I was most concerned this week to see the publication of an article by property spruiker Jennie Brown, endorsing retirement villages as a property investment strategy on the Australian Property Investor magazine website.

In the article, Jennie confuses retirement villages where residents buy a right to occupy which is re-sold when they leave, and rental villages where residents occupy a unit and pay a weekly rent under a standard residential lease. If you want to know more about how residents occupy a retirement village, check out my video tutorial HERE.

She says in the article “When the retiree passes on or moves away, their house, villa or unit becomes the property of the retirement village once again, with the resident (or their estate) receiving a small amount of their initial investment back,”. Well this is just plain wrong. The retirement village owner or operator always retains the freehold title to the property, with a resident’s right to occupy being in the form of a lease or licence. They don’t revert back to the village owner on exit, but are re-sold to the next resident. The out-going resident receives the re-sale proceeds, less any accrued fees and capital gains paid to the village owner (for more information on how this arrangement works, check out my video tutorial HERE). Furthermore, these villages have strict owner-occupier provisions and are simply not available to property investors. The closest you can get to investing in these types of villages would be to buy shares in a listed retirement village owner such as Aevum, FKP, Lend Lease or Stockland.

Jennie also says in her article that “retirement villages get to increase their rents twice a year in accordance with the biannual increase in government pensions, so with retirement villages the net yield you can expect will be high.” Wrong again! Here, Jennie is now talking about rental retirement villages, where a resident signs a standard residential tenancy lease with the owner of a unit that is located in the rental retirement village. Under these agreements, rent can only be increased in accordance with the lease document, which may or may not be in line with the government pension increases. If rents do happen to be linked to pension increases in the lease document, it doesn’t necessarily go straight into the investor’s pocket! The weekly rent paid by the resident has to cover village management, meals and laundry, leaving very little residual “rent” to flow back to the property owner.

As for investment yields, well, this depends on the price you pay for the property in the first place. Most of the units in rental retirement villages were sold to “Mums and Dads” investors around ten years ago at inflated prices through financial planners, who received massive commissions from the developer. The fatal flaw in the plan was that rents were linked to the pension, which meant that the miniscule pension increases “enjoyed” by our seniors did not keep pace with rents in the overall property market, and neither did they keep pace with the increasing costs associated with the delivery of meals and laundry in the villages. This has actually resulted in falling yields and greatly reduced property values, to the extent that the sum value of individual units in a rental retirement village in most locations are less than the price of the land they occupy!

I go into more detail about investing in rental retirement villages in my own article on the subject, which appeared on the same website some weeks earlier.

Jennie, may I respectfully suggest that you stick to the property sectors that you know, and keep out of the ones that you don’t. People listen to property educators such as yourself and you therefore have a responsibility to ensure that what you say is correct.