Australian retirement village market looks to diversify

As demand for later living options in Australia increases, with developers and policymakers striving to offer more flexible, affordable and fit-for-purpose accommodation, there is also an influx of private investment in the sector.

Australia's retirement villages are evolving to meet the diverse needs and preferences of an ageing population, with innovations such as private care suites and integrated care options enhancing the continuum of care available in these communities.

However, challenges related to affordability, the sustainability of deferred management fees (DMFs), regulatory frameworks and inflationary pressures remain key considerations for the sector's future development. 

The Retirement Villages Act 2012, for example, sets out particular rights and obligations for retirement village residents and operators including requirements relating to advertising and contract transparency, the provision of safe and secure premises and handling of resident funds.

The broad range of accommodation types and services offered by retirement villages means prospective residents consider many factors, including:

• affordability
• tenure type
• operator's reputation
• on-site community facilities
• ongoing service charges covering, among other things, the maintenance of common facilities
• DMF or contractual fee structure
• size and unit design
• proximity to amenities such as public transport.

Properties include independent living units (ILUs), independent living apartments (ILAs) and serviced apartments, under a retirement scheme governed by the respective state or territory legislation.

ILUs and ILAs typically comprise one to three bedrooms and range from 85m² to 140m², while serviced apartments are usually studios of between 35m² and 60m².

Residents can access on-site staff and communal facilities that might comprise a library, gym, activities or games room, function room, bar area, communal dining area and lounge areas.

Serviced apartments are another option for those in need of more care, support or even help with everyday tasks.

These offer all residents peace of mind, knowing such an option is available if they become less mobile and more care-dependent. In turn, this improves ILU and ILA occupancy levels by attracting older residents to the village, aware that they can easily upgrade for greater support should their needs intensify.

Private care suites are typically located in ILA buildings across a single floor and include a bedroom akin to a studio hotel room, typically between 12m² and 18m², including an ensuite shower room, a bed and a bedside seating area.

Those who choose to live in such suites primarily do so to age in place and maintain their social connections, including staying connected with family who might live nearby. The resident can offset care costs using the government-funded home care packages.

These units often contribute less than 5% of the overall yield for the ILAs in the retirement village, though. For example, the Verge retirement village owned and operated by Retire Australia has ten care suites, and Henley on Broadwater village has 12.

As the private care suite is a new and evolving concept, these characteristics may vary from village to village. Nevertheless, the range of options shows that private care suites, ILUs, ILAs and serviced apartments are situated along a continuum of care.

• Leasehold, loan or licence: a resident pays the owner a lease premium or interest-free loan equivalent to the market value of the unit, for which they are granted a life-term lease or licence. When the lease or licence is terminated, the owner pays the resident or their representative – such as a family member or legatee – the entry price, subtracting the DMF and an amount to cover running costs and refurbishment obligations in accordance with the original licence or lease agreement.
• Strata title: the resident becomes the holder of the strata title, a form of ownership unique to Australia, where the strata title is akin to a freehold title for a dwelling unit but all residents share the common areas and facilities. The resident also becomes a member of the owners' corporation on purchasing the unit. The contract may include payment provisions for DMF, capital gain contributions and recurrent charges.
• Periodic tenancy or rental: the resident is granted a lease with no fixed termination date and pays regular rent. They may also be required to pay some form of entry price, which could be refunded at the end of the tenancy in full or in part, subject to the agreement between the operator and resident.
• Ground lease or licence: these are used by villages described as manufactured housing estates (MHEs) or land lease communities (LLCs). Manufactured homes or cabins offer an affordable form of accommodation and are often located in coastal destinations, like the caravan parks from which they evolved. They range from affordable developments with limited services, where homes typically costing 60–70% of the median house price in the surrounding area to prestige estates comprising premium homes and community facilities such as swimming pools, tennis courts, parks and even marina berths. Once a home is sold and placed on a marked site, the resident enters into an agreement stipulating the payment of a fee, which may be subsidised by the federal government for qualified retirees. Over the years, the appeal of such assets has increased based not only on growing demand for affordable retiree accommodation but because they offer less onerous arrangements than DMF contracts in traditional retirement villages.
• Other: other rental and donation-style payment schemes are available, almost entirely run by not-for-profit providers.

