Selecting the right property for retirement is not simply a matter of selling a large property and buying a smaller property.
Selecting the right property for retirement is about considering the financial implications of various purchase options in light of your lifestyle.
It should form part of a well-considered retirement plan, in which the financial implications of various purchase and development options are carefully considered in light of retirement income, affordability and lifestyle.
When it comes to retirement, perhaps one of the most important decisions that investors will have to make will be the type of sale transaction they choose when purchasing.
South African buyers now have a large number of options available to them in terms of types of retirement communities and villages available and, as such, the number of purchase options is also on the increase.
The three main purchase options that buyers have available to them for retirement property are:
Sectional Title, Share Block Scheme and Life Rights.
It’s advisable to weigh up the risks and rewards of each and, of course, when it comes to selecting the right one for you, to heed the repeated advice of residents, developers and owners:
- Compare a number of developments or estates, their facilities and costs
- Consider your future requirements carefully
- Request and read all the relevant information pertaining to your chosen development and ask questions where necessary
- Inspect the facilities
- Talk to existing staff and residents
- Check on the developer’s track records and reputation
- Enquire about levy increases and special levies
- Seek advice from a financial adviser or a real estate professional if necessary
Bear in mind, however, that an important factor when comparing various retirement options is that costs and contracts are often so precisely tailored by each development that it becomes almost impossible to make useful comparisons.
There is often confusion as to the differences between the various purchase options available and, in particular, the misconception that sectional title and share block schemes are one and the same – which they are not.
Let’s address the main differences in Sectional Title, Share Block and Life Rights first:
When buying a sectional title unit within a retirement village, the purchaser obtains ownership of a unit or residence by means of a title deed that is registered with the Deeds Registry.
Some of these sectional title schemes also offer profit share.
Share block schemes operate differently.
Here owners do not obtain exclusive title to the unit they have ‘purchased’.
Instead they obtain shares in the company that owns the residence. The purchaser is then issued with a share certificate.
Life Rights offer precisely what the name implies; purchasers have a legal right to occupy the unit for the duration of their life.
With Life Rights, however, the buyers do not purchase a unit, but secure the right to occupy the unit for the rest of their lives.
The village and all its facilities remain both an asset and the responsibility of the developer.
In all 3 schemes the buyer has the protection of the Housing Schemes for Retired Persons Act of 1988.
Sectional title is the option that most SA property investors are familiar with as it deals with purchasing the property through what could be termed relatively conventional channels.
Statistically most property investors at the retirement life stage are selling a property to downsize or move into more suitable and secure accommodation that offers appropriate facilities and, as such, they are therefore generally well acquainted with this purchase process.
When the first resident takes occupation within the sectional title development the Body Corporate is required to be formed and must then comply with the rules and regulations of the Sectional Title Act.
A sectional title village can often have quite complex administrative infrastructure as it’s subject to stringent legislative requirements and there is often the question of which legislation takes precedence – the Sectional Title Act or the Housing Schemes for Retired Persons Act.
Furthermore group decision making by residents in the form of a Body Corporate can often prove to be an arduous affair
Registration of a unit within a sectional title scheme occurs through the deeds offices and transfer duty and conveyance costs are therefore incurred.
Importantly, the developer of a sectional title development carries no responsibility for the ongoing maintenance and cost management aspects once the development has been built.
The onus falls upon the residents to do so.
As stated, a share block resident owns shares in a company and not a section of the building itself and in this way the costs involved are generally minimised.
From a conveyance perspective, the transfer of the shares is very similar to a sectional title or conventional transfer of ownership.
A sale agreement is still a requirement for the valid sale of a share block unit.
Transfer duty is still payable on the purchase price to the Receiver of Revenue, for both natural persons and legal entities.
A share block transfer is, however, not registered in the Deeds Registry.
The Share Block Control Act 59 of 1980 regulates the operation of a share block scheme.
The purpose of this regulatory measure is to ensure that prospective investors receive full disclosure when deciding on whether to buy shares in a particular share block company and also regulates the procedure for the conversion of the share block to sectional title, which is fairly common practice.
