Retirement village developments can generally be defined as usually including a mix of independent living units (ILUs) and serviced apartments (SAs) with community facilities providing a shared congregational area for village activities and socialising (McAuliffe, 2010).
Very little has been published in South Africa on the valuation of retirement villages. The retirement village phenomenon is fairly new in South Africa with a recent history of not more than 30 years when the first Baby Boomers reached retirement age and available amenities (old age homes run by government and other “care” societies and groups) were found to be wanting. Developers saw a market to develop schemes tailor-made to suit the needs of middle- to upper-income retirees, and so the first privately owned and operated retirement villages, as a departure from the traditional retirement homes, were constructed. Since then there was an explosion in the construction of retirement villages.
Retirement village assets differ from traditional residential assets due to their operation in accordance with statutory legislation. Before one can determine the approach and method of valuation to follow, one must have therefore an understanding of the legislation and legal structure surrounding a property type and its ownership. Following is a short discussion on the legislation governing retirement villages as well as the legal structure of ownership, as envisioned by the legislation.
Unfortunately, legislation does not always keep up with the pace at which the social landscape changes with the result that South Africa does not have any specific laws regulating the development of retirement villages per se as opposed to Australia and the USA where every state has its own Retirement Villages Act (Towart, 2013). There exist, however, an Act in South Africa known as the Housing Development Schemes for Retired Persons, Act No 65 of 1988, which tried to address issues regarding such schemes. Unfortunately the language used in the Act is in some respects obscure and the Act’s structure is cumbersome. The word “retirement village” is nowhere mentioned in the Act. And, yet, the Act offers substantial protection against a variety of risks to retired persons who invest in retirement schemes (Kilbourn, 2008).
Some definitions as set out in the Act is important in understanding the legal structure of the property interest.
The Act defines a “retired person” as someone who is “fifty years of age or older”. The purchaser of the housing interest need not be a retired person; anyone; regardless of age, may invest in a retirement scheme. In terms of section 7 of the Act, however, no person other than a retired person or the spouse of a retired person except with the written consent of all other holders of housing interests in the scheme may reside in a retirement scheme.
Section 1 of the Act defines “housing development scheme” as follows:
“any scheme, arrangement or undertaking-
“Housing interest” is defined as follows in the Act:
“in relation to a housing development scheme (that is a retirement scheme), means any right to claim transfer of the land to which the scheme relates, or to use or occupy that land”
“Right of occupation” is defined as follows in the Act:
“means the right of a purchaser of a housing interest-
It can be seen from the definition of housing interest above that two general legal structures underpinning investment in a retirement scheme (or retirement village) can be identified: “any right to claim transfer of the land” alludes to the sale of full ownership while “any right ….. to use or occupy that land” alludes to a lesser right than ownership, namely the right to occupy.
A number of legal structures on which retirement villages can be based can therefore be deducted from this definition. Broadly speaking they can be divided into three categories:
There exists a paucity in publications on property valuation in South Africa in general and it is therefore not surprising that nothing on the valuation of retirement villages could be found. However, several journal articles and conference papers on the subject are available from outside of South Africa. These will be discussed and applied to the South African context. In Australia, for example, it is rare for a retirement village operator to sell the title of a unit. The most widely accepted model is the License to Occupy (life right) scheme, whereas in South Africa both models exist, sometimes even within the same village.
Elliott, et al (2002) identifies retirement villages as complex businesses being described as management intensive operating businesses with a substantial real estate element which can only be valued using the Dicounted Cash Flow (DCF) method of valuation. McAuliffe (2010) takes a broader view by dividing the retirement village into different component parts and discusses different approaches of valuation for every part. His research was based on a survey of practicing valuers registered with the Australian Institute of Valuers (AIV) with experience in the valuation of retirement villages.
McAuliffe (2010) identifies the following component parts:
The summated value of (a) and (c) will constitute the total market value of the operator’s interest which will include the business enterprise value and the land value while the value of (b) will represent the market value of a single unit to its occupier. The value of the operator’s interests in existing ILUs and SAs (a) are typically assessed through a Discounted Cash Flow (DCF) approach whilst the value of any surplus land (c) is typically assessed through the hypothetical development feasibility or residual approach. The direct comparison approach, which is the primary approach for traditional residential assets such as free hold and sectional title residential units, is considered as only a secondary approach in the valuation of retirement villages due to the variation in resident occupancy agreements within individual villages, let alone between different villages. Consequently the differences in entry contributions, calculation of entry fees, shares in capital gains, expected time until resident departure and expected re-sale prices, let alone differences in location, village size and quality of improvements and community facilities renders the Direct Comparison approach a secondary approach for this class of assets.
