Finance Retirement Retirement homes: are they a good investment?
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Retirement homes: are they a good investment?

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Most of us can appreciate the benefits of retirement village living in our twilight years – first-rate facilities, gardens that you don’t have to worry about maintaining, a built-in social network.

A 2013 Productivity Commission research paper, An Ageing Australia: Preparing for the Future, estimated that by 2060 there will be 25 centenarians for every 100 babies, and 58 per cent of the population will be in their 50s or older.

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While some of these retirees will sink their hard-earned savings into retirement village properties, experts are warning that far from being just another property purchase, a retirement unit purchase needs extra careful consideration.

elderly woman on beach
Retirement villages are a lifestyle investment, but not necessarily a financial one. Photo: Shutterstock

A matter of definition

Melbourne financial advisor Wally David thinks retirement village units make great investments – but not in the financial sense.

“I actually don’t think you should look at them as a property investment,” says Mr David.

“They are investments in lifestyle, people are attracted to them because of the village-style living, the security and the peace of mind.

“If you want to lock up the house and travel around Australia in a caravan for three months then you can do it.”

But financially speaking, there are better (and easier) ways to make money.

“People need to understand that buying a retirement village apartment is very different from buying an apartment in a suburb,” he says.

Devil is in the detail

Many retirement homes in Australia are purchased under leasehold arrangements, which means that buyers don’t own the title outright, they are simply leasing the land off the company that owns the village.

This means that when owners decide to sell the unit they are often hit with what is known as deferred management fees, which can see them handing over a percentage – sometimes 50 per cent, sometimes higher – of the sale price on the unit to the management company.

Usually, the longer the person lives in the unit, the higher the fee, as it is accrued annually.

(This is in addition to the usual management fees that are charged during the period the unit is occupied).

“Contracts are extremely complicated for retirement village purchases and people need to make sure they get a good lawyer, who understands the area, to look at the contract for them,” says Mr David.

“A good rule would be to ask the village operator to calculate what percentage you would receive from the sale if you exited the property after five years, and they should be able to break that down for you.

“The villages are run by private companies and at the end of the day they are there to make a profit.”

Money superannuation
Make sure you have a good lawyer to avoid finding yourself out of pocket. Photo: Shutterstock

Eyes wide open

Some retirement units can be bought outright which means the capital growth on the property is yours and yours alone, which will leave you in a much better position financially. But as seasoned property investor Todd Hunter from Where Group Property points out, you may still struggle for a market to sell to down the track.

“While we do have an ageing population in Australia that does not necessarily mean that everyone is going to want to live in retirement homes,” he says.

“It may still be a niche market, and they can always release more land to build retirement apartments to meet demand.”

Furthermore, Mr Hunter is keen to stress that most banks will not lend against retirement village purchases, and he would never buy one for clients.

“Most people who are buying retirement homes are wanting to spend as little money as possible,” he says.

Mr David says people should not be deterred from buying into retirement units if that is the lifestyle they are chasing, but they must keep their eyes open about what this involves.

“Just make sure you do your homework first, as every contract is different,” he says.

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