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The Aveo Way: no easy exit

Many residents across the country told Fairfax-Four Corners that retirement villages are a financial trap. They say the villages don’t live up to the hype nor the promises represented in their glossy brochures and television ads.

According to the Property Council, the peak lobby group for the multi-billion dollar retirement village industry, most people who live in retirement villages are happy. It bases this on individual retirement village operator surveys and the national McCrindle Baynes Census, which says the vast majority of residents are happy – and happier than they were before they moved in.

However, the joint investigation can reveal that Aveo’s more recent Freedom Aged Care contracts squeeze the time period for capping exit fees to as little as two years.

Under its other new-look contract, known as “the Aveo Way”, which were introduced in 2015, exit fees reach a maximum of 35 per cent after three years and freehold properties are converted to leases. In year one, exit fees sit at 7 per cent, in year two another 14 per cent is added and then a further 14 per cent in year three, which is a total of 35 per cent. There are no sales commissions, marketing costs or refurbishment costs.

Aveo says its new Aveo Way contracts are simpler and it is standardising contracts through the Aveo Way to give residents certainty.

Angela Moore belives she is a victim of the Aveo Way. Moore and her husband Pete moved into the Mountain View retirement village in the town of Murwillumbah in northern NSW, just south of the Queensland border, in 2014.

It seemed like a suitable decision at the time because Pete’s mobility was becoming impaired. “Because of his health we thought we really needed to move into a retirement village which was advertised as they all are, or seem to be, as providing services to help us with our living needs as we aged,” says Angela Moore.

But the couple’s stay would be much shorter than expected.

On June 20, 2015, Aveo held a meeting for residents that sent chills throughout the community. They were told that Aveo wanted to buy all the units that were freehold and turn the village into leasehold, known as the Aveo Way.

“The overwhelming feeling was shock, disbelief and powerlessness.”

“Powerlessness,” Moore says, “in response to a big company saying that they were taking over our homes and ability to sell our homes.”

The Moores had bought into the village because it was freehold. They have a daughter and granddaughter and wanted something to pass on to them when they died.

Moore believed if Aveo bought more than 50 per cent of the units it would devalue the village and the residents would lose power. She – and many others – believed Aveo could then set strata fees to force out the rest of the owners.

She said anybody who had their unit on the market had to vacate it before they would market it for them, which was almost impossible for the majority of people because that meant that they would have to look for rental accommodation, as well as pay the monthly maintenance fees charged by the company.

Moore says that after the meeting she told her husband they needed to leave the village, to get out with some of the money before it was too late. “I felt vulnerable ... I said to Pete that this was some potentially huge asset-stripping exercise, particularly over our lifetime.”

After a year of gut-wrenching decisions, the couple decided to move out.

“He was very sick by then but he wanted to know that when he went I was safe and happy, which I wasn’t at Mountain View. He wanted to know that we still had funds, still had assets when we passed away that would be of help to the children that certainly wouldn’t have ... or was unlikely to have happened if we’d stayed where we were.”

Shortly after they moved out, Pete died. “We still lost a considerable amount of money but we did move at a time and in a circumstance where financially we were able to recover somewhat but Pete, the move took a lot out of Pete physically. Pete passed away within six months of us moving.”

They bought the freehold unit and garage in 2014 for $225,000 and sold it in November 2016 for a similar price to a retiree who bought the property as a leasehold, meaning Aveo got to keep the freehold title for virtually nothing. After exit fees and other expenses, the Moores walked away with $181,469. They were out of pocket more than $40,000.

Moore says she knows of one person who, in desperation, sold their unit for $70,000 to Aveo. “Then, by the time exit fees were taken out of that very small sum, they were left with a nominal amount, as I understand it.”

Aveo says it does not compel the buyback of any units but confirmed it was transitioning its villages from freehold to leasehold through the Aveo Way.“There is no evidence that switching to leasehold has disadvantaged ongoing residents, who cannot be compelled to change to the new contract, or exiting residents.”

But not everyone agrees. Lawyer Stewart Levitt, who acted for Geoff Richards, says the Aveo Way is akin to selling gold when it is only gold-plated. “They’re effectively converting freeholds into leaseholds by stealth, and selling the leaseholds as if they were freeholds,” he says. “Many people seem to have been confused as to what they’re actually acquiring when they’ve been acquiring retirement units pursuant to the Aveo Way,” he said.

Aveo share price. Source: ASX

Brutal and booming

It is a brutal business model that is becoming more honed with each new contract.

Under Aveo’s Freedom Aged Care business, which it started rolling out in 2016, the exit fee reaches a maximum of 40 per cent after two years with 50 per cent share of any capital gain going to Aveo and the resident taking the hit on any capital loss. If a resident moves out after a year they are charged 25 per cent, moving to 40 per cent after two years. The resident shares 50 per cent of the refurbishment and reinstatement costs.

Aveo bought the Freedom Aged Care business in February 2016 for $215 million as part of a new plan to expand its business from retirement villages to include higher care centres. The business model is to provide supported care right up to palliative care level.

It is part of a bigger plan to tap into a deregulation of the sector that came about in February this year, allowing the elderly to direct the government funding they receive for low-care assistance to large service providers, like Aveo’s Freedom Aged Care.

According to the company’s executive ranks, both the new Freedom contracts and the Aveo Way contracts deliver major benefits to Aveo’s financial accounts.

