A retirement village can be a haven in your golden years, or a millstone round your neck, so be sure to consider all the options.
The retirement village industry in South Africa has had a chequered past owing to teething problems, a lack of experience in developing these sophisticated and specialised schemes and undercapitalisation which has lead to some developers going bankrupt, leaving retired buyers out of pocket.
Legislation has however been beefed up considerably since the first retirement village schemes were marketed.
The Housing Development Schemes of Retired Persons Act prohibits developers from using buyers' money to develop a retirement complex.
This means that any deposit you put down for a unit in a retirement village must remain in trust until you take transfer of the property into your own name.
Longer life expectancies, increased threats to security and disintegrating social services have boosted the demand for retirement village accommodation.
For many people, retirement villages have proved the lifestyle of choice - and ideal way to live out their lives. But others have lost their life savings to unscrupulous operators.
The bottom line is, if you are looking to invest in a retirement village, you need to be well informed.
There are several crucial factors to consider before investing in retirement schemes and the most important, and least understood, is the capital and financial structure of the village.
Capital and Financial Structure
There are basically five different types of capital structures on which retirement villages are based. These are full ownership or complete title; part ownership or sectional title; share ownership or share block schemes; life right; and lease schemes, in which you have no ownership, says Metropolitan Life economist Chris Visser.
These capital structures can be financed by a developer in various ways. In most cases, it is done by obtaining a bond from a financial institution which is taken out on behalf of a separate company established for this purpose.
A retirement scheme involves several participants: the developer, the managers or administrators of the scheme and you, the buyer.
If you obtain a loan from a bank to buy into the scheme, the bank will also be a party to the transaction.
The key to financial security is ownership, which can be divided into the following three categories:
Full Ownership
This is the simplest capital structure. As sole owner you hold the title deeds and the property is registered in your name.
You enjoy protection under property laws and the Bill of Rights, which states that nobody except the State, and then only under exceptional circumstances, can remove you from your property.
Buying into a scheme which gives you full ownership or individual title allows you to finance your house or apartment by raising a bond with a financial institution, without losing any rights.
As the owner, you will be fully responsible for maintaining the property and you will personally be responsible for the services, rates and taxes associated with that property.
Full ownership is regarded as the safest form of ownership, although the cost of facilities such as security, recreation and upkeep are relatively high.
It is the preferred route for those who can afford it.
Sectional Title
This type of ownership offers almost the same financial security as full ownership, but resources and responsibilities are pooled, making the burden of upkeep and facilities much lighter.
The capital outlay is as high as full ownership, but maintenance is usually less because communal property reduces the area which needs to be maintained.
Flexibility is limited and joint decision-making is required, says Visser.
For financial and physical security, this is the preferred, although not the cheapest route.
Share Block Schemes
Share block schemes have come under a great deal of criticism. The reason for this is that these schemes are usually much larger and more complex and present a greater risk and exposure than normal sectional title schemes.
However their size and the resulting economies of scale generally results in more facilities at a lower cost a unit.
In a share block scheme, you buy a block of shares in an operating company and not the property itself.
You are granted the right to use the property within the rules of the company.
These shares are usually transferable so you can sell them again.
The rules may prevent you from selling to younger people, limiting the value of your investment.
The investment itself may seem and can be good value, because you could pay less than it would have cost you to buy the property outright.
Loans and bonds may be tied to the property, therefore you buy assets as well as liabilities in the company.
With this capital structure, you could find yourself out on the street if the underlying company goes bankrupt.
Life Right
Life Rights were first set up in the 1970s by welfare groups and this is the most complex capital structure.
"The scares of life right in the 1980s have been adequately addressed in the 1990s," says Syd Eckley, executive director of the South African Council for the Aged.
It is still a viable form of retirement development but you should be aware of potential problem areas.
Life Right is exactly what it says. It means that you have a right to occupy the property for the rest of your life. You do not actually buy any property or shares, so nothing in the village belongs to you.
You therefore cannot sell the right, except back to the company that runs the village, and only at the original purchase price.
The village can sell the right over and over again and can theoretically provide the use at a fraction of the price.
This can be helpful for people who retire and do not have the capital to buy into a property, or for those who need their capital to provide them with income for living expenses.
The same risks attached to share block schemes apply to life right developments.
The amount invested is usually substantially less than other schemes that provide the same facilities.
It is not an investment that will bring any financial return, but it can be an excellent alternative if you do not need the investment to return to your estate, for example if you have no heirs.
The Risks
Be careful of the sale of units in a large development which comes on the market in phases, says Visser.
A developer uses a phased approach to reduce his risks but if you invest in the first phase, depending on the circumstances, you could be out of pocket if the whole scheme collapses before the last unit is complete.
It often happens that a project like this fails in the second or third phase as revenue from sales from the third phase is still used to develop the first two stages. What happens is that by the time phase three is to be built, there are insufficient funds. The fact that a project is being financed by a large and/or well-known financial institution is not necessarily a guarantee for buyers, warns Visser.
All it means is that the property is bonded by the institution in order to finance the developer.
It says nothing about the financial soundness of the project or the developer.
"If it goes wrong financially, the bank is going to be first in line to get its money out," he says.
Renting or Leasing
These are also options available and are generally familiar methods of obtaining accommodation.
Tax Aspects
There is are no special tax relief if you buy into a retirement village.
Lisa Katzeff of Ernst and Young says by buying into a retirement scheme in whatever form, be it full title, sectional title, shareblock or life right, you are acquiring a capital asset and any expenditure associated with it such as levies, maintenance costs or services fees are not deductible, because it is regarded as domestic expenditure.