Short-term mandatory buy-back law for retirement villages poses major risks for the industry

There are some huge misconceptions about the financial constraints villages are already operating under. As our recent industry shows, being a retirement village operator is not for those seeking short term property development gains. 

The findings revealed a payback period of more than two decades based on two different, but common, site scenarios. 

By focussing on actual cashflows, the real financial position for operators emerges. While the sites in both our scenarios experience strong early cashflows from the initial purchase of ORAs by new residents and subsequent deferred management fee (DMF) payments, this declines sharply between the seven-and-a-half to 10-year mark as ongoing operational and refurbishment costs start to eat into annual profits.

And with the average stay of residents between seven to eight years, cashflows from the resale of ORAs quickly decrease due to reduced inflows of new residents. We also know many operators are already incurring losses on weekly fees of around 20% which puts upward pressure on ORA prices so village owners can still generate enough cashflow to cover their operating costs.

Major risks for the industry, future residents and their families

If the three-month mandatory buyback period is eventually passed into law, not only will operators suffer the consequences, so too will residents and their families through higher fees, increased unit prices and the closure of villages throughout the country.

Short-term compulsory buy-back periods will create a requirement for massive cash reserves to be held by operators. They will need to have additional lines of credit in place to provide ready access to cash to settle these obligations. 

The risk profile of villages will also deteriorate in the eyes of lenders as operators face greater financial uncertainty. As evidenced by our model, this would decimate the financial viability of many villages.

Not only will some villages become financially unviable, the number of new market entrants may also dramatically decrease.  Operators will most likely react to this by increasing the sale price of new ORAs and hiking up weekly fees, which may make retirement village living inaccessible for many retirees.  

It also wouldn’t be surprising to see DMF percentages (the percentage of the ORA price that is deducted on exit) rising. We only need to look across the Tasman to see the impact of the financial burden on smaller villages when mandatory buy-backs were introduced in Queensland, New South Wales and South Australia.

Larger operators with stronger balance sheets will be better placed to weather these changes, and in fact many are already repurchasing units before they have been relicensed, or paying interest on outstanding repayments while they await resale.  

However, for medium sized operators who are often located in the regions where there are fewer choices, these proposed changes will come as a blow, and some may be faced with no other option but to close their doors for good.