However, according to the Valuers that were surveyed, they may be called upon to determine the value of an individual unit or apartment (b) within a Village held under a life right. In these instances then a Valuer may rely on the direct comparison approach having regard to comparisons in terms of the village and the resident’s agreements. It is essential that in assessing the value for an individual unit, the Valuer takes into account the terms and conditions of the occupancy agreements for the units utilised as sales evidence in comparison to the subject unit and makes allowances for differences, most notably in the structure of the deferred management fees and sharing of capital gains. These differentials may be shown in a matrix format. It may be possible to have regard to sales within the same Village on similar terms, however where outside evidence is sought, the Valuer must have regard to the characteristics and peculiarities of the Villages and the terms and conditions of the individual agreements.
Where ownership of an individual unit or apartment is in the form of transfer of deed of a free hold or sectional title unit, the parameters for direct comparability are less strict and rely more on the physical attributes of the property.
Some schemes, especially in South Africa, offers a mixture of occupation types to cater to a larger market. These can include full ownership of an individual unit or apartment or life right occupation. It is therefore crucial that the Valuer confirm the legal struture of a unit before commencing with a valuation assignment.
A common mistake made in the approach to the valuation of a sectional title or free hold property within a scheme occupied under a life right is to apply the highest and best use approach. Under the highest and best use scenario it can be argued that the sale of the sectional title units will return the highest value and therefore this value should be deemed the market value of the unit. However, highest and best use is defined as “the reasonable probable and legal use of vacant or an improved property that is physically possible, appropriately supported, and financially feasible and that results in the highest value” (Appraisal Institute, 2008:277). In the case of property occupied under a “life right” agreement in a retirement village, the developer is legally prohibited under Sections 4A, 4B and 4C of the Housing Development Schemes For Retired Persons Act 65 of 1988 to sell the units in the open market and therefore a value based on the sale of the sectional title units must be excluded.
Retirement Village assets differ from traditional residential assets due to their operation in accordance with statutory legislation. In South Africa the Housing Development Schemes for Retired Persons, Act No 65 of 1988, which regulates such schemes make provision for occupation through both direct ownership and through a form of life right.
Occupation through life right greatly complicates the valuation approach for the determination of the value of both the developer’s interest and the occupant’s interest due to complex agreements which can include payment of Deferred Management Fees at the death of the occupant sometime in the unknown future. Due to these irregular and postponed payment periods the Discounted Cash Flow (DCF) approach is indicated to be the preferred method of valuation.
However, for the valuation of individual units occupied under a life right, the Direct Comparable Sales Approach is also indicated where there is sufficient market evidence and allowance is made for adjustments due to incomparability and displayed in the report in the form of an adjustment matrix.
Units occupied under direct ownership can be valued using the Direct Comparable Sales Approach.
Extreme care is to be taken not to value “life right” units using market evidence from the sales of directly owned units.
References Elliott, P., Earl, G. & Reed, R., 2002. The Valuation Of Self-Funded Retirement Villages In Australia: Analysis, Reliability And Investment Valuation Methodology. Christchurch, Pacific Rim Real Estate Society Conference.
Kilbourn, L., 2008. Retirement Village: An introduction to their legal nature, applicable legislation and the risks faced by investores in such schemes (1). Lexisnexis Property Law Digest, June, pp. 8-12.
Kilbourn, L., 2008. Retirement Village: An introduction to their legal nature, applicable legislation and the risks faced by investores in such schemes (2). Lexisnexis Property Law Digest, September, pp. 3-8.
McAuliffe, B., 2010. Valuation Methods for Resident Funded Retirement Villages in Australia: A Practitioner’s Perspective. Wellington, NZ, 16th Pacific Rim Real Estate Society Conference.
Towart, L., 2009. Current Issues in the Analysis and Valuation of Established Retirement Villages. Australian Property Journal, 2(3).
Towart, L., 2013. Retirement village resident duration - An empirical analysis. Melbourne, 19th Annual Pacific-Rim Real Estate Society Conference.
About the Author
PT Pienaar holds a MSc. in Property Studies from the University of Cape Town as well as a higher diploma in Mechanical Engineering from the Cape Peninsula University of Technology. He is the owner of PPE Valuations (Pty) Ltd, a valuations firm which focus on the valuation of specialised property in all sectors and in the valuation of property, plant and machinery in the industrial and agri-industrial sector.