“In financial terms, there’s a very significant value uplift over the medium term for the rollout of both the Aveo Way and Freedom,” Aveo’s chief executive told analysts on a conference call in August 2016.

Given the average age of its residents is 82.8 years old, it is not hard to see why Aveo can roll out the contracts quickly and no doubt lift the turnover of units – the older the profile of residents the less time they are likely to stay.

Tim Kyng, an actuary and senior lecturer at Macquarie University in the department of applied finance and actuarial studies, was given a research grant to build a calculator to help people understand the true cost of living in a retirement village as well as compare different retirement village contracts against each other.

He was inspired after his mother became interested in moving into a retirement village.

“After taking my mother around to a few villages and different operators and then looking at the contracts I realised it was a cleverly disguised rip-off.”

“You go to the retirement village” says Kyng, “and talk to the sales person and they give you all these glossy brochures and spend several hours trying to talk you into buying an apartment or buying the right to live in the apartment and it’s really difficult to get them to actually give you the financial details of how the contract works.”

He said exit fees vary from village to village, and the different combinations of entry fee, maintenance fees and exit fees make it difficult to figure out which retirement village deal is the best.

"Our calculator aims to calculate a 'comparison rent', like a comparison interest rate for home loans, so that each combination of the fees and fee types can be equated to a rent-per-month payable over the new resident’s expected term of residence," Kyng says.

Kyng agrees to calculate the cost, for this story, of an 82-year-old woman moving into an Aveo retirement village using actual figures from a Freedom contract, assuming monthly maintenance fees of $1600 and an exit fee of 40 per cent after two years. The result was astounding: if the woman either died or moved out after two years, she would have paid the equivalent rent of $13,300 a month, or more than $3000 a week for the privilege of living in the village.

For that kind of money you could rent a five-bedroom house with a pool in the ritzy Sydney suburb of Bellevue Hill or a four-bedroom mansion (also with a pool) in Melbourne’s Toorak, according to properties listed for rent on domain.com.au in June.

How much will a retirement village unit cost me per month based on my stay? Select age and gender. Default figures are based on typical amounts. Age 82 Gender Male Female i Entry fee $600k i Maintenance fees $1600 i Exit fee 40% i Term of fees 2 i Capital gain share 50% Apply calculation to entry fee Apply calculation to resale fee Monthly rent for an expected year residency Equivalent monthly rents: 1 year 5 years 10 years Calculate No representations or warranties of any kind are made about the accuracy, completeness, currency, reliability or suitability of the information for any purpose. Users acknowledge that they should seek further professional advice before relying on this information to make any decisions. Retirement village algorithm courtesy of Dr Tim Kyng, Macquarie University

The Consumer Action Law Centre’s Gerard Brody says the contracts and high fees are hard for even sophisticated consumers to understand. He believes some of them are unfair and unconscionable.

The law centre has taken an increasing interest in the retirement sector after being involved in a Victorian parliamentary inquiry last year into the sector, which received nearly 800 submissions from angry residents, including Aveo residents.

“When it comes time to exit, some people can feel trapped. It’s a bit like a financial prison.”

“These fees are too high to enable them to exit, move into aged care, or back close to relatives and family,” he says.

For some residents who do leave, the pressure can be intense in other ways.

Fairfax Media and Four Corners have seen a property valuation given to a resident at The George in Melbourne’s bayside suburb of Sandringham. The freehold one-bedroom serviced apartment was purchased in 2005 for $230,000. In 2014 – almost a decade later – it was valued by Aveo at $250,000. Then in August 1, 2016, Aveo lowered the valuation of the property to $240,000. After exit fees and other deductions including legal fees and reinstatement costs, the resident would be left with $183,000.

Aveo is currently marketing Freedom Aged Care leases over one-bedroom units in the same village for $600,000. The loan leases are for 99 years, including an exit fee of 40 per cent at two years.

Aveo says its efforts to bring in higher care was aimed “at reducing the number of residents who leave the village for health reasons”.

“Freedom model offers exceptional standard of care to residents, which cannot be compared to a standard lease agreement for a retirement village unit.”

It also says the low price offered to the outgoing resident reflected the lack of demand and the high price for units at the same village reflected the high demand for the Freedom program.

Under the Freedom Aged Care program, documents obtained by the joint investigation show that Aveo has been charging residents of the program $270 per week per person plus maintenance fees of $473 per week and $56 per week for meals, totalling $799 per week. The document says pensioners and part-pensioners could defer up to $430 a week up until exit.

Aveo promotional material.

At another village in Cheltenham, Victoria, documents show that residents have been charged $415 per week per person for the Freedom Care program, $480 per week for maintenance fees and $56 per week for food, bringing the total to $951 per week, with residents allowed to defer up to $580 per week up until exit.

According to Brody, such high charges and the ability to defer fees is really “asset stripping”. Asset stripping and questionable dealings are a recurring theme in Aveo’s villages across the country.

The company’s Freedom Aged Care ads end with catchy jingle “Give me freedom”. Yet in the absence of governments and regulators reining in some of Aveo’s more avaricious business practices, residents are more likely to find only financial internment and servitude rather than anything resembling “freedom”.

For more revelations, watch ABC TV Four Corners on Monday, June 26 at 8.30pm.