The UK retirement sector is a long way from saturated. Filling the market gap will require investment, development, regulation and, probably, legislation – but what can be done in the meantime to open up the offer? This article explores how alternative tenure options can reach a broader customer base.
Currently, say in the context of affordable housing, the vast majority of Integrated Retirement Communities (IRCs)* occupations are on the basis of a long lease for-sale model. Similar to buying an apartment at any other stage of life, a lease (anywhere between 125 and 999 years) is granted for a premium, giving the owner a legal interest in land as security for the value they have paid up front. Generally, the IRC market is not funded by mortgages, so this suits very well those who have capital available, who have owned and sold their family homes, for example. Occupiers will also need to ensure they are able to meet the ongoing service charges and potential care fees, which can limit the amount they are willing to spend up front on a lease premium. The concept of deferred fees (also called event fees) can help with this by reducing the ongoing cost of the accommodation in return for capital paid from the resale value of a dwelling.
There are a variety of reasons why the long leasehold model may not suit everyone. There are older people who don't have that chunk of capital and for these people, a rental product may be the best option. There are some positives to renting – the barriers to entry are much lower than buying – no conveyancing cost and timescale, easy to exit if it isn’t to taste. However, whilst rental is familiar to, and popular with, investors, such as pension funds, looking for stable long-term income, customers may see it as a temporary option, or one carrying a "what if I run out of money" question. These can be barriers for potential occupiers who have been homeowners for most of their lives. This doesn’t mean there is no room for rented IRC offerings – there absolutely is – but the proposition requires careful thought.
Where a dwelling is let to an individual or individuals who occupy that dwelling as their principal home, the Housing Act 1988 tells us that is an assured tenancy. That could be a fully assured, or "lifetime" tenancy (AT), or an assured shorthold tenancy, or AST. Social housing providers are familiar with both types, but outside of this the AT is not commonly used.
The key difference for both operators and occupiers is that with an AST, the landlord may (as the law currently stands, though Government intends to revisit this) end the tenancy – after a period of notice – without any particular set of circumstances existing. With an AT, possession can only be regained on certain grounds, including the tenant being in arrears of rent. Clearly the former gives more control to an operator, but the latter is more in keeping with the idea of a home for life and can be an effective way to help potential occupiers overcome their fears and understand they have security.
Using rental products does have tax implications – both for landlords (who won't be able to recover input VAT on the rental element) and for tenants (who will have to consider SDLT liability if the rent tips over £125,000).
There's also a hybrid option which sits between the rental and the for-sale models: shared ownership. Here again we have a product which is common to social housing but increasingly recognised as a means to offer wider customer choice in the IRC sector. This part buy, part rent model has been used to allow those without the capital to buy outright the opportunity to get a foot on the housing ladder.
Once a tenant buys an initial equity share (paying rent on the remaining unowned share), they can over time "