The retirement racket

Slowly walking down the path with his dog, Tosh, the crumpled 80-year-old glanced back one last time.

It was August 2016 and it was the day that Aveo won.

Richards had moved into the retirement village almost six years earlier in December 2010 with Harry Nash, his partner of 55 years. They were in their late 70s and had been seduced by the glossy brochures and promises of low maintenance that come with living in a retirement village.

But things started to unravel when Harry lost his battle with cancer in May 2014. Within weeks of burying him, Geoff received a letter from Aveo telling him he had no right to live in the village, despite being the sole beneficiary of Harry’s estate, including the unit.

“Imagine if a husband and wife,” Richards adds, “and one of those died and was the only name on the title. Would they throw out the other surviving partner?”

A joint Fairfax Media-Four Corners investigation into the ASX-listed retirement village juggernaut Aveo can reveal that Richards’ eviction helped them achieve their overall stated business strategy to “turn over” or churn a certain number of residents a year for profit.

Fairfax Media-Four Corners has spoken to current and former residents, their children, lawyers, former Aveo staff and lobby groups and has found some questionable business practices at Aveo, including safety issues, misleading marketing and advertising and property sales.

But the company’s biggest driver of profit – and behaviour – is exit fees.

With 89 retirement villages around the country, which house more than 13,000 retirees, Aveo is one of the biggest retirement village operators in the country. And it makes a lot of money churning residents out of their villages.

Retirement villages such as Aveo collect an exit fee when a resident dies or leaves. It is a fee unique to the retirement village industry. It is generally based on a percentage of the purchase price on a sliding basis over the number of years of occupancy.

The fee can be extremely lucrative for Aveo. In the company’s most recent Freedom Aged Care contracts, the exit fee charged by Aveo after just two years is 40 per cent of the value of the property. Some units are now selling for $600,000, which means that for each unit that changes hands every two years or so, Aveo pockets a cool $240,000.

It also means that the higher the churn or “turnover” of residents, the more exit fees the company collects.

The joint investigation has obtained a number of letters sent by Aveo to outgoing residents threatening legal action if they reveal any aspects of an offer, including any discussions, to anyone other than their lawyers. “If you disclose the confidential information for any other purpose, we may suffer loss and may have legal rights against you.” Buyback offers from Aveo also include such threats.

Aveo is the most aggressive listed operator in the country, stinging residents with a menu of fees that eat up a lifetime of savings within just a few years. Aveo has a stated target turnover of 10 to 12 per cent of residents each year. That is equivalent to about 1200 units a year, which is high by industry standards. It’s a numbers game.

If Aveo hits its target, and the average exit fee is assumed to be approximately $75,000 per unit, then Aveo would make $90 million in exit fees each year.

This will only increase after Aveo’s move to a new model that will lift unit prices and hike exit fees to 40 per cent after two years. Some of its older contracts have an exit fee of 20 per cent while others rise to a maximum of 33 per cent on a sliding scale over five to seven years.

Aveo declined to be interviewed for the story.

In a statement Aveo said it was “committed to enhancing the lives of older Australians by improving living choices”. It added that Aveo rates very highly on resident surveys.

In answers to a series of questions, Aveo denied it was more aggressive than other operators saying its exit terms were more favourable and substantial than available “from almost any other operator”.

It says it does not generate a profit from ongoing service fees and it does not churn residents.

In Geoff Richards’ case, Aveo relied on a clause in the contract that says if the “owner” dies, his/her successor loses the right to continue to reside in the village even if they are a de facto partner.

A letter sent to Richards from Aveo says a title search shows the proprietor of the unit was Harry Nash “and not yourself”. It says “sub clause 3 (i) of the agreement provides that a person other than the owner is not permitted to live in the unit without the express written consent of the manager … we have not given such consent so your occupancy has no standing under this agreement.”

He was initially told he could only stay in the place he owned if he sold it to himself, enabling Aveo to collect the exit fee, which was almost $100,000. But the agreement fell apart and Richards found himself looking for a new place to live outside the village.

Aveo says it tried to negotiate with Richards and that he was not a permanent resident and that it had asked Nash to put him on the title.

