Lendlease shakes up retirement sector

Lendlease shakes up retirement sector

13 April 2018

Retirement village operator Lendlease is shaking up the retirement sector by offering three new payment options for residents, in addition to the traditional “deferred management fee”, reports The Australian.

Lendlease, Aveo and Stockland–the three biggest retirement villages operators–have traditionally asked residents to pay less up front but clawed back a hefty “deferred management fee” when they leave.

The issue of deferred management fees came under scrutiny last year when Fairfax journalists exposed questionable business practices at Aveo, including churning of residents, excessive fees and charges, high exit fees, and exorbitant refurbishment costs.

In response to the negative industry coverage, Lendlease is now offering three new financing options at 15 of its 71 retirement villages, with plans to extend them across the board after market feedback. These include a pre-paid plan, a refundable contribution option, and a pay-as-you-go scheme.

Lendlease managing director of retirement living, Tony Randello, said the move would put his company in a strong position to capture more market share.

“People are retiring with more super than they had previously, they’re more investment savvy than they used to be and may even choose effectively to invest some of their money and pay less.”

He said the prepaid option gave residents the choice of paying full price for their retirement village accommodation, and then pocket the full sale price, including the capital gain, when they sold up and left. Exit fees would be about 1-2 per cent in sales commission and $10,000-$15,000 in refurbishment costs.

For example, a $500,000 deferred management fee home would cost $590,000 upfront. After 10 years if it sells for $1 million the departing resident would receive the $1 million.

Lendlease reports that roughly one in five customers have taken this option over a 12-month test period.

“It’s really pitched at someone who has an investor psyche, who wants to come into a village and not necessarily end up with less than what they paid when they moved in,” Mr Randello said.

The refundable contribution involved paying upfront the price of accommodation plus an additional 30 per cent, and a 3 per cent establishment fee.

A $500,000 home, for example, may have a $650,000 guarantee when the owner leaves. There are no selling fees at the end but you they pay an upfront establishment fee of 3 per cent ($15,000 in this example).

“When they move out, whether it’s after six months or 15 years, we give them back the total amount within 60 days of them leaving,” Mr Randello said.

“They’re designed for people who want something simple and want the sense of security of what they’re going to end up with when they move out, and there’s no deferred fee.”

Pay-as-you-go is essentially a rental scheme, where residents paid rent of about $600 a week on accommodation that would normally sell for $500,000.

The Retirement Villages Act dictates the owner will receive a lease (currently five years) and pay rent with no upfront payment and no departure fee or payment.

The rent will be above the local market, reflecting the community facilities enjoyed and management support. They will also pay the same ongoing fees as the rest of the village residents on top of their rental fees.

“Pay-as-you-go means you can keep the family home and rent it out, and use that to fund your retirement living accommodation,” Mr Randello said.

“It’s really targeted at those who can afford to buy (into a retirement village) but don’t want to sell their home.”

Despite the suite of new payment options, Mr Randello said he expected the deferred management fee to remain the most popular.

This model levies an average 30-35 per cent fee on the resale price after seven years. There is also a 1-2 per cent sales commission and a $10-15,000 refurbishment fee with option to upgrade at between $50-70,000 to maximise resale price.

“There’s still very much a sense of having now, paying later, but we think having a choice of a prepaid plan, a refundable contribution or pay as you go, will have more market appeal,” he added.

Aged Care Gurus principal Rachel Lane told The Sydney Morning Herald she’d been arguing for years that operators should offer options without a deferred management fee.

“What they’re doing is not brand, shiny new because a number of community and church-run providers already offer different options,” Ms Lane said. “The reason it’s going to shake up the market is that Lendlease has got 70-odd retirement villages.”

Lendlease has about 9 per cent share of the highly fragmented retirement village market, according to Grant Thornton research.

The sector is, with the five biggest companies controlling about 28 per cent of the market between them, while many villages are run by a single owner-operator rather than being part of a chain.

The Weekly Source, a retirement industry newsletter, has warned industry operators to brace themselves for further negative publicity that could stem from a new ABC Investigations survey into residential aged care in Australia.

Following last year’s negative publicity, retirement village sales dropped by up to 30 per cent for over 6 months.

Over the same period, the Aged Care Complaints Commissioner, Department of Health and other sources received over 3,200 complaints, more than the total amount for the previous year.