Australian Ageing Agenda - June 21, 2019
The future impact of retiree renters
Aged care providers and governments need to plan now for the impact of lifelong renters on the financial models driving the industry, writes James Kelly.
For generations, Australians have been selling their homes to fund retirement and aged care. Downsizing from a family home to a smaller dwelling then into a retirement village and later to aged care if required, is a familiar path.
But baby boomers’ high expectations for life after retirement are shaping fresh approaches within the sector. And with a 38 per cent increase over the past decade in the number of households renting, we need to pave fresh paths to ensure equitable access. Many people simply won’t have a primary asset to leverage for retirement.
The prohibitive cost of home ownership and the preference of some millennials for renting in locations they love rather than buying in more affordable places they don’t is turning huge numbers of us into long-term and in many cases life-long renters.
According to a study of census data by the Australian Population Research Institute, most young households in Sydney and Melbourne can’t afford to buy homes in established suburbs, and the proportion of us renting is rising sharply. In Sydney, the percentage of households headed by 30-34-year-old renters is now 53 per cent. Melbourne fares little better at 48 per cent.
So what happens to this growing cohort at retirement? Without a family home to sell, how will they access retirement villages and aged care homes developed in anticipation of a return on investment via residents’ sizeable upfront and deferred lump sum payments?
The European experience
In Europe, centuries of high-priced housing means renting for life is ingrained in the culture. Most people pay a weekly or monthly fee to rent a property (cold rent) or a property plus services like heating and cooling (warm rent).
The system is funded by philanthropic organisations or government or a combination of both. Aged care is a relatively small sector that’s fully government funded. Seniors stay at home or in assisted living facilities wherever possible and aged care is an end-of-life option for those whose needs can’t be managed elsewhere.
Australia’s transactional approach
Australia’s model is a hybrid. Some seniors have care needs funded by government. A significant proportion self-fund. Typically residents of both commercial and not-for-profit retirement villages and aged care facilities buy in rather than rent. Private providers lower upfront costs via deferred, departure or exit fees payable when the resident leaves.
As property prices and construction costs have risen, however, reductions in upfront costs have tightened. Many residents now effectively pay full property value plus a deferred management fee (DMF). This is increasingly unpalatable to a more knowledgeable market keen to free up capital for retirement, and it’s set to impact life-long renters.
The rise of long-term renters could shift focus to the long-term wellbeing of our ageing population. That’s good for society. Incentives for developers and operators to retain residents for longer could improve people’s welfare, social connection and sense of community. Operators could expand their offering through assisted living and a membership service allowing residents to tailor a package of paid services, activities and care that suits their needs.
Building-to-rent is a development model gaining traction in the multi-residential apartment sector and offers our sector food for thought. In the US and elsewhere, build-to-rent is booming in residential property. Grocon introduced the concept in Australia with the Commonwealth Games athletes’ village on the Gold Coast and is now planning a 400-apartment, executive-style development in Melbourne’s Southbank. Other large developers are exploring their options.
Build-to-rent in retirement living and aged care offers flexibility to residents, developers and governments. One of our clients, YMCA, is pioneering options for a no-DMF structure at Lincoln on the Bellarine, currently under construction. Incentives like a buyer’s premium will recoup some of the costs usually covered by DMFs. This could benefit renters able to amortise costs over, say, 15-20 years. As the market evolves will a no-DMF, upfront fee or ongoing contribution approach gain traction?
Build-to-rent retirement will require new funding models that capitalise projects upfront and allow for incremental returns weekly or monthly. For developers that currently receive a big return on investment at settlement, this transition will be challenging. Options will emerge as operators test new models and offerings. Relying solely on traditional retirement village models into the future would be a mistake. Should a large proportion of prospective residents be unable to justify upfront capital costs, the market will inevitably shrink – along with retiree renters’ choices.
Given a percentage of life-long renters will accumulate more savings than their mortgage-paying peers, self-funded in-home care could keep renters at home for longer. The aged care sector may contract in response, or shift focus to short-term palliative care – which the government may therefore elect to fund. Such moves would certainly change the dynamic of retirement and aged care in Australia and may provide opportunities for affordable lifestyle, health and wellbeing focused villages to thrive.
We look forward to working through the design implications of these emerging models and demographic shifts. Whichever way we’re headed, accommodating life-long renters of all means in retirement is a conversation we need to be having within the industry and across the wider community. It’s an issue that’s first and foremost about equity and welfare, not simply economics.