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The valuation of Life Right occupation in retirement villages

This article was first published on the 14th of March 2016 by PPE Valuations.

Retirement village developments can generally be defined as usually including a mix of independent living units (ILUs) and serviced apartments (SAs) with community facilities providing a shared congregational area for village activities and socialising (McAuliffe, 2010).

Very little has been published in South Africa on the valuation of retirement villages. The retirement village phenomenon is fairly new in South Africa with a recent history of not more than 30 years when the first Baby Boomers reached retirement age and available amenities (old age homes run by government and other “care” societies and groups) were found to be wanting. Developers saw a market to develop schemes tailor-made to suit the needs of middle- to upper-income retirees, and so the first privately owned and operated retirement villages, as a departure from the traditional retirement homes, were constructed. Since then there was an explosion in the construction of retirement villages.

Retirement village assets differ from traditional residential assets due to their operation in accordance with statutory legislation. Before one can determine the approach and method of valuation to follow, one must have therefore an understanding of the legislation and legal structure surrounding a property type and its ownership. Following is a short discussion on the legislation governing retirement villages as well as the legal structure of ownership, as envisioned by the legislation.

Unfortunately, legislation does not always keep up with the pace at which the social landscape changes with the result that South Africa does not have any specific laws regulating the development of retirement villages per se as opposed to Australia and the USA where every state has its own Retirement Villages Act (Towart, 2013). There exist, however, an Act in South Africa known as the Housing Development Schemes for Retired Persons, Act No 65 of 1988, which tried to address issues regarding such schemes. Unfortunately the language used in the Act is in some respects obscure and the Act’s structure is cumbersome. The word “retirement village” is nowhere mentioned in the Act. And, yet, the Act offers substantial protection against a variety of risks to retired persons who invest in retirement schemes (Kilbourn, 2008).
Some definitions as set out in the Act is important in understanding the legal structure of the property interest.
The Act defines a “retired person” as someone who is “fifty years of age or older”. The purchaser of the housing interest need not be a retired person; anyone; regardless of age, may invest in a retirement scheme. In terms of section 7 of the Act, however, no person other than a retired person or the spouse of a retired person except with the written consent of all other holders of housing interests in the scheme may reside in a retirement scheme.

Section 1 of the Act defines “housing development scheme” as follows:
“any scheme, arrangement or undertaking-

  1. in terms of which housing interests are alienated for occupation contemplated in section 7, whether the scheme, arrangement or undertaking is operated pursuant to or in connection with a development scheme (read: sectional title) or a share block scheme or membership of or participation in any club, association, organization or other body, or the issuing of shares, or otherwise, but excluding a property time-sharing scheme; or
  2. declared a housing development scheme by the Minister by notice in the Gazette for the purposes of this Act;

“Housing interest” is defined as follows in the Act:
in relation to a housing development scheme (that is a retirement scheme), means any right to claim transfer of the land to which the scheme relates, or to use or occupy that land

“Right of occupation” is defined as follows in the Act:
means the right of a purchaser of a housing interest-

  1. which is subject to the payment of a fixed or determinable sum of money by way of a loan or otherwise, payable in one amount or in instalments, in addition to or in lieu of a levy, and whether or not such a sum of money is in whole or in part refundable to the purchaser or any other person or to the estate of the purchaser or of such other person; and
  2. which confers the power to occupy a portion in a housing development scheme for the duration of the lifetime of the purchaser or, subject to section 7, any other person mentioned in the contract in terms of which the housing interest is acquired, but without conferring the power to claim transfer of the ownership of the portion to which the housing interest relates

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Shire offers development consulting – assisting developers in the planning and execution of all key elements of new retirement villages. To read more about our services, click here.