Retirement villages are a popular choice among retirees as they provide facilities, essential services, amenities and security within a like-minded community. However, the costs, contracts and facilities of each retirement village are often so precisely tailored to each development that it is sometimes impossible to make meaningful comparisons. Having sold their retirement home with the intention to invest in a retirement complex, many retirees find themselves torn between buying section title, investing in a share block scheme or securing life rights to a unit. In addition, many retirees find themselves financially unable to afford the retirement unit they had originally planned on, and are forced to consider other financing options. The practical, legal and financial structures underpinning the various retirement development models can significantly impact on one’s retirement, and it is essential that the differences between these models are unpacked and fully understood.
- Sectional Title
Most South African property investors are familiar with sectional title ownership, and many retirement complexes are structured on this basis. The retiree who elects to purchase a sectional title unit within a retirement village acquires full ownership of the unit. As such, registration of the property takes place through the Deeds Office and the purchaser will be liable for bond registration, transfer duties and conveyancing fees. The governance of the retirement complex needs to comply with the provisions of the Section Titles Act of 1986, which also requires that a Body Corporate – consisting of all the unit owners – be formed. The Body Corporate assumes full responsibility for the day-to-day running and financial management of the common property, although this can often result in slow and arduous decision-making. Importantly, the developer of the sectional title scheme bears no responsibility for the ongoing maintenance and cost management once the development has been completed, with these duties falling squarely on the collective shoulders of the residents. With residents being in charge of the development’s maintenance, there remains little incentive for sectional title developers to build cost-efficiency and levy affordability into their developments. For those who enjoy DIY, garden maintenance and taking care of one’s own property, sectional title is an option worth considering. A distinct advantage of sectional title ownership is that the property forms part of one’s estate on death, and the property can therefore be bequeathed to one’s heirs in terms of a will. Sectional title ownership therefore remains an attractive option for those wishing to leave a property legacy to their loved ones, whilst still enjoying the benefits of close community living.
- Share Block
Unlike sectional title schemes, a share block scheme does not involve ownership of immoveable property. A retiree who elects to purchase into a share block scheme in essence purchases shares in the company that owns the retirement village. The retiree is issued with a share certificate and becomes a shareholder of the share block company. As a shareholder, the retiree signs a Use & Occupation Agreement which entitles him to use and occupy the unit for as long as he owns the shares. As there is no immoveable property involved in the transaction, a share block transfer is not registered through the Deeds Office, although transfer duty on the purchase price of the shares is payable to the Receiver of Revenue. As there is no transfer of immoveable property, acquisition costs on joining a share block scheme are therefore much lower than purchasing a sectional title unit. Whereas sectional title owners are responsible for the running of their complex, this is not the case in a share block scheme. The directors of the share block company take all management decisions leaving shareholders with very little say as to the how their scheme is run. However, as a share block company does not generate an income, each shareholder is required to contribute towards a levy fund which is used to cover the running costs of the complex. Repairs or maintenance in respect of the shareholder’s unit or section remain the financial responsibility of the shareholder. Whilst the share block company is obliged to insure the property, each shareholder is responsible for insuring the contents of their unit. From a financing perspective, it is important to note that financial institutions generally do not provide finance to buy into share block schemes as there is no security against the loan.
- Life Rights
Life rights schemes are growing in popularity in South Africa because they offer a cost-effective and less onerous option for retirees. Ideal for those who have less capital to invest, a life rights scheme involves the retiree purchasing the right to use the unit/apartment for the remainder of his life. In the case of couples, the right to use the unit ceases upon the death of the second spouse or partner, and this right is inalienable. Because purchasing into a life rights scheme does not involve any transfer of property, no bond registration, transfer fees or VAT is payable meaning that there are very few cost barriers to entry. Residents of a life rights scheme enjoy similar benefits to sectional title owners, with the added advantage that the developer remains the sole owner of each unit and therefore carries the responsibility for maintenance and upkeep. As a property investor, life rights scheme developers are naturally incentivised to keep the facilities and amenities of their village at a high standard in order to ensure continued clientele into the future. Needless to say, many retirees find this aspect of life rights schemes particularly attractive. Another advantage of life rights schemes is that their monthly levies and administration costs are generally lower, with developers being obliged by law to provide a two-year cost estimate in respect of levies. Reduced levies and greater levy transparency make it easier for members of a life rights scheme to plan financially for the future. Upon the death of the retiree, the right to use the unit/apartment reverts back to the owner of the complex who can then resell it. Upon resale, the deceased’s estate will receive the original purchase price plus a percentage of the net profit which is determined at the time of purchase.
Navigating the available retirement home options can be overwhelming, especially when coupled with the inevitable emotions and fears that most retirees experience as they enter this life stage. We encourage all retirees to look further than the marketing material’s manicured lawns and luxurious living spaces in order to fully understand what is being offered. Seek to look beyond the brochure for a retirement home that is fit for your special purpose.
Categories: Financial Planning