Exit fees and ‘super’ profits: The truth about retirement villages

The reaction to recent scare stories about retirement villages and aged care underlined two things; there’s a lot of misinformation out there about the residential solutions available later in life and, as a result, many people are deeply opposed to using them.

Starts at 60 asked Geoff Grady, the chief executive of Aveo – the subject of the most damaging recent stories by Fairfax and Four Corners about the retirement village sector – to separate truth from fiction in a frank interview, so readers could make up their minds with the full facts at hand.

Starts at 60 received payment for publishing this story. We chose to take up this opportunity with Aveo because we believe it’s in readers’ interests to see both sides of the story before drawing a conclusion on what may be a viable housing option for them or their parents in the future.

Why are Australia’s aged care needs changing?

There are about 5.5 million Baby Boomers – people born between 1946 and 1965 – in Australia. The oldest of the generation turned 70 last year, which means they’re likely only now just starting to think about what their care needs might be as they get older.

But unlike previous generations, Baby Boomers can expect to live longer, healthier lives post-retirement.

This means that even as the oldest Baby Boomers are turning 90 and probably still making use of aged care services, the youngest of the generation will be starting to consider their own future care needs.

As a result, there’s going to be many more people than ever before using or planning to use aged care services of all kinds.

To give you a rough idea of the numbers involved, almost 200,000 additional people are expected to want accommodation in a retirement village between 2014 and 2025 alone – that’s almost double the total number that live in villages today. *

That’s good news, right? We’re all staying healthier and living longer!

It’s great news, but the truth is that as people get older, they do often need a little help in managing day-to-day living such as shopping, cleaning and cooking.

And some need more than a little help, perhaps because they’ve developed an illness or heath condition that needs careful management. They may need assistance bathing, dressing, treating an illness or managing their health care. They may even need more intensive assistance or treatment that requires 24-7 access to care professionals.

And because we’re all living to a greater age, they’re going to need that help for longer than the generations before them.

But Australia doesn’t currently have the capacity to meet what’s going to be a huge jump in demand from Baby Boomers for all levels of care. There just aren’t likely to be enough places in government-funded residential care facilities for everyone, which is why those places are, and probably will remain, means tested.

Going back to the 200,000 additional residents I mentioned earlier, that means that the retirement village sector alone – not counting other types of aged care – will need 150,000 more units than it has today just to cope with expected demand over the next eight years. *

The government is already working on ways to meet the growing need for care, in part by moving its aged care funding system to a more consumer-focused model that allows users to stay in their own home, live in a retirement village, or some other kind of semi- or totally independent unit, and still access taxpayer-funded or part-funded care if they’re eligible.

Residential aged care-focused companies are also transforming to meet demand, by offering the option of increasing levels of care at existing retirement communities – again, with the resident able to cover the cost of some or all this care through government funding.

In short, even though we all like to think we’ll always be able to remain in our own home, that’s just not what happens for some people. The number of people in that situation is going to grow rapidly. If they aren’t eligible for a means-tested aged care bed, they’ll need somewhere they can access that care – and that’s where the private sector comes in.

What’s Aveo’s place in all of this?

Just providing those extra 150,000 housing units would cost about $75 billion – and that’s not a cost taxpayers alone can bear, or that the government wants them to. Instead, it relies on companies such as Aveo to invest in providing services alongside the government.

Since 2014, Aveo’s been developing new retirement communities and other aged care housing options.

We’ve also been investing in allied care businesses and services, such as ones that provide physiotherapy and podiatry, so we can bring those services to our residents. And we’ve been improving how we deliver existing services, such as meals and telecommunications, to residents.

We’ve spent more than $700 million doing this because we know that today’s and tomorrow’s retirees are going to expect better services and for longer periods than ever before.

But Aveo’s dealings with some of its residents have been criticised in the media as unfair, if not illegal. What’s your response on that?

We’ve heard the recent commentary about the retirement living and aged care industry, and about Aveo as an industry leader, and we understand that people have concerns.

It’s a reality that Aveo’s bought many smaller retirement villages over the years and it’s fair to say that some of the contracts those villages used are confusing, but we can’t legally scrap the existing contracts and replace them with ours.

As an industry, there’s work to do in terms of improving contracts. We’re listening to our customers and understand these concerns.

As part of our commitment to improve, two years ago, we introduced a new style of contract called the Aveo Way, because we were concerned about the complexity of these old contracts and wanted to make sure we clearly set out the cost of living in and moving out of a village and addressed a range of other issues our customers had at those points.

Since then, we’ve been rolling out the new contracts to our villages, over 2,000 contracts to date, so eventually all residents in Aveo villages will have the new, simplified contracts. None of the issues raised in the reports by Fairfax or Four Corners involved the new Aveo Way contracts, and most complaints would not have occurred under these new contracts.

We’re aware of instances where the services we provide residents have fallen short of expectations but these cases are rare and although we can’t talk about individual cases, we’re continuing to engage with these residents to sort the issues out.

Aveo contracts, both old and new, must meet legislative requirements – the rules on what is acceptable in a contract are set by state and territory governments, not by the residential aged care industry.