The ownership of the shares entitles the purchaser to the use and occupation of the unit, which is secured by a ‘use and occupation agreement’, concluded between the buyer who is now a shareholder, and the company.
While the purchaser does not have ownership of the unit, a shareholder plays a role in the management of the scheme through a general meeting of shareholders.
There also exists a set of management rules, similar to the rules in a sectional title scheme, which regulates the manner in which an owner or tenant occupies a unit.
A share block company does not have regular income and in order to maintain the property, the directors of a share block company establish a levy fund to which the shareholders contribute in order for the company to meet its running expenses.
Shareholders are never liable for the debts of the company though.
Because the buyer doesn’t obtain a title to the share block unit, financial institutions do not obtain sufficient security if they choose to offer bond finance for the purchase of the unit.
Due to this, the majority of financial institutions do not offer such finance.
While the Life Rights Scheme is arguably the most popular of all purchase schemes internationally, it is a relative, and rather attractive, newcomer to the SA retirement landscape.
As a purchase option it is considered ideal for those who have less capital to invest, or simply prefer this scheme due to its other numerous benefits.
Life rights developments first launched here in the 1970s and subsequently began to experience incredible traction within the marketplace in the 90s and beyond.
Life rights is a widely practiced and requested retirement model in the more mature markets worldwide.
In the USA (the world market leader for retirement villages) the most common type of sale is based upon the Life Plan model, the same as the South African life rights system.
Unlike sectional title developments, an advantage of life rights is that it is not a property transfer, there are no bond registration fees, transfer duties and no VAT payable, thereby avoiding the negative effects that such costs have upon discretionary income and estate values.
Residents enjoy similar privileges to the homes being purchased by sectional or other titles; the developer, however, remains the sole owner of each unit and therefore carries the responsibility of maintenance and the upkeep of the village and its facilities.
This relationship therefore ensures that all facilities are kept to a high standard.
As the asset is an investment for both the life right holder and the developer, the developer will protect and maintain this asset so as to ensure solid investment appreciation and returns for both parties.
Among the many benefits afforded by life rights, the freedom from the stress of managing and maintaining one’s home ranks paramount.
As life rights are protected by an act of parliament, the right of occupation for the remainder of your life is that of the purchaser and their spouse.
In other words, no developer or property owner shall alienate your right of occupation.
When the life right terminates, through death or other circumstances, it reverts to the owner of the village, who is then entitled to resell it.
Upon successful resale, your estate receives the original purchase price along with a percentage of the net profit, which is determined and agreed at the time of purchase, less selling and refurbishment costs.
Importantly, the Housing Development Schemes for Retired Persons Act requires the life right developer to provide a ‘statement of basis’ upon which any levy is to be calculated as well as an estimate, for a period of two years in advance, of the amount of the levy.
In other words the retiree enjoys levy transparency and the ability to plan around predictable costs.
While transparency in terms of operating costs is built into life rights legislation, developers of sectional title (and even freehold) schemes have little incentive to build ongoing cost efficiency and levy affordability into their developments as the maintenance and upkeep of the individual development is ultimately the responsibility of the residents.
Life right scheme developers, however, are keenly aware that the ongoing desirability and performance of their asset will depend upon the quality, condition and affordability of the village and this naturally incentivises them to ensure that all three aspects are carefully managed.
Essentially a life right scheme can be viewed as a housing product, an insurance policy and a worry-free existence rolled into one.
This is not to say that peace of mind cannot be secured via other schemes but a well-run life right scheme offers all the ingredients for a successful, secure, and stress-free environment.- Arthur Case, GM of Evergreen Lifestyle
About the Author
Arthur’s career spans the financial services, healthcare and management consulting industries. Prior to joining Amdec he served as Company Secretary for BOE, Managing Director of the Medicor private hospital group and Regional Executive of Deloitte’s human capital corporation. Arthur has become a thought leader in the fast growing retirement sector in South Africa and now heads up Evergreen, Amdec’s lifestyle retirement business.