Valuation methods for resident funded retirement villages in Australia : a practitioner's perspective

McAuliffe, Brett (2010) Valuation methods for resident funded retirement villages in Australia : a practitioner's perspective. In Levy, Deborah (Ed.) Proceedings from the Pacific Rim Real Estate Society 16th Annual Conference (PRRES), Pacific Rim Real Estate Society (PRRES), New Zealand, Wellington, 1 -10.

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Designed for independent living, retirement villages provide either detached or semi-detached residential dwellings with car parking and small private yards. Retirement village developments usually include a mix of independent living units (ILUs) and serviced apartments (SAs) with community facilities providing a shared congregational area for village activities and socialising.

Retirement Village assets differ from traditional residential assets due to their operation in accordance with statutory legislation. In Australia, each State and Territory has its own Retirement Village Act and Regulations.

In essence, the village operator provides the land and buildings to the residents who pay an amount on entry for the right of occupation. On departure from the units an agreed proportion of either the original purchase price or the sale price is paid to the outgoing resident. The market value of the operator’s interest in the Retirement Village is therefore based upon the estimated future income from Deferred Management Fees and Capital Gain upon roll-over receivable by the operator in accordance with the respective residency agreements. Given the lumpiness of these payments, there is general acceptance that the most appropriate approach to valuation is through Discounted Cash Flow (DCF) analysis.

There is however inconsistency between valuers across Australia in how they undertake their DCF analysis, leading to differences in reported values and subsequent confusion among users of valuation services. To give guidance to valuers and enhance confidence from users of valuation services this paper investigates the five major elements of discounted cash flow methodology, namely cash flows, escalation factors, holding period, terminal value and discount rate.

Whilst there is dissatisfaction with the financial structuring of the DMF in residency agreements, as long as there are future financial returns receivable by the Village owner/operator, then DCF will continue to be the most appropriate valuation methodology for resident funded retirement villages.

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ID Code: 41133
Item Type: Conference Paper
Refereed: Yes
Keywords: Valuation Methods, Retirement Village, Independent Living Unit (ILU), Deferred Management Fee (DFM), Discounted Cash Flow (DCF)
Subjects: Australian and New Zealand Standard Research Classification > COMMERCE MANAGEMENT TOURISM AND SERVICES (150000) > COMMERCIAL SERVICES (150400) > Real Estate and Valuation Services (150403)
Divisions: Past > QUT Faculties & Divisions > Faculty of Built Environment and Engineering
Past > Schools > School of Urban Development
Copyright Owner: Copyright 2010 the author
Deposited On: 07 Apr 2011 01:21
Last Modified: 01 Mar 2012 03:39

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