Those contemplating moving to an attractive retirement village are well advised to review the different purchasing options other than sectional title that can offer concrete lifestyle advantages and safeguards to the retiree.
“The life rights proposition is a well-established concept, contained in the Housing Development Schemes for Retired Persons Act No 65 of 1988 (HRP Act), which provides safeguards for both the purchaser and the developer," says Power.”This is according to Power Developments marketing Director, Gary Power, who says that an option gaining traction is ‘Life Rights’ schemes.
“An example of this kind of scheme is the one in place at Featherwood Retirement Village in Pretoria East, a joint development backed by the Old Mutual Retirement Accommodation Fund, Power Developments, and Retire 24, specialists in retirement developments,” says Power.
“The life rights proposition is a well-established concept, contained in the Housing Development Schemes for Retired Persons Act No 65 of 1988 (HRP Act), which provides safeguards for both the purchaser and the developer.”
However, Power says the concept of life rights is not particularly well understood where, on the face of it, the purchaser provides an interest-free loan to the developer in return for the right to occupation of the housing unit for the rest of their and their spouse’s life.
“But that’s just part of the scheme. Life Rights is a widely-practised and requested retirement model worldwide. The USA is the world market leader for retirement villages, and the most common type of sale is here based on the ‘Life Plan’ model, the same as the South African Life Rights system,” says Power.
“In Australia and New Zealand the most widely-accepted model is the ‘License to Occupy’ (life right) scheme, where 80% of residents in a retirement village have a Licence to Occupy agreement.”
Power says the UK is facing a shift towards private retirement villages where developers generally use the ‘Life Time Lease’ model, while in Europe, the ‘Apartments for Life’ ('levensloopbestendige' units), sold on a life rights basis are increasingly popular.
“While a monthly levy is involved, in terms of the Act the developer must provide a draft levy budget for the first three years of occupation, so there are no hidden costs of which the purchaser is unaware. Insurance, interior and exterior building maintenance and general village upkeep are covered by the monthly levy,” says Power.“Life rights is hence a widely-practised and well-recognised retirement scheme worldwide,” says Power.
He says depending on the structure of the contract, there may be a substantial price advantage under a life rights contract of the ‘purchase price’ between sectional title and life rights.
“There are also important financial and logistical advantages to consider with the life rights proposition. Special protection measures in the HRP Act were drafted with life rights in mind and how a life right amounts to a statutory real right that is comparable to ownership,” says Power.
“The developer and purchaser conclude an agreement in terms of which the developer makes the housing unit available to the retired person to use, occupy and enjoy for the duration of his life or until the he elects to sell and move on. The retired person also becomes entitled to use the communal facilities in the scheme.”
As consideration for the right of occupation, Power says the retired person makes an interest-free loan to the developer, this being the ‘purchase price’ for the life right. When the life right terminates, a typical agreement makes provision for a refund of the original interest-free loan upon the ‘resale’ of the unit to the next investor.
Power says the advantage to the developer in selling life rights is that it retains the underlying capital asset, while the benefit to the purchaser is that there are no transfer fees or VAT involved, unlike freehold or sectional title, share block schemes, making the initial purchase more affordable.
“While a similar monthly levy is involved, in terms of the Act the developer must provide a draft levy budget for the first three years of occupation, so there are no hidden costs of which the purchaser is unaware. Insurance, interior and exterior building maintenance and general village upkeep are covered by the monthly levy,” says Power.
Gavin Wolmarans, Fund Manager of the Old Mutual Retirement Accommodation Fund (OMRAF) within Old Mutual Alternative Investments (OMAI), the largest private alternative investment manager in Africa, says perhaps the most important advantage of a life rights scheme is the administration and management of the retirement village.
“Our experience indicates that individuals are retiring older than expected, and are more demanding in the lifestyle benefits, assistance and care services they require,” says Wolmerans.
In addition, he says purchasers have an appetite for performing and stable villages which have been set up with the appropriate long-term retirement accommodation management structures.”
“The life right model offers purchasers peace of mind in the knowledge that the developer is there for the long haul providing the skills and expertise required to effectively run and maintain all aspects of the retirement village,” says Wolmerans.
“This is a major benefit to both us as investors and to the residents as the professional management and upkeep of the village has been seen to enhance the village ‘brand’ and marketability - not least their reputation and profitability - so as to present an attractive proposition to future buyers when a unit becomes available.”
When it comes to any potential disadvantages from life rights schemes, Power says some might argue that the purchaser may forfeit the capital appreciation which he/she would generally enjoy in the case of freehold title schemes.
“But this is offset by the lack of transfer fees, VAT payments and the potential of Capital Gains Tax when a unit is sold on,” says Power.
“There are different life rights models available that share a portion of the profit/appreciation with the life right holder. In all other aspects the costs are similar, but the big advantage is that the developer is ever present to maintain the promised lifestyle.”
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