In addition, last week we unveiled an initiative for new residents – we’re offering a six-month money-back guarantee.

In short, we are letting you try, before you buy. That’s because we are confident customers will love the Aveo offer, however, we want to offer peace of mind around a big decision.

You keep mentioning the Aveo Way. Why is it an improvement?

There were quite a few key criticisms of most retirement village contracts:

• The contracts are too complex
• Residents practically, if not legally speaking, have to rely on the village operator to sell their property, and this can take longer than everyone ideally wants
• Residents have to pay the operator to refurbish the property for re-sale, pay fees to market the property, and then pay a commission on the sale, making it a time-consuming and expensive process
• Residents who find their care needs have increased have to sell their village property, often quickly, to enable them to enter a nursing home and afford those fees.

The Aveo Way deals with those issues:

• We give an extended cooling-off period – the buyer can cut up the contract and scrap their purchase plans without any penalty – of 21 days. The Aveo Way contract is more beneficial for consumers than state legislation requires.
• We also allow six-month money-back guarantee period in which a resident can actually move into our retirement community and still decide to back out of the purchase, again without incurring a deferred management fee
• We guarantee we’ll buy back any property that doesn’t sell within six months of being vacated
• We are responsible for all refurbishment costs and there are no fees or commissions on the sale of the property – the exiting resident pays nothing toward these costs
• We offer Aveo Way residents a discount if they buy a second property at any Aveo community. If there’s a higher-care facility in the same community in which they already own a property, they can move immediately using a credit on the equity in their existing home. Either way, it relieves the need to sell their original property before being able to access a higher level of care.

But even the retirement village financial model itself seems complex. How does it work?

It’s easier to understand if you don’t try to equate it to what you know about the property market.

That’s because when you buy into a village, you’re usually not buying the home you’re going to live in – you’re more like a tenant who’s leasing the home. To get that lease, you pay some money upfront, just as a tenant pays a bond. The upfront payment is about $350,000 on average across all retirement villages in Australia.

You also agree to pay a charge when you leave the village, usually as a percentage of the resale price of your unit. The percentage is set out in your purchase contract and varies depending on how long you live in the village.

That percentage is called an exit fee or deferred management fee (DMF) and is like the ‘rent’ you’re being charged for living in the village and using its services.

Why can’t retirement villages just be priced like apartments? After all, they have separate accommodation but shared facilities too?

The pricing model evolved in this way due to demand from residents themselves.

Many older Aussies are asset rich but cash poor. When they sell the family home, they often want to use some of the cash to buy a new property, and some as capital to live on in retirement.

But charging people the full amount that it cost to build their village unit and the facilities around it would make living in a village too expensive for many people – they’d be left without enough capital to live on.

Instead, the DMF model allows people to use some money to buy into the village, then not worry about paying the cost of their accomodation they’ve used until they sell the unit and leave. That way, they effectively get ‘double use’ of the same capital – once when it secures a property for them, and again when it pays for facilities and services they used.

That’s why retirement village homes usually cost less than apartments, despite offering many more facilities than most strata apartment complexes, and why even people on a full Age Pension can afford to live in them.

DMFs, or exit fees, have been particularly criticised. How do they work?

A DMF is usually set as a percentage of the entry price of the unit. It’s capped at a pre-determined percentage that that’s clearly spelled out in the purchase contract.

The cap, which normally usually kicks in three years after the unit’s purchased, exists to ensure that the capital a resident put in as a ‘bond’ isn’t entirely eaten up by the DMF when they leave.

DMFs of between 30-35 per cent are the norm, but the more services a village provides, the higher the DMF usually is.

For example, Aveo’s Freedom Aged Care business charges a DMF of 40 percent of the resale value of the unit because Freedom provides high-level care for residents (which is charged on a cost recovery-only basis i.e. no profit) that’s more equivalent to the care provided by a nursing home.

It’s worth noting that in Freedom communities, as just mentioned, Aveo doesn’t profit from the provision of care, which is charged to residents at cost, with no mark up. Instead, Freedom’s higher DMF reflects the additional cost to the company of creating facilities that can accommodate this care.

Because Aveo’s bought villages from many smaller providers over the years, all offering different levels of services and care, we have residents who’re contracted to pay DMFs of anywhere between 20 per cent and 40 per cent.

That’s why we’re moving all new residents to the Aveo Way contracts, which cap the DMF for residents at 35 per cent of the purchase price after three years of residence.

Many people think even 35 percent is too high. What’s your response to that?

It can sound like a lot of money, but it depends on how long you live in a village, what services you use, what lifestyle you value, and whether you value all the benefits the contract has to offer.

Villages.com.au, a retirement village information site, explains it like this:

If you pay a $350,000 ‘bond’ to buy into a village that has a DMF capped at 30 per cent after five years’ residence, and you leave after five years, you’ll owe a DMF, or ‘rent’, of $105,000.

That works out to $400 a week for the period of your residency. But if you stay for 10 years, it’ll equate to $200 a week. 

