APPG July 11: Retirement event fees ‘align interests of buyers and operators’, Michael Voges tells meeting

By Michael Voges, executive director ARCO

Retirement event fees – a term used to describe exit fees on re-sale – align interests of buyers and operators and are the business model for retirement housing in New Zealand, Australia and the US, said Michael Voges, executive director of the trade body the Association of Retirement Community Operators.

Speaking to the All Party Parliamentary Group on leasehold and commonhold reform on July 11, Mr Voges said he his members were 24-hour, long-term operators of care and support schemes in retirement communities.

“They are not primarily housebuilders or developers and they generally hold on to the freeholds.

“I want to show that exit fees can be very popular with consumers because they align the interests of consumers with the retirement community operator.

“These can’t be compared to the 1 per cent exit fee that went to the freehold owner [in the retirement leasehold flat volume house builder model] who in no shape or form was involved in the running of a retirement scheme.

“That was the focus of the Office of Fair Trading investigation into exit fees in 2009. These were being charged on properties that had often fallen in value and I can fully understand why consumers got upset about that. And I’d like to congratulate Carlex and Sebastian for having highlighted that.

“Deferred fees that I am talking about are directly involved in the operation of the retirement community schemes that are involved in providing care and support. They are used in the US, New Zealand and Australia.

“This is the primary way of paying for the care needs and housing needs of the elderly population.

“Older people can be quite keen to pay these fees as long as they believe that the proposition is right for them.

“They allow the transfer of risk from the resident to the operator. The operator accepts a cap on the service charges and they take on all the risks for major repairs that happen in that period. If the roof needs repairing or the swimming needs fixing it is not the responsibility of the residents anymore but they’ve paid for by the operator.

“That risk transfer is something that older people are very keen on.

“The service charge might be capped, which means it doesn’t go up at all.”

Mr Voges referenced a retired policeman paying £400 a month service charges on an indexed linked pension, which suited him fine. He says “I’m richer every day that I live here”, because of the event fee model.

“One of our members is offering half the service charges that residents would normally pay in return for an extra 1 per cent on the event fee at the end. 85 per cent of the people who were offered this deal accepted it. It offers them the opportunity to live a lifestyle that they would not otherwise be able to afford.

“Event fees can also make the unit cheaper: the developer doesn’t have to recover the cost of the communal facilities until later, or they can effectively defer some of the profit until the unit is resold.

“It is very attractive to people who are asset rich but cash poor.

“There is an alignment of interests between the resident and the operator because if they are taking a 10 per cent or 20 per cent stake of your property then they are a stakeholder in the resident’s property.

“[Commercial estate agent] JLL looked at 3,000 resales across our membership over 25 years and they found that 82 per cent had increased in value and the ones that had decreased were moving in line with house price inflation in that area.

“We think this is a very encouraging sign and good news. It demonstrates that alignment of interests between the resident and the operator.

“You’re not making so much money on first sale, but you are creating a long-term operational business.

“And that business provides food, dining, wellbeing advisors, care staff, on site activities, leisure facilities and so on, and then our members run these businesses for 20 or 30 years.

“I think creating a long-term sustainable business model to operate those services is actually at the core of why this business model works.

“At one site, where the average age is 85, every single resident had a care need. Every single one.

“Just to be very clear: not all the event fee is about recovering foregone costs. There is also a profit or surplus element there as well, which incentivises developers to build and operate the sites in the long run.

“What is absolutely key to that is that there is transparency upfront about what people buy.

“If people know how much they pay and when they pay it and they’re told early enough … that is something we are very keen on. That means that some people will not buy these properties.

“People need to make an informed choice.

“We do believe that the sector needs to be much better regulated.

“In every country of the world that I just mentioned there is a statutory way of disclosing the event fees and the deferred fees and other fees, and we do not have that.

“The Law Commission looked into this and they found very considerable problems with fees and how they were being disclosed in the UK. In a mystery shopping exercise it found that five out of six properties that they visited did not disclose the fees. The one that did was an ARCO member, which is good.

“We are very clear in supporting the Law Commission proposals to make disclosure clear; making it easier for residents to say, I wasn’t told about this correctly, or transparently and can I get my money back.

“Judging by the push-back out there from some of the freeholders in the sector [the one who have bought the freehold in the traditional house builder model] I think the Law Commission has struck a nerve. We need more transparency in the sector and not less.

“So, it’s really about giving people a choice whether they want to pay more now upfront, where they would have cost certainty. Or they were to reduce their contributions, enjoy now and pay later. It all comes down to transparency and a cost issue.

“I think event fees are here to stay and we seen a lot of interest in our sector from Legal and General and AXA. They do run this business for the next 30-40 years.

“It’s really about creating business models that support not just the development but the ongoing operation, in what are complex care and support developments.

“We want more regulation not less, which is why we will be campaigning for a Retirement Community Act or something similar.”

Sebastian O’Kelly’s report on the ARCO conference earlier this month can be read here:

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