The untapped promise of mid-market retirement housing

You may not have heard of ‘Last Time Buyers’ (LTBs), but they
are over 55s in the UK who might look to downsize their property requirements
going into retirement.

There are 3.3m of them, and they’re sitting on assets of £820bn, according to the Centre for Economic and Business Research, and highlighted in a report – ‘Free Up Housing Stock’ – by financial services provider Legal & General in 2015.

Currently, though, most of them are going nowhere. For many that is because they don’t want to move and never will. But for those that do it’s mainly because there’s nowhere to go.

“Older people’s housing in the UK has traditionally been focussed on social or affordable provision, councils and housing associations. There’s also a small amount at the very top end. The whole market is underserved but the mid-market has been particularly neglected,” says Kyle Holling, projects partner at Trowers & Hamlins and co-head of the firm’s market-leading Health & Social Care team.

“We’re talking about the average homeowner in the UK, maybe in a three or four- bedroomed house, perhaps looking to downsize but not necessarily downgrade. Downsize is perhaps not quite the right word either - we hear “rightsize” used a lot. This is not about the size of the accommodation but about an offer which better suits people at the time they are looking to move and anticipates their future needs too. As yet, there’s very little available in terms of what we might call ‘aspirational’ product out there, so a lot of people are staying put.”

So what might this aspirational housing look like in practice? Well, think retirement villages of up to 350 units, or specialist apartment blocks, providing comfortable living with a range of services, a sense of community and care element.

"The care element in this kind of project is a de minimis onsite unplanned reactive service,” explains Holling, “which means there will be someone onsite for emergency situations, with services also designed to meet occupiers planned care needs as required."

Holling, a Kiwi by birth, points to the New Zealand market as an example of what might be possible in the UK. “The New Zealand market is in many ways about 20 years ahead of the UK in this respect,” he says. “There is every reason that this should work in the UK, the demographics are right and as the L&G report shows, there are millions of homeowners who have benefited from rampant growth in house prices, but who are now living in properties which don’t meet their current needs in some way. Sometimes this is about the home being too large and challenging to manage physically or financially. But there is also evidence around social isolation and the benefits on health and wellbeing - including savings for the NHS and social services - of the sort of environment which a good retirement community can create.”

Those larger properties account for 7.7m spare bedrooms, according to the L&G report, or 10 years’ worth of housing supply based on government targets (double that in terms of current completions).

"It’s not a panacea,” cautions Holling. “Maybe five in a hundred people will want to go into this kind of housing, so 5% of the market. That may not sound like a lot, but the current provision is around 0.3%, so there is a lot of untapped demand.”

One of the main obstacles to date has been the law. Standard procedure for a number of established operators is to discount service charges or other costs to residents in order to maintain affordability and to recover that discount from housing equity on the resale of the unit. In other countries this “use now, pay later” fee can be up to 30% of the equity in the property.

While this model is used here in the UK a 2012 report by the Office of Fair Trading – not directly related to the retirement housing with care market – cast doubt upon the enforceability of what are known as deferred charges or exit fees. The Law Commission has labelled these “event fees” and is currently working to clarify the situation.

The removal of any legal uncertainty is, of course, vital to creating a positive investment environment, but it’s not a market for every investor. “If your revenue is based on units changing hands, for older people’s housing there is a reality that to some extent (though far from exclusively which seems to surprise many) you are recovering from people’s estates after they have passed away. So you have to understand the demographics,” says Holling. “There’s an issue around developments taking time to get to a steady state with an expected number of changes of resident each year, and also an issue of scale within a wider business and, for example, managing the average age of residents across that business.

Much of the activity in this part of the sector so far has come from third sector organisations such as ExtraCare Charitable Trust. This Trowers client supports over 4,000 elderly people in 17 housing schemes and 14 villages, and its five-year strategy includes a £200m plan to complete five housing villages in the Birmingham area.

“We are definitely seeing interest in the mid-market from a number of sources” says Holling. “The not-for-profits are moving toward it from the affordable end, while the higher-end providers are moving toward it from that end. They are already sector players and understand the business models and the demand drivers for buyers. We are also seeing interest from established providers in the care home market and from those in the hotels and leisure sector”.

Tim Nye, partner in the firm’s corporate department, and a specialist in private equity, thinks other investors can benefit but need to modify their outlook. "The investor timescale on this kind of development is 10 plus years before you see predictable returns,” he says. “That’s too long for traditional private equity investors, it doesn’t necessarily work for the banks, and pension funds only think in terms of fixed yields not the lumpy type payments that these developments throw off at the start. This requires a different investment mindset.”

Nye welcomes the move to clarify the law. “Clearing up uncertainty around deferred management fees will settle investor concerns,” he says. “It will mean the deferred management fee can form part of valuations because as its applicability becomes more certain and this makes the whole concept of the deferred fee much more bankable, from an investor point of view, and will lead in due course to a secondary market, when there are many more units around.”

Nye also thinks the offering (as well as the price) is central to the success of retirement villages. “The focus for the mid market is on creating a great living environment with good facilities which aren’t going to break the bank for residents,” says Nye. “As an operator, it’s up to you what you put on the site, you may have a cinema, gym, a bowling alley, restaurants, however the key is availability of use, not its uptake; no one nowadays really wants organised entertainment or forced activities and operators in planning their villages and packages should bear this in mind.”

Larger developments are very much the norm in other places such as New Zealand, Australia and the US and, along with infrastructure, can be a powerful driver for urban regeneration too.

In the UK, the team feels it could also be an attraction for local authorities looking to develop moribund town centres. “The story goes that as you got older, you’d want to move out to the country,” says Holling. “But increasingly, the evidence shows that people would rather be in a more vibrant community with good infrastructure, close to good facilities. There’s a great opportunity for local authorities to think about how retirement living can be incorporated into their strategic plans, and to work with the NHS, which is looking to make better use of its estate.”


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