However, documents seen by Fairfax Media-Four Corners prior to Richards’ settlement show that Richards was treasurer of the owners committee at Veronica Gardens and was in charge of the committee’s bank account. Other documents show Richards and Nash had held discussions with Aveo for Richards’ name to be put on the title, however Nash’s cancer worsened and their focus shifted to Nash’s health.

After Nash’s death, documents show that Aveo’s offer was withdrawn. Further, the documents show that before Nash’s death, Richards, Nash and another man were running a mail order business from a residential address. It was that address, according to Richards, that Aveo would later state that proved Richards was never a permanent resident.

The joint investigation has obtained numerous Aveo contracts, which include clauses that some lawyers describe as complex and draconian, particularly when the unit is freehold. These include residents potentially losing the right to reside in the village if they become bankrupt, if they vacate their unit for more than two months without Aveo’s permission, if they mortgage their unit, or put a tenant in or allow somebody to stay in the resident’s unit without permission.

Chief executive of the Consumer Action Law Centre Gerard Brody describes some of Aveo’s contracts as among the worst he has seen. “Not only are they over 120 pages in length. They’re dense, they’re hard to understand, they’re legalistic. And the financial obligations in them are eye-watering.”

Some of the clauses state that residents will breach the rules of the village if they are charged with any offence, including late lodging of tax papers or a low-level drink driving charge. And, in some contracts, residents can be directed to replace expensive items like carpets, hot-water services, ovens and heaters if, in the manager’s reasonable opinion, the items require replacing – all while copping tens of thousands of dollars in refurbishment and reinstatement costs to return units to saleable condition on departure.

Under some contracts, if a person dies or leaves the village, they or their estate have to keep paying maintenance fees until the unit is sold. This can take a very long time. In some instances, residents had signed contracts that enabled Aveo to charge maintenance fees for as many as four years after they moved out.

Further, Aveo usually acts as the real estate agent in most unit sales, charging agency fees to the leaving resident or their estate. Restrictive clauses in the contracts deter most real estate agents from selling the units.

It puts Aveo in the box seat.

These incidents occurred during a period when property prices were booming, making it one of the only property asset classes where people lose money.

Geoff Richards sold his freehold property to Aveo under a confidential settlement. He moved to a small unit in a nearby suburb away from his friends at Aveo’s Veronica Gardens retirement village in Melbourne’s Northcote.

“I am now up here in a separate unit, wonderful location. Instead of $6000 a year in body corporate fees, I pay here $1300 a year, yet the same benefits except for an alarm system which didn’t work anyway.”

He also doesn’t have to pay exit fees when he leaves.

Under Richards’ settlement agreement he isn’t allowed to disparage Aveo. But as a certified practicing accountant who has assisted local councils on programs on financial abuse of the elderly, he can comment on the sector in general.

Many residents across the country told Fairfax-Four Corners that retirement villages are a financial trap. They say the villages don’t live up to the hype nor the promises represented in their glossy brochures and television ads.

According to the Property Council, the peak lobby group for the multi-billion dollar retirement village industry, most people who live in retirement villages are happy. It bases this on individual retirement village operator surveys and the national McCrindle Baynes Census, which says the vast majority of residents are happy – and happier than they were before they moved in.

However, the joint investigation can reveal that Aveo’s more recent Freedom Aged Care contracts squeeze the time period for capping exit fees to as little as two years.

Under its other new-look contract, known as “the Aveo Way”, which were introduced in 2015, exit fees reach a maximum of 35 per cent after three years and freehold properties are converted to leases. In year one, exit fees sit at 7 per cent, in year two another 14 per cent is added and then a further 14 per cent in year three, which is a total of 35 per cent. There are no sales commissions, marketing costs or refurbishment costs.

Aveo says its new Aveo Way contracts are simpler and it is standardising contracts through the Aveo Way to give residents certainty.

Angela Moore belives she is a victim of the Aveo Way. Moore and her husband Pete moved into the Mountain View retirement village in the town of Murwillumbah in northern NSW, just south of the Queensland border, in 2014.

It seemed like a suitable decision at the time because Pete’s mobility was becoming impaired. “Because of his health we thought we really needed to move into a retirement village which was advertised as they all are, or seem to be, as providing services to help us with our living needs as we aged,” says Angela Moore.

