Property valuers give guidance to the parties involved in retirement living complexes, and they determine the value of specific rights of owners and residents and services provided within these complexes.
Towart (2021) provides a comprehensive study of the methodology for the valuation of seniors’ property facilities. McAuliffe (2010) explains the approach and variables when valuing the scheme operators’ interest in a retirement village. Bunce and Reid (2021) offer an insight into the existing residential parks in Australia, but there is limited literature on the valuation of residential parks in Australia. There are numerous academic publications on seniors’ living accommodation in Australia and a useful literature review is Hu et al (2017).
The PWC/Property Council (2020) census provides data and analysis on approximately 600 retirement villages in Australia with the assistance of CoreLogic. Their annual information on the characteristics and demographics of RVs is a useful source of the state of RVs in Australia.
When property valuers are valuing an individual unit within a retirement living complex they should assess a market value that is derived from a combination of financial and social characteristics. They should use a direct comparison approach to value the ILUs and incorporate in their analysis the key variables of location, condition and size of the unit, communal facilities, community synergy and quality of management. A direct comparison with freehold housing or apartments in the neighbouring region is not logical.
The summation approach, which determines cost less depreciation of the improvements and adds allowance for the site rights, may also be used by valuers but this is not a preferred approach as the cost of the improvements is not a determining factor for the purchaser of the rights.
Petersen et al (2017) researched the market for seniors’ living complexes in Queensland and surveyed the residents about their research and expectations prior to entering the village. Their findings identified the variability of the professional advice received by prospective residents and noted that most recognised the complexity and specialist nature of this housing type.
The researchers concluded that “it is vital that older people have a clear, consistent understanding of the financial and legal obligations of retirement village life and that legislative reform, legal and financial professionals and operators reinforce this objective”.
The profile of prospective residents requires careful consideration. Retirees who have held responsible work positions and have owned residential property over a long time period are unlikely to choose an older style retirement village that is 20 to 30 years old. It should be expected that major renovations will be required to older style retirement villages in order to compete with the newer products in the market. The physical condition of the seniors’ living complexes and the lifestyle facilities will result in large demand differentials and substantial value differentials.
Anomalies and resident risk in the legislation governing retirement living
When assessing the worth of rights to reside in either a residential park or a retirement village, there are several features in standard occupation agreements that may lack clarification or justification. Among the key risk elements in residential parks are consideration of future changes in site fees and the security of tenure in site agreements.
In the case of retirement villages, the legislation condones exit fees at a percentage of the entry fee and the timing of exit entitlements payouts that may not be consistent with efficient market practice, these anomalies should be considered by prospective residents. These concerning issues are:
Site fee changes in residential parks
It is expected that prospective homeowners will consider whether the price being asked for the right to the site lease and the site improvements is reasonable and will select a park that meets their financial situation. They will also be aware of the ongoing site rental figure, usually described as a weekly figure. The MH(RP)Act stipulates certain controls on site rent increases (s 69) but a possible basis for a future increase is a market review or special costs (s 71) that can be included into the site rental. Both future market reviews and special costs are unknown and may result in increases well above the annualised consumer price index increase. This is a risk that homeowners should understand, noting that the special costs may be operational, repair or upgrade in nature. As these parks age it is probable that special costs will escalate to maintain the high standard of community facilities.
Site agreement tenure in residential parks
The site agreement (HM(RP) A, s14) will specify the period of the site lease and the conditions under which the lease may be cancelled. Part 6, division 3 of MH(RP)A refers to situations where a site agreement may be cancelled, including possible change of usage. It is unlikely that the designated use of new residential parks will be changed and it is highly improbable that the park owner will seek a material change of use but home owners should be aware of the possible circumstances that may, in the longer term, initiate a cancellation of the lease (s38). Homeowners should also be conscious of the amount of compensation they may receive as a result of a cancellation of the site agreement (s40). Section 93 of the MH(RP)A allows the park owner to offer the site owner an alternative site in the complex but, practically, the modern ‘Over 50s Complexes’ have immovable “movable” homes and this option is not practical.
The rationale for exit fees in retirement villages
There are two arguments put forward for the charging of exit fees in retirement villages. Originally, it was proposed that residents, living on fixed income, could not afford to pay the regular weekly amount needed to run the retirement village facilities. The proposed solution was an exit fee which replaced a portion of the ongoing fee payable for management services and operator profit. While the current service levies in retirement villages do not cover scheme operator profit and some management costs, the exit fee chargeable on modern units is excessive as a deferred management fee. Using time-value of money calculations, it is feasible to calculate the equivalence of an exit fee as a weekly charge amount and as demonstrated in Table 3.