That’s the ‘rent’ you owe for having had access to facilities such as swimming pools and bowling greens, as well as for having organised activities on tap, and safety features such as alarms, special lighting and safe footpaths.

Of course, everyone has a different view on whether that $200 a week is good value.

But potential buyers should always look at the level of facilities and services they’ll receive for their DMF, how long they intend to remain at the village, and the other costs they may be liable for when leaving a village, to help them decide if a DMF represents good value for them.

A low DMF isn’t necessarily good value if, for example, the resident is then also liable for high resale fees and charges.

What about the profit retirement villages make from maintenance charges?

 Residents do have to pay regular fees toward the running of the village, to cover items such as electricity and garden maintenance.

But legislation prevents the village operator from marking up these items, so residents can only be charged as much as the operator requires to cover its costs – there is no profit in providing these services.

Because these costs are ongoing, it’s worth noting that residents are liable for them as long as they hold the right to live in their unit, even if it’s up for sale. This is the same as would happen if you were selling an apartment in a strata complex. Not paying them during the sale period would be unfair to remaining residents, who’d face higher charges to cover the shortfall.  Of course under an Aveo Way contract this is limited to a maximum period of six months.

But if out-going residents are having trouble covering these costs, in many cases Aveo has covered the charges for them or deferred the charges until their home is sold so they can repay the money owing out of the resale value of their property.

Aveo was accused of re-selling residents’ homes for less than they paid for them, even in a soaring property market. Why does this happen? 

Every year we have a third of our properties valued by an external, independent company that’s experienced in the valuation of retirement villages, so we can re-sell properties for residents at the right prices.

But the market for retirement village homes doesn’t closely follow trends in the broader property market. It’s more closely aligned with the types of properties prospective buyers want.

Because we’re all living longer, there’s likely to be many more years of later life in which we want to remain in our own home but may need some home or health help.

So, today’s buyers are increasingly looking for villages that can provide a higher level of care in their later years, because they don’t want to have to move a second time. They want the independence of a retirement village but with the support of a nursing home, such as the service Freedom Aged Care provides.

As a result, villages that offer lower levels of support and care are less popular these days, which means units in those villages can take longer to sell and sell for a lower price.

The price expectations of the seller, the condition of the unit, the amenities it offers (for example, a car space) and its location (both within the village and the location of the village itself) can also have an impact on the amount of time it takes to sell and the resale price achieved.

Residents are not compelled to use Aveo’s resale services. In every state they can sell their own home or use an external real estate agent if they chose.

In short, though, if you expect a home in a retirement village to deliver a profit in the same way as buying in the broader property market may do, you may not have fully understood the product – this is a lifestyle and care-based purchase, not an investment purchase. 

What if you’re one of the residents who’s unhappy with the resale process, though?

First, for any customer who is unhappy with their contract or their resale process, we are committed to opening a conversation.

It’s important to remember that we advise everyone buying into a village to get independent legal and financial advice on the contract – as with a normal residential property purchase, it isn’t something anyone should sign up for without understanding their rights and obligations.

But every state and territory has a retirement village act that sets out how these contracts must work, including how disputes are resolved.

Queensland, Victoria  and New South Wales both plan to introduce updated legislation covering retirement villages, that aims to further simplify contracts and fees. Meanwhile, Federal Aged Care Minister Ken Wyatt has promised to revisit recommendations made in a 2007 report into the sector on ways to improve the sector.

In the meantime, retirement village operators and leaders of the retirement village residents’ associations have agreed a new, eight-point plan designed to deliver more transparency and better standards in contracts, dispute resolution and other areas.

Aveo complies with, and in many cases, goes much further in its dealings with residents than the current legislation requires, and will be a keen participant in any discussion on changes to the industry.

So, you’re not profiting from maintenance charges or care services and don’t charge extra to re-sell units. But you’re still making a huge profit, right?

In the 2016-17 financial year, Aveo made a 6 per cent return on its retirement assets. That’s a bit higher than the 5 per cent return village operators generally make on existing assets, but it’s hardly an excessive profit, or a ‘super profit’, as most of the financial analysts who cover Aveo have commented.

We want to push this up to 7.5 percent to 8 percent in 2017-18, but that’ll be mostly from new developments, rather than from ‘squeezing’ bigger profits from our existing assets.

Making some profit, though, is key to the private sector’s involvement in the sector.

It’s vital that companies work alongside the government if Australia’s going to meet the growing demand for aged care services. And it’s vital that those companies are financially sound – having older Aussies buying into residential options that aren’t backed by providers with cast-iron balance sheets would be a huge risk.

And while you may not agree with the involvement of the private sector in aged care, it’s worth remembering that many of those private sector companies are listed on the Australian stock market, where their shares are owned by superannuation funds. So, it’s in many peoples’ interests that we run a viable business.

Aveo’s backing is cast-iron. We own and operate 91 retirement villages in Australia, with more than 13,000 residents, and we’re innovative and committed to continuing to offer Australians much improved residential lifestyle and care choices. We’re here to stay.

*  Source: The Property Council of Australia