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For a truly awful property investment look no further than retirement villages. For many older people, the decision to check into a retirement village devastates their life savings.
Buying an apartment or unit in a retirement village often costs many hundreds of thousands of dollars. That's not the end. You then clock up a huge "facility fee" over three to five years covering staff salaries, maintenance, emergency call systems and village activities, which is charged when you leave, and then a monthly fee for services.
New legislation, which came into effect earlier this month, gives consumers more protection than they had in the past. Nonetheless, Consumer warns: "Buying into a village can be a financial minefield. So it's a case of buyer beware."
Consumer's investigation found:
* The contracts are extremely complex and favour the operators, not residents
* Residents rarely get the capital gain on their units, the operator gets that
* There can be multiple charges for maintenance and administration
* Residents often have no control over the sales process
* The operator sets the cost of "refurbishment" when a resident leaves and doesn't necessarily have to spend it fully on the property.
Residents' service fee average about $80 to $90 a week if you're living independently within the village or up to $350 per week for a serviced apartment, says Bill Duncan, consultant at Fortune Manning Law Partnership.
Add to that administration fees of say 2 per cent when you move out or on, and you're looking at an investment that makes even the dodgiest Auckland apartment sale look like a good deal.
While retirement village units are "dreadful" investments, says Jeff Matthews, senior financial adviser at Spicers Wealth Management, they can be good lifestyle choices if "buyers" go in with their eyes open. It's a life changing decision that shouldn't be taken lightly or without seeing a lawyer and financial adviser.
Matthews cites the example of one of his clients who bought a retirement village apartment in a fairly typical deal for $400,000, was charged a 10 per cent facilities fee for three years in a row, which reduced the value of the property to $280,000. In addition she pays a weekly service fee.
There is often no guarantee with most retirement villages that the service or other fees won't be increased as time goes on, says Matthews. This is of most concern where a village is bought by new operators who want to extract more bang for their buck.
Matthews says when his client leaves all she will get is $280,000 regardless of inflation. At that time a new buyer will pay $400,000 or even more to buy that same apartment, joining the conveyer belt while the operator gets another slice of the cake. "I've heard it said it's like farming the elderly," says Matthews.
What's more, says the Consumer's Institute, some operators, while pocketing the capital gain, expect residents to foot any capital loss if the market value drops.
Even if residents have the legal right to leave their contracts, financially it is often impossible, says Matthews. "After three years you're screwed. Your property has just dropped 120 grand in value." It would only be possible to buy into a lower- grade unit or village.
That's not the end of the story. If you need geriatric care, you'll often need to move out of your apartment, sell, and then your remaining capital is eaten up in care costs until only $160,000 remains, at which point the government steps in and pays your costs.
Retirement villages are not just an issue that affects the older generation. Some younger people will baulk at the idea of "their inheritance" being swallowed up in retirement village "investments". Others may be stuck with a situation of their parents being unhappy at their decision but trapped financially.
An even worse situation is if you want to sell and there is no one to buy. Currently there are waiting lists for many villages. If, however, they keep popping up like mushrooms, the market will eventually be oversupplied - as can happen in any section of the property market.
It's important to realise that you're not buying property in the sense of an ordinary suburban home. You're buying a right to exclusive occupation until you choose to move out, says Duncan.
The contracts are totally different from ordinary real estate agreements. In 60 per cent of contracts you are buying a licence to occupy. Less common is a retirement village where you buy leasehold, a unit title, or a freehold title.
The Retirement Villages Association New Zealand (RVA) says anyone buying a home in a retirement village needs to carefully read the Occupation Right Agreement, Village Complaints Policy and Procedure, Code of Practice, Code of Residents Rights, and the Retirement Villages Act 2003. It's a good idea to also find out how much you'll receive when you leave as you will do one way or another.
Even better, they should have a lawyer check these documents because it's not uncommon for documents in any property transaction to be heavily weighted in the sellers' favour.
Back in the good old days retirement villages such as Selwyn Village in Auckland's Pt Chevalier were set up by churches "to provide Christian care and support for the elderly". These days villages are set up as property plays by big business. And they can be very good business indeed.
If you want to know just how profitable the business is, says Matthews, take a look at the Ryman Healthcare shares, which rose in value by 500 per cent for the three years to February 2007, or the Metlifecare shares that went up 340 per cent.
Matthews said he "just about gagged" when he read the blurb for a retirement village marketing seminar. It included phrases such as "how to turn empty beds into fast cash-flow".
"They really view their clientele as widgets, or economic units. If you want to invest in retirement villages, buy the Ryman Healthcare or Metlifecare shares."
It's no wonder that retirement villages are mushrooming. By 2050 there will be an estimated 50,000 people living in these villages in New Zealand, says Duncan.
One piece of good news is that the new Retirement Villages Act 2003, which came into force this year, requires that Occupation Right Agreements contain certain information such as the terms and conditions if you want to leave the village. There is now a cooling-off period of 15 days from the date of signing.
It's true there are many thousands of retirement village residents for whom the financial hit is worth it. As the RVA points out, you get:
* The privacy of your "own home"
* Have 24 hour on-call assistance
* Have services and recreation facilities on site
* Don't need to worry about maintaining your home
* Have decent security.
Alternatives to retirement villages can be downsizing and paying for help from capital released or other investments, or using equity release mortgages to make money available.