Retirement village contracts are undergoing a significant shift, moving towards prioritising certainty and flexibility for residents over offering them a portion of the capital gain on their units.

The latest data from the 2023 Retirement Living Census reveals fascinating insights about the evolving nature of these contracts. If you’re considering the move to a retirement village, it’s imperative to understand these changing dynamics. One key shift is that the contracts are leaning more towards calculating the exit fee based on the initial purchase price.

In recent times, there’s been a surge in the adoption of this new contract format: 73% of the industry now favours this model, up from approximately 50% the previous year and a significant jump from its 2017 percentage. This change can be attributed to residents favouring a sense of financial assurance and to the introduction of new legislative measures.

State-wise regulations play a role here. For instance, in many states, a retirement village must guarantee a buyback for residents if their property hasn’t sold within a specified timeframe. However, the duration differs across states and isn’t universally applicable to all contracts. As an example, in NSW, regional area buybacks are set at 12 months, whereas metropolitan areas have a six-month window. Notably, this doesn’t apply to contracts under strata, company title, or community title.

While foregoing contracts that offer capital gain might seem disadvantageous on the surface, one needs to juxtapose retirement villages against the wider property market to grasp the full picture. The price trajectory of a standard two-bedroom unit highlights the trend – an escalation of $32,000 brought the price to $516,000 this year, marking a 6% annual increase. For perspective, the price five years back in 2016 was $398,000, translating to an average annual appreciation of roughly 4%.

Contracts that provide residents with some or the entirety of the capital gain often mandate them to bear certain associated costs. These can range from renovations and marketing to various selling-related fees. Renovation costs, in particular, can be substantial. The census data indicates that about 49% of renovations for units older than 15 years can cost upwards of $40,000, with a notable 6% even exceeding the $80,000 mark.

The census also highlighted a noteworthy shift in residents’ reasons for departing a village. Previously, transitioning to aged care was the dominant reason. However, the latest data shows an even split between moving to another village and entering aged care. The spike in residents switching villages was unprecedented, recording a staggering 600% increase from last year.

This shift in contractual norms has led to some intriguing benefits. A notable number of village operators now allow residents the liberty to shift between villages without resetting their exit fee calculations. Such adaptability empowers residents to migrate between properties under the same operator, be it to be closer to family members or to adapt to changing personal circumstances.

Moreover, the newer contractual arrangements provide enhanced flexibility around the management fee structure. More options are emerging, including paying the fee upfront at a discounted rate, deferring it until departure, or even opting for a higher purchase price to completely sidestep the management fee. These choices not only suit residents’ individual financial preferences but also bring much-needed transparency to the process.

In essence, while the capital gain might be diminishing in these contracts, the added certainties and flexibilities can more than compensate. A retirement village contract, at its core, is a blend of rights, duties, and expenses. It’s crucial to evaluate it with a discerning eye, ensuring it aligns with your personal and financial aspirations.