to three and a half per cent per cent establishment fee. The refundable contribution is reimbursed within 60 days of the resident leaving.
“This option is designed for people who want something simple and want the sense of security of what they’re going to end up with when they move out, and there’s no deferred fee,” Randello said.
Pay As You Go
The Pay As You Go option is available for serviced apartments only at select villages. This option allows residents to try out serviced apartment living without committing fully to a village. In this instance, a resident might pay monthly instalments of $600 a week on accommodation that might normally sell for $500,000, allowing them to keep their family home, rent it out and use the rental income to fund their retirement living.
Deferred Management Fee (DMF)
This option will still be available for those who prefer the DMF model. The deferred management fee allows residents to buy in to a retirement village by deferring payment of the management fee until they sell. By taking advantage of selling their family home and downsizing into village accommodation, they are able to free up cash to live on in retirement.
Randello said this greater choice would broaden the market opportunity since only one in 20 Australians over the age of 65 lived in a retirement village – low penetration in comparison to similar countries.
While not-for-profit and community-based groups have been offering some choice in their retirement village contracts for some time, it’s the fact that Lendlease has villages nationally, and is offering four different options, that makes it such a disruptive move for the industry.
According to Rachel Lane, principal at Aged Care Gurus, “the idea of offering choices or options isn’t a new concept. But the big end of town – like AVEO, Stocklands and Lendlease for example, haven’t gone down that road before. So, from that point of view, Lendlease are really leading the market.”
Lane, who was paid for some of the research Lendlease used, said the new contracts offer the choice and flexibility today’s Baby Boomers expect.
“I think it’s fantastic for people who want to share in the capital gain and want to pay a deferred management fee, and have if you like, the standard option that’s already available. They can have it. For people who want to have their deferred management fee up front, so they know what it is and it’s based on the purchase price – but still get some of the capital gain – they can have it,” she said.
“For people who go, ‘you know what? At this point in my life I don’t want to be subject to market forces, I don’t want the uncertainty of capital gain and capital loss, I don’t want the uncertainty and responsibility of renovating this unit when I leave, I want to know that what I put in I get back, and the operator takes care of everything else. They can have the capital gain, but they can also have the responsibility to renovate this unit and sell it, and I get a guaranteed buyback within a very short of period of time – I’m happy with that. I’m buying certainty.”
Despite the number of options now available in Lendlease’s contracts, both Randello and Lane predict that many retirees will still opt for the deferred management fee option.
“There’s still very much a sense of having now, paying later, but we think having a choice of a prepaid plan, a refundable contribution or pay as you go, will have more market appeal,” Randello said.
“I think the Baby Boomers have kind of revolutionised everything they’ve ever touched, and the idea that they’re going to accept the same financial arrangements that their parents did – it’s not going to happen,” Lane concluded. They’re going to expect choice, they’re going to expect transparency, they’re going to want to fund their retirement in a way that works for them, and so I think what Lendlease is doing is certainly going to be the way of the future when it comes to retirement villages.”
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