The equivalent weekly amount of the deferred management fee when the entry fees exceed $500,000 is more than $200 per week and can be as high as $500 per week. It is difficult to justify that a deferred management fee should be more than $200 per week when the residents are already paying a levy for all other services. However, more recently there has been a further justification for the exit fee, the second argument. It is stated that the entry fee paid by the resident of a retirement village is below the market value of the accommodation provided and this ingoing contribution discount should be paid later when they leave the village. Some advertising material states that retirement village units are priced at 20% to 30% below the market price of comparable units. The author has found little evidence of this discount to the entry fee in relation to comparable unit costs. It is noted that some retirement village operators now offer an entry fee option that excludes the exit fee and increases the entry fee by approximately 20%. It is unlikely that this higher entrance fee represents the real market price of the units as it is not the popular choice, but rather an alternative for persons who are not price sensitive. The fact that residential parks do not charge an exit fee raises the question whether exit fees are justified. It is probable that exit fees do reduce the regular levies payable in retirement villages. However, considering that the average ongoing weekly contribution in retirement villages is in the region of $120 per week (source: PwC/PCA 2020) and the average site fee of residential parks is in the region of $220 per week (source: local data), the differential of $100 per week does not justify the equivalence figures, shown in Table 3. There is clearly an imbalance between the levy differential and the amount of the exit fees. The author’s contention is that existing levels of exit fees at 30% to 35% on either entry fees or entry fees paid by the next resident, are excessive and should not be supported by the RVA. The author’s recommendation is that the exit fee should be based on the period of residence and be an amount (preferably a dollar amount, not a percentage) that represents a defined allocation to the Capital Reserve Fund of the village and a reasonable profit allowance for the scheme operator.
The payout of exit entitlements in retirement villages
At present the outcome of the recent review of section 63 of the RVA is still unknown but it is anticipated that some changes will be made to the time period permitted under the Act, at present – up to 18 months, before the scheme operators must pay the exit entitlement to the exiting resident. The current legislation requires the scheme operator to agree the next sale price of the unit with the exiting resident and undertake any refurbishment of the unit prior to marketing the unit. The exiting resident will only receive their exit entitlement once the unit has been occupied by the next resident. However, if the unit is not sold after an 18 month period, the scheme operator must pay out the exiting resident. This is not a satisfactory arrangement for the exiting party and, hopefully, new legislative changes will alter this arrangement. It is noted that some scheme operators now contract to pay out the exiting party within a shorter time frame, a commendable practice. A maximum time period before payout of 12 months would be more equitable but efficient management could reduce the average turn-around time to within six months.
Suitability and Condition of Communal Facilities and Individual Units
The physical state of retirement living complex is evident in a comprehensive inspection of the complex. The “state” of the complex reflects the quality of management of the complex. The intentions of the owner/manager of the complex will be noted in the level of maintenance and refurbishment of the facilities and the overall condition of the individual units and, accordingly, the wellbeing of the residents.
In a retirement village, prospective residents can gauge the attitude of management by examining the quantum of the capital replacement fund (CRF). The RVA requires the scheme operator to have and maintain a CRF (RVA, ss 91 – 94) and the fund should have a realistic figure set aside to ensure that future upgrades are achievable. As a guide to the adequacy of this figure, the CRF should be compared to the accommodation payables revenue (APR) from the village – this is essentially the exit fees received over the past year. As a rule of thumb, if a scheme operator is serious about upgrading facilities of the village, their CRF should be in the region of 40% and 50% of the APR.
Another important consideration in the assessment process is to note the level of care support within the complex. It will be noted that some retirement villages have residential aged care facilities (RACFs) within the property and may offer some level of “in home” care from that facility. However, it is important to realise that residents wishing to transfer from an ILU to a RACF cannot be guaranteed access to the RACF within that property.
Learn more about retirement living options in Queensland:
Evaluating retirement living options in Queensland (Part 1 of 3)
The future of retirement living complexes in Queensland (Part 3 of 3)
References
- Bunce D and Reid J (2021) Retirement in residential parks in Australia: Smart move or move smart, Urban Policy and Research, 39, published online 18 August 2021
- Hu X, Xia B, Skitmore M, Buys L and Zuo J (2017) Retirement Villages in Australia: A literature Review, Pacific Rim Real Estate Journal, 23:1
- IVSC, 2021, International Valuation Standards, effective 31 January 2022, IVSC, London
- McAuliffe B (2010) Valuation methods in resident funded retirement villages in Australia: a practitioner’s prospective, Pacific Rim Real Estate Society Conference Wellington, proceedings online
- Petersen M, Tilse C, Cockburn T (2017) Living in a retirement village: choice, contracts and constraints, Journal of Housing for the Elderly, 31:3.
- PwC/Property Council of Australia, (2020), PwC/Property Council Retirement Census, online: https://f.hubspotusercontent40.net/hubfs/2095495/2020%20Retirement%20Census%20Snapshot%20Report-1.pdf
- Towart L (2021) Retirement and Aged Care Property Valuation, Ch 12 in Principles and Practice of Property Valuation in Australia, third edition, 2022, Routledge.
