Retirement Villages

Valuation and certification of contingent interests and financial assets and liabilites under AASB 139; Demographic studies; Projections; General consulting.

Background

Contracts between retirement village residents and owners and managers generally involve payment of a deferred management fee (DMF) on vacation. The manager’s interests are commonly called “contingent interests” or “embedded value”. Actuarial involvement in this area focuses on determining and maximising the value of these interests.

Benefits

The benefits of actuarial advice to village owners are those which come from a deeper knowledge of the factors influencing profitability. Owners can harness this knowledge to increase profitability and minimise the impact of controllable negative influences.
Actuaries are best placed, with assistance from real estate valuers to determine the fair value of “financial assets” and “financial liabilities” as required under AASB 139.
An understanding of the value of contingent interests can be helpful for real estate valuers comparing different villages.
People contemplating buying a retirement village unit can use the value of contingent interests to determine the full expected cost of their occupancy.

Services

The practice’s services are normally provided to owners, managers or financiers of retirement villages in the church and charitable, municipal and private sectors. These services include:-

• Valuation and Certification of Contingent Interests- the practice normally values an owner’s contingent interest in conjunction with a licensed real estate valuer. Valuations typically record and analyse the past experience of the village, value the manager’s projected income and comment on the sensitivity of that valuation to changes in the underlying assumptions. Valuations are mostly undertaken for security purposes or to meet contractual obligations but are also used for accounting and management purposes.
• Demographic studies- demographic studies are normally undertaken as part of the valuation process but can be used in managers’ general business planning processes. Such studies normally reveal the age and sex distribution of new entrants expressed as means and standard deviations. They also reveal age and sex specific exit rates for a variety of exit reasons. From these studies, one can select assumptions concerning future entrants and exits. From these assumptions flow occupancy expectations of both new and current residents. These expectations differ between different classes of care and change with the assumptions.
• Price Movement Studies- price movement studies are also normally undertaken as part of the valuation process. The results of these studies generally find their expression in a real rate of growth of prices. This growth typically ranges from 1 to 3% above Consumer Price Index growth.
• Projections- the projections normally done by the practice are of villages’ turnovers” and owners’ cash flows. These projections when taken over the long term are the foundation of the valuation process. Shorter term projections are used in village planning and cash flow management. In this context, the inherent uncertainty of exits is critical. Statistical fluctuations around long term averages are inevitable. For this reason, the practice’s projections contain not only expected results but ranges of results within specified probability bounds.
• General Consulting- Most of the practice’s general consulting in this field draws together all of the above processes to assist owners and managers to understand and manage their villages and to optimise the value of their contingent interests. Much of this revolves around the concept of “reversionary unit factors” (RUF). These are single numbers which encapsulate a village’s demographic and financial experience and assumptions and the nature of its contract with the residents. The concept of RUF was developed by the practice early in its involvement in this field and has stood the test of time.
• For individual families- the practice can can calculate occupancy expectancy and the present value of future fees. Click here to download (.xlsm) a calculator that gives approximate values free of charge. More accurate values can be provided on request.

Methodology

When the practice was first involved in the industry, its calculation methodology was based on preparing factors that could be applied algebraically to give the same effect as individual event and cash flow projections and the discounting of those cash flows.
As computing power has increased, the methodology has moved to individual projections reflecting the exact circumstances of each occupancy. Importantly, the factor based methodology is still available as a check on the detailed projections and as a tool for quick sensitivity analysis and understanding the drivers of the industry.
As in all fields, the practice gives due regard to the likely range of results as well as the central estimate of the result.

Experience

The practice has been significantly involved in the retirement village industry since the mid 1980’s. It has worked for major owners of groups of retirement villages and has valued villages in all States of Australia and in New Zealand.

Information Needs

The information that the practice usually needs to do any work for a retirement village includes: –

• Copies of the standard documentation between resident and owner and managers;
• Details of each occupancy for the past five years, including sex, date of birth, date of entry, date and mode of exit (if applicable) for the principal resident and (if applicable) spouse. Download our retirement village spreadsheet(.xlsm);
• Purchase price and re-occupancy price (either actual if vacated or current estimate if still occupied);
• Details of refurbishment expenditures and the managers maintenance expenditures not covered by levy income and
• Details of the manager’s selling costs.

Fees

The practice believes that quality service justifies its price, but seeks to be competitive in its fee structure and will quote fixed or maximum prices if required.
Hourly fees apply unless the task is solely related to the production of a standard certificate. Where the task makes substantial use of standard systems, usage charges apply.

Fees quoted do not include GST.