Leases and licences are the most widely adopted and accepted form of tenure, appealing to retirees who are after a balance between lifestyle and financial security.

This is despite the relatively complicated nature of the individual occupancy agreements with varying DMFs, capital gain structures, charges and disclosure requirements for owners.

While DMF is the most prevalent option in Australia it is relatively unpopular with residents, so operators are now offering various structures within this tenure to attract consumers; however, there are no signs indicating that this will make it any more popular.

Yet given the difficulty in developing new villages and the fact that over 60% are owned institutionally, DMF and capital gain returns are likely to continue for the foreseeable future.

However, as potential residents and their families are increasingly aware of viable alternatives, methods of obtaining DMF or capital gain income streams will need to evolve continually. Otherwise, these could be superseded by a superior product type offering the same facilities at a much lower cost.

The influx of private investors in the later living sector – including private equity funds, international investors, high-net-worth individuals and institutional players – appreciate the potential presented by the ageing demographic, a stable political climate and the relatively stable economy.

Notably, there is continued growth and expansion of not-for-profit ownership, while higher-density vertical or combination villages are becoming increasingly prevalent.

Stakeholders involved in co-owning aged-care facilities, assisted living and retirement villages have consistently chosen to sell off their non-independent co-living assets to concentrate on retirement villages.

This has created co-location opportunities for both nursing home and retirement village operators, including LLCs. Prominent operators such as real-estate investment trusts and private equity are drawn to the land lease sector, for instance, providing a diversification opportunity.

Several retirement village operators are embracing, or at least considering, the continuum of care by incorporating care units or serviced apartments in their communities. Many retirement village operators likewise provide a variety of DMF contracts to accommodate a range of residents.

At Colliers, we have observed a trend whereby the operator is entitled to 100% capital gains and is responsible for the unit reinstatement when the resident leaves for more supported living in an aged care facility or to another retirement village or passes away; such operators can thus appeal to a wider market.

However, the expansion of Australia's later living sector also creates unique challenges – not least the changing expectations of retirees. These challenges include:

• DMF sustainability: modifying or reinventing payment structures, or creating new structures that do not incorporate deferral
• cash-flow volatility: returns on retirement village assets are realised on change of resident through the DMF approach, but this can affect cash flow in unpredictable ways; the risk can be hedged by holding a varied portfolio of relative size and maturity
• state government regulations and sector-specific controls: these influence the growth and functioning of the sector, such as state-mandated unit buyback requirements and evolving planning regulations
• impact of inflation: this affects recurrent fees – such as utilities for common areas (e.g. electricity), insurance premiums for the buildings, security, waste removal, cleaning and council rates – as inflation leads to increased costs for utilities, maintenance, wages, insurance and supplies; as these operational expenses rise, retirement village operators pass these costs on to residents through higher charges to maintain service standards.

With living costs increasing and more seniors seeking affordable retirement options such as LLCs and MHEs, developers and policymakers have responded by creating dedicated housing models that help manage ongoing costs and provide greater flexibility.

For example, the National Housing and Homelessness Agreement between the federal and state or territory governments provides funding and sets priorities for housing and homelessness services, including for older Australians. It aims to improve affordability and accessibility, supporting vulnerable groups such as retirees.

Meanwhile, the Department of Health, Disability and Ageing focuses on increasing the supply of affordable and accessible housing options for older Australians, including those transitioning to aged care facilities. It supports the development of well-designed residential aged care facilities 

Smart home technologies, for example, enable residents to control lighting, heating and air conditioning remotely using smartphones or voice-activated devices such as Amazon Echo or Google Home.

These enhance safety and convenience, allowing residents to maintain their independence as well as improving energy efficiency.

Remote digital consultations with healthcare specialists are also an example of so-called telehealth services, which particularly support residents with mobility challenges, ensuring timely medical interventions.

From a property management perspective, telehealth reduces the need for on-site medical facilities, which can substantially reduce operational costs.

Ultimately, the sector must remain adaptive to changing resident expectations and demographic trends to ensure retirement villages remain a desirable and accessible choice for older Australians.