Last week The Village Glen on the Mornington Peninsular launched its new DMF contract with a mail shot to its data base of past sales leads. Within days it had four new deposits on village homes from otherwise dormant prospects.
The new offer: No service fees ever.
You pay your entry fee and pay no more until you leave when the DMF kicks in. The operator will take on all your obligations including council and water rates. Your electricity and contents insurance is all you have to cover.
As Peter Nilsson told us this week, it is the equivalent of giving pensioners a 25% pay rise – forever and indexed.
Why are they doing it? At our LEADERS SUMMIT in 2014 The Village Glen owner Chas Jacobsen said he believed it was vital to hold service fees below 23% of the pension to allow residents to maintain a quality of life and dignity. He spoke again at our 2015 LEADERS SUMMIT and admitted it was becoming impossible to keep the fees down to the 23% level and they had to come up with a solution. This appears to be it.
COO Peter Nilsson tells us they have been working on it for two years. With over 600 village units it is a huge financial undertaking if it proves successful.
Here is how it works.
First up, incoming residents have a choice. They can have the existing, long established contract which starts with a 12 months cooling off period – they can leave whenever they like and have a 100% refund. Their only costs will be the fortnightly service fee. From 12 months and one day a 20% DMF applies for the life of the contract. They receive 20% of the capital gains.
The new contract offers the same cooling off period and a 33% DMF after 12 months and one day. No service fee is charged for the life of the contract. There is no share of the capital gain. If a resident chooses to leave in the initial 12 months they will be asked to cover the service fees only.
That is it. Simplicity and choice. Creating innovative financial options for seniors is not new for Chas Jacobsen. He was one of the four Victorian operators who conceived the Deferred Management Fee contract around 1976/7, a worldwide first. He was also responsible for the first Retirement Villages Act, which was roughly shaped on his development approval for The Village Glen in 1977/8.
How do the dollars work? Our back of envelope figures show it works very well IF the operator is prepared to carry the funding.
Consider a resident joins the village at age 75, buying into a $500,000 home. The difference in the DMF across the two contracts is 13%, paid at the departure settlement. The operator receives an extra $65,000 flat with a 33% DMF.
The service fee is roughly 25% of the pension at say $900 per fortnight: that is $225 per fortnight or $488 per month/$5850 per year.
At 5% compounding interest the cost to the operator looks roughly like this for years 1 to 15:
- $6,143
- $12,285
- $18,428
- $24,570
- $30,713
- $36,855
- $42,998
- $49,140
- $55,283
- $61,425
- $67,568
- $73,710
- $79,853
- $85,995
- $92,138
The operator is covered up to Year 10 but is paying out serious cash on the way. But how much?
The Village Glen will be one of the worst case scenarios given its size. With about 620 units and serviced apartments and say a 10% annual turnover, they have 62 vacancies a year. If half the new residents (31) take up the ‘no fee’ offer they will be funding the following over the next 10 years:
- $190,418
- $571,253
- $1,142,505
- $1,904,175
- $2,856,263
- $3,998,768
- $5,331,690
- $6,855,030
- $8,568,788
- $10,472,963
In this model in Year 10 they will receive $2,015,000 extra DMF income (the 13% for 31 departing residents), reducing their financial commitment to $8.4M and each year thereafter it will reduce by another $1.8M.
This model does not take into account people who depart earlier than 10 years and as Peter Nilsson points out, 13 years ago the average age of entry was 70 and now it is 79. No doubt health issues will be a factor as well. So 7 years may be the better base for calculating the ‘cost’ looking forward.
What is certain is that this will be a game changer. First because it offers choice. Second it offers a better quality of life for the 70% of village residents who are on a full pension. They indeed will have achieved a ‘pay rise’. Third, in the marketplace it is going to generate at times difficult discussions about DMFs and the intentions of operators.
Consider this. How will an operator with a village that has lower value homes handle this contract? 13% of $350,000 is $45,500 or $20,000 less than The Village Glen is able to collect and therefore carry in fees. And these lower value villages will have a greater proportion of pensioners who will like the ‘no fees’ deal.
And what of operators that are charging a higher DMF than 33% with no fee replacement plan? Will they feel the heat if this contract gets momentum.
Small operators plus Not For Profits who have other demands on their cash and balance sheets will be particularly challenged, especially when valuers will scratch their heads and wonder how to measure the impact of such deals
The fascinating thing is the attitude of Chas Jacobsen and Peter Nilsson. A cynic may say that they will now target elderly, more frail potential residents to ensure they maximise profitability and value of the village. Track record and public record has proven this wrong. At our SUMMITs they have campaigned the need to bring younger people into villages to maintain their vibrancy and appeal, not to mention the volunteer workforce that would otherwise have to be paid – and drive up fees.
And the more people they attract to the ‘no fees’ deal the more Chas has to personally fund.
By creating this model they have also made it more difficult to value their business in the near term. As the owner, Chas says he is not selling the business and will continue to work there every day, as he has since the mid-70s. Valuing and selling the business apparently is not in his plans.
Will others take this business model up? I expect reluctance. Will customers want it? That has already been proven in the first week at The Village Glen – plus Ryman who have had a great reception to ‘no fee increases – ever’ for their first Melbourne village.
Watch this space.
