Golden oldies

Retirement village operators versus the critic of their profits

Re tire ment village owners say their profits are being overstated, and their costs understated in a paper handed by a residents’ group to the government department charged with a long-overdue review of retirement village laws.

It’s a $1 million question for an industry that agrees change is needed, but wants to preserve the profitable status quo allowing it to hang onto ex-residents’ money for months after they vacate their units.

Village owners say the paper’s claim that village owners earn $1m from a resident over an eight-year stay in a village, assuming a $600,000 entry price, was “way out in accuracy”.

And they argue calls to make them repay departing residents their capital within 28 days of vacating a unit would be much more expensive than the paper claims.

But Janine Starks, the author of the paper, is holding her ground, firing back that New Zealand is “the most expensive market in the world for retirement living”.

The Retirement Village Association (RVA), a political lobbying body that represents village owners, is fighting to convince the Ministry of Housing and Urban Development (MHUD) not to recommend sweeping changes to retirement village laws.

Village owners are especially opposed to calls for village owners to repay residents, or their estates, their capital within 28 days of them vacating a unit.

But the rival Retirement Village Residents Association (RVRA), a political lobbying body representing thousands of village residents, says the RVA is “catastrophising” its calls for reform.

It was the RVRA which presented Starks’ paper, Demonstrating the Fairness of Mandatory 28-Day Buybacks to the ministry, which was peer-reviewed by economist Shamubeel Eaqub.

It represented only a modest few pages of the 18 archive boxes of documents dropped off at the ministry, with most of the space filled in by survey responses from more than 11,300 retirement village residents wanting reform.

The RVRA says it is fighting for fairness. The RVA says the residents’ proposals will drive up costs for villages, risk driving some smaller ones out of business, and ultimately result in people moving into retirement villages paying even more.

The inclusion of Starks’ paper has not been welcomed by the RVA. Its president, Graham Wilkinson, challenged Stark’s figures and claimed she lacked “commercial awareness”.

Starks is a businesswoman who co-founded the Liontamer funds management business, which she later sold, leaving her independently wealthy, and writes opinion articles for Stuff.

The RVA also feels it has not been getting a fair go in the media, and that in recent weeks its voice has been given less prominence than those lobbying for change.

At any time, about 50,000 people live in retirement villages, which offer secure, comfortable and social lifestyles, having paid for “occupational right agreements” (ORAs) to live in retirement units.

When residents vacate their unit, either by leaving, or dying, they, or their estate, get back only part of their capital, minus a large deferred management fee.

But after a push by the RVRA, supported by the government-funded Retirement Commission Te Ara Ahunga Ora, the last Labour-led Government ordered the ministry to review two-decade old retirement village laws.

The new Government’s coalition agreement promised to “progress” the review.

But instead of pledging to lay down new laws as it sees fit, it planned “to liaise with retirement village owners and occupiers to seek a mutually agreed way forward to safeguard the interests of the 50,000plus New Zealanders living in retirement villages”.

While both the RVA and the RVRA do agree on some points, such as removing “unfair” clauses from ORAs, they do not agree over the fairness, or cost, of a crucial issue - the call for 28-day buy-backs.

The RVRA says ex-residents should get their capital back within 28-days, while the RVA wants village operators to be able to hold onto the capital for much longer, and only pay interest on the money after they have had it for nine months.

Village owners say it takes time to refurbish and sell an ORA on a vacated unit, and new ORAs are sold on vacated units within nine months in 90% of cases.

The RVRA wants the change to cover people already living in villag

es, while the RVRA opposes retrospective legislation.

The two sides also do not agree on the cost of setting maximum buyback timeframes, and it will be up to the ministry to judge their competing claims, although it does not seem the ministry currently favours such a short maximum repayment period.

Its August consultation paper asks about six, or 12-month repayment maximums. It suggests the cost per unit for village operators of a six-month buyback maximum would be in the range of $745 to $3095.