But the couple’s stay would be much shorter than expected.

On June 20, 2015, Aveo held a meeting for residents that sent chills throughout the community. They were told that Aveo wanted to buy all the units that were freehold and turn the village into leasehold, known as the Aveo Way.

“Powerlessness,” Moore says, “in response to a big company saying that they were taking over our homes and ability to sell our homes.”

The Moores had bought into the village because it was freehold. They have a daughter and granddaughter and wanted something to pass on to them when they died.

Moore believed if Aveo bought more than 50 per cent of the units it would devalue the village and the residents would lose power. She – and many others – believed Aveo could then set strata fees to force out the rest of the owners.

She said anybody who had their unit on the market had to vacate it before they would market it for them, which was almost impossible for the majority of people because that meant that they would have to look for rental accommodation, as well as pay the monthly maintenance fees charged by the company.

Moore says that after the meeting she told her husband they needed to leave the village, to get out with some of the money before it was too late. “I felt vulnerable ... I said to Pete that this was some potentially huge asset-stripping exercise, particularly over our lifetime.”

After a year of gut-wrenching decisions, the couple decided to move out.

“He was very sick by then but he wanted to know that when he went I was safe and happy, which I wasn’t at Mountain View. He wanted to know that we still had funds, still had assets when we passed away that would be of help to the children that certainly wouldn’t have ... or was unlikely to have happened if we’d stayed where we were.”

Shortly after they moved out, Pete died. “We still lost a considerable amount of money but we did move at a time and in a circumstance where financially we were able to recover somewhat but Pete, the move took a lot out of Pete physically. Pete passed away within six months of us moving.”

They bought the freehold unit and garage in 2014 for $225,000 and sold it in November 2016 for a similar price to a retiree who bought the property as a leasehold, meaning Aveo got to keep the freehold title for virtually nothing. After exit fees and other expenses, the Moores walked away with $181,469. They were out of pocket more than $40,000.

Moore says she knows of one person who, in desperation, sold their unit for $70,000 to Aveo. “Then, by the time exit fees were taken out of that very small sum, they were left with a nominal amount, as I understand it.”

Aveo says it does not compel the buyback of any units but confirmed it was transitioning its villages from freehold to leasehold through the Aveo Way.“There is no evidence that switching to leasehold has disadvantaged ongoing residents, who cannot be compelled to change to the new contract, or exiting residents.”

But not everyone agrees. Lawyer Stewart Levitt, who acted for Geoff Richards, says the Aveo Way is akin to selling gold when it is only gold-plated.

“They’re effectively converting freeholds into leaseholds by stealth, and selling the leaseholds as if they were freeholds,” he says. “Many people seem to have been confused as to what they’re actually acquiring when they’ve been acquiring retirement units pursuant to the Aveo Way,” he said.

It is a brutal business model that is becoming more honed with each new contract.

Under Aveo’s Freedom Aged Care business, which it started rolling out in 2016, the exit fee reaches a maximum of 40 per cent after two years with 50 per cent share of any capital gain going to Aveo and the resident taking the hit on any capital loss. If a resident moves out after a year they are charged 25 per cent, moving to 40 per cent after two years. The resident shares 50 per cent of the refurbishment and reinstatement costs.

Aveo bought the Freedom Aged Care business in February 2016 for $215 million as part of a new plan to expand its business from retirement villages to include higher care centres. The business model is to provide supported care right up to palliative care level.

It is part of a bigger plan to tap into a deregulation of the sector that came about in February this year, allowing the elderly to direct the government funding they receive for low-care assistance to large service providers, like Aveo’s Freedom Aged Care.

According to the company’s executive ranks, both the new Freedom contracts and the Aveo Way contracts deliver major benefits to Aveo’s financial accounts.

“In financial terms, there’s a very significant value uplift over the medium term for the rollout of both the Aveo Way and Freedom,” Aveo’s chief executive told analysts on a conference call in August 2016.

Given the average age of its residents is 82.8 years old, it is not hard to see why Aveo can roll out the contracts quickly and no doubt lift the turnover of units – the older the profile of residents the less time they are likely to stay.

