More retirement villages ditch capital gain sharing in contract revamp
By Rachel Lane
Retirement village contracts are moving away from giving residents a share of the capital gain on their unit as residents eschew the returns in favour of greater flexibility and certainty in their retirement.
The recent 2023 Retirement Living Census shines a light on how retirement village contracts are changing. These contracts, which are crucial to understand if you intend to live in a retirement village, are also moving towards basing the exit fee on the purchase price.
Almost three-quarters (73 per cent) of the industry is now using this form of contract, up from about half of contracts in the previous year and more than triple what it was in 2017. This change is likely to be a result of residents preferring certainty and recent legislative changes.
Retirement village contracts are increasingly not offering residents a share of the capital gain made on the unit they inhabit.Credit: Moodboard
In most states, retirement villages are 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 NSW the buybacks are 12 months in regional areas and six 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 average price of a two-bedroom unit increased by $32,000 to $516,000, an increase of 6 per cent for the year. If we look at the longer-term numbers, the price increased from $398,000 in 2016, with no negative years, so retirement village properties are averaging a gain of about 4 per cent, per annum.
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 half (49 per cent) of renovations for retirement village units more than 15 years old cost at least $40,000 with 6 per cent exceeding $80,000.
Interestingly, the reason why residents left a village changed significantly over the year. In the previous census, the most common reason for leaving a village was to enter aged care. In this census, entering aged care and moving to another village were the most common reasons for leaving.
The increase in residents moving to another village was the highest ever recorded and a staggering 600 per cent greater than the previous year, albeit off a low base.
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 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 cases 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, it also creates transparency around the true price.
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.
Rachel Lane is co-author of Aged Care, Who Cares and Downsizing Made Simple. She is also the creator of Village Guru, a software programme designed to take the financial confusion out of downsizing.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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