Refitting costs eat into return
Retirement villages where residents get to keep most of the capital gain are being developed by a new company throwing down the gauntlet to the big players. Karaka Pines Villages, based in Tauranga, is planning and building two villages, one at Drury and one in Rototuna in Hamilton, where part of the deal is that residents keep the capital gain on the property when it is sold, less a 12.5 per cent facilities fee (also known as a deferred management fee) and refurbishment costs.
By contrast, most large retirement village operators pay residents when they leave or die, or their estates, the price they bought the unit for, less a 20 per cent to 30 per cent deferred management fee and refurbishment costs.
It has long been the subject of criticism, particularly as property prices have climbed in the past several years.
Karaka Pines’ ‘‘next generation’’ model, as it is being marketed, has been developed by chief executive Adam Yates, who said it was a lot fairer than the present model where the capital gain goes to retirement village operators.
Yates, with more than 20 years in the retirement sector, said the motivation to move into a retirement village was partly an older person’s anxiety about their retirement years.
He had earlier developed for his previous employer, Manor Group in Tauranga, an ‘‘own your own’’ model where residents effectively owned the retirement village. A trustee was appointed to manage residents’ interests, and residents kept 100 per cent of the capital gain.
His ‘‘next generation’’ model offered more services to residents and charged a
12.5 per cent facilities fee (a deferred management fee) on the unit’s sale price.
The key test of the model was that residents were happy to pay the 12.5 per cent in exchange for quality living and services in the village, Yates said.
Residents bought a licence to occupy the units, like in most retirement villages.
Yates said he was not setting out to build a large company, but Karaka Pines’ way would help to free residents from the financial burden of retirement.
Generally, people buying their ‘‘villas’’ were younger than those going to traditional operators. ‘‘I think people move into villages too late, as it is, to get the benefits,’’ Yates said.
The company was developing a
309-unit village, Karaka Lifestyle Estate, at the Auranga housing development in Drury, South Auckland, and recently held an open day, selling about 30 units off the plans. That development would offer healthcare services.
It was also seeking resource consent for a 140-unit development in Rototuna, north Hamilton, which would not have healthcare services but was opposite a Radius aged-care facility that did.
Yates said the model was a viable one. Karaka Pines sought investors, capable of investing at least $750,000, for each village development. Investors would own the village and Karaka Pines would develop and manage it for them.
‘‘You can make a return that investors are happy with without taking the capital gain,’’ he said.
The profit was made through a development margin when the village was built, as well as from the facilities fees.
Karaka Pines had also developed three ‘‘own your own’’ retirement villages for Manor Group where residents are entitled Retirement village units where the resident gets the capital gain might not be as rosy as they first sound, the retirement village watchdog cautions.
The Commission for Financial Capability’s national manager of retirement villages, Troy Churton, said residents attracted to the capital gain model should ‘‘tie down’’ with their lawyers what the refurbishment costs would be on a unit.
After a new code of practice was introduced in September 2006, operators could still have clauses in the Occupation Right Agreement (ORA) enabling them to claim ‘‘a contribution to refurbishment’’, but it had to be set out explicitly.
In some older ORAs the wording was loose enough to enable ‘‘quite exorbitant refurbishment costs to be deducted’’, Churton said. The full refit of a unit to bring it to as-new standard ‘‘might be a charge of $100,000’’, he said.
Refurbishment costs varied from village to village. A few operators might have a standard clause with a standard sum, while others stated refurbishment ‘‘to an as-new condition’’.
The commission had taken independent advice on ‘‘as-new condition’’, and it related to the state of the unit at the time the resident entered into the ORA and not when they left.
That was accepted by the Retirement Villages Association, which represented operators.
‘‘So what’s new in 2000 might be a little bit different aesthetically from as new in 2018,’’ Churton said.
In addition, getting a share of capital gain was really only relevant when a resident terminated their occupation. For most residents, that occurred when they died, meaning the capital gain was more of a benefit to their heirs. Churton advised people talk to their family before buying a unit with capital gain.
to 100 per cent of the capital gains. One of those, Woodcroft Estate, is being built south of Christchurch at Rolleston, and will have 78 two- and three-bedroom units priced from $450,000.
The two others are Kempton Park at Bethlehem in Tauranga, and Roseland Park in Hamilton, soon to be completed.
Yates said ‘‘own your own’’ was ending and Woodcroft was the last to be built on those terms.