Tim Kyng, an actuary and senior lecturer at Macquarie University in the department of applied finance and actuarial studies, was given a research grant to build a calculator to help people understand the true cost of living in a retirement village as well as compare different retirement village contracts against each other.

He was inspired after his mother became interested in moving into a retirement village.

“You go to the retirement village” says Kyng, “and talk to the sales person and they give you all these glossy brochures and spend several hours trying to talk you into buying an apartment or buying the right to live in the apartment and it’s really difficult to get them to actually give you the financial details of how the contract works.”

He said exit fees vary from village to village, and the different combinations of entry fee, maintenance fees and exit fees make it difficult to figure out which retirement village deal is the best.

"Our calculator aims to calculate a 'comparison rent', like a comparison interest rate for home loans, so that each combination of the fees and fee types can be equated to a rent-per-month payable over the new resident’s expected term of residence," Kyng says.

Kyng agrees to calculate the cost, for this story, of an 82-year-old woman moving into an Aveo retirement village using actual figures from a Freedom contract, assuming monthly maintenance fees of $1600 and an exit fee of 40 per cent after two years. The result was astounding: if the woman either died or moved out after two years, she would have paid the equivalent rent of $13,300 a month, or more than $3000 a week for the privilege of living in the village.

For that kind of money you could rent a five-bedroom house with a pool in the ritzy Sydney suburb of Bellevue Hill or a four-bedroom mansion (also with a pool) in Melbourne’s Toorak, according to properties listed for rent on domain.com.au in June.

The Consumer Action Law Centre’s Gerard Brody says the contracts and high fees are hard for even sophisticated consumers to understand. He believes some of them are unfair and unconscionable.

The law centre has taken an increasing interest in the retirement sector after being involved in a Victorian parliamentary inquiry last year into the sector, which received nearly 800 submissions from angry residents, including Aveo residents.

“When it comes time to exit, some people can feel trapped. It’s a bit like a financial prison.”

“These fees are too high to enable them to exit, move into aged care, or back close to relatives and family,” he says.

For some residents who do leave, the pressure can be intense in other ways.

Fairfax Media and Four Corners have seen a property valuation given to a resident at The George in Melbourne’s bayside suburb of Sandringham. The freehold one-bedroom serviced apartment was purchased in 2005 for $230,000. In 2014 – almost a decade later – it was valued by Aveo at $250,000. Then in August 1, 2016, Aveo lowered the valuation of the property to $240,000. After exit fees and other deductions including legal fees and reinstatement costs, the resident would be left with $183,000.

Aveo is currently marketing Freedom Aged Care leases over one-bedroom units in the same village for $600,000. The loan leases are for 99 years, including an exit fee of 40 per cent at two years.

Aveo says its efforts to bring in higher care was aimed “at reducing the number of residents who leave the village for health reasons”.

“Freedom model offers exceptional standard of care to residents, which cannot be compared to a standard lease agreement for a retirement village unit.”

It also says the low price offered to the outgoing resident reflected the lack of demand and the high price for units at the same village reflected the high demand for the Freedom program.

Under the Freedom Aged Care program, documents obtained by the joint investigation show that Aveo has been charging residents of the program $270 per week per person plus maintenance fees of $473 per week and $56 per week for meals, totalling $799 per week. The document says pensioners and part-pensioners could defer up to $430 a week up until exit.

At another village in Cheltenham, Victoria, documents show that residents have been charged $415 per week per person for the Freedom Care program, $480 per week for maintenance fees and $56 per week for food, bringing the total to $951 per week, with residents allowed to defer up to $580 per week up until exit.

According to Brody, such high charges and the ability to defer fees is really “asset stripping”. Asset stripping and questionable dealings are a recurring theme in Aveo’s villages across the country.

The company’s Freedom Aged Care ads end with catchy jingle “Give me freedom”. Yet in the absence of governments and regulators reining in some of Aveo’s more avaricious business practices, residents are more likely to find only financial internment and servitude rather than anything resembling “freedom”.

For more revelations, watch ABC TV Four Corners on Monday, June 26 at 8.30pm.

Contact adele.ferguson@fairfaxmedia.com.au and sarah.danckert@fairfaxmedia.com.au