The RVA has been particularly upset by Starks’ claim that “it is unconscionable that operators make an average of $1 million revenue over the eight-year tenure of a resident living in a village (based on a $600,000 purchase price), but are refusing to support legislation to buy-back the unit in a short, mandated time frame.” “The figures Janine quoted are way out in accuracy and context – both income and costs,” Wilkinson says.

He also claims that village owners routinely subsidise the costs of running their villages, and overstate the development margin developers earn.

The RVA felt so aggrieved it hired an economic consultant to respond to Starks. “If Janine was right, wouldn’t the market be flooded with developers and the share price of villages would not be the current circa 60% of their net tangible assets and sitting at all-time lows. She can’t be right and the market?” Wilkinson says.

Starks says the retirement village operators’ share prices show the market “punishing” them for their decisions, and the impact of wage and construction inflation, not because of any change to their highly attractive revenue model. “Behind the prolific property development, lies arevenue generating model in each village that is

as profitable today as it was 10 years ago,” Starks says.

“It defies gravity and is the unicorn of the property sector. Property developers have morphed into property investors, while withdrawing all their capital and moving on to the next village.

“It is sheer genius to be able to extract capital gains and a 25% management fee, with no underlying investment remaining. Some even claim it is woeful when projects have a little development debt remaining on completion. Fancy having to keep a little skin in the game as an investor.”

Both sides to the dispute agree that the retirement village industry model involves village owners utilising the money they get from ORAs to develop new units, which they sell ORAs on, using that money to develop new units.

It’s a “resident-funded” development model relying on what are in effect interest-free loans from residents, repaid only after they vacate their units, often at death, or to go into residential aged care.

Retirement villages do not throw out large amounts of cash, but instead use residents’ ORA money to build valuable assets owners can one day cash out of.

“I often say that while I might not see the fruits of my labours, I think my children might thank me,” Wilkinson says.

“In the meantime I have to fund the shortfall. Larger operators have some massive shortfalls. Remember inflation on costs has been savage while fees are frozen.”

Wilkinson describes retirement villages as a “use-now, pay later scheme”, saying there is “no mischief in this model”.

“The trick is to get the overall balance right between the operator and the resident as to benefits and obligations … while not altering the basic financial parameters of the model, which could cause significant industry damage and halt village development,” he says.

Balance is just what the RVA and Starks say is lacking.

“Operators in other countries look on in awe,” she says. “This model is a money-printer which is why shareholders enjoyed 800% gains in a 10-year period up to 2021.”

The $1m figure is not the only one in dispute.

“The [28-day] buyback cost has been modelled at $13,535 based on the most efficient method of commercial bridging-loans and known sales patterns,” Starks says.

The RVA claims it will cost a lot more for villages to maintain lines of credit at banks.

“The issue is that to be able to guarantee

an operator can repay within 28 days, they will need to have funds available and not for just one unit,” Wilkinson says.

PWC has modelled the cost, assuming it is funded by villages holding more capital, it will require village owners to inject some $70m to $250m into their balance sheets, he says.

PwC, which was hired by the RVRA to do the modelling, claims the likely impact of village operators having to hold more capital is that they will increase their deferred management fees, increase their ORA prices and slow village development

But Starks says “buying back a unit is compulsory in Australia. It didn’t collapse the market. Operators have to repurchase in six months, but units take longer to sell, so the burden is similar”.

“All residents are asking for is to have the money repaid on death or exit, given they have no equity interest in the property.

“They currently become unwilling creditors and surrogate shareholders, with no benefits,” she says.

Nigel Matthews, chief executive of the RVRA, stands by the decision to submit Starks’ paper to the ministry.

“If there is any substance that a 28-day refund of capital will cripple the industry as some RVA representatives have said, then let’s discuss a structured/tiered way to ensure smaller operators can return a portion of the funds to assist residents and families when they do move out and/ or pay interest on the funds that they’re hanging on to … or share the capital gains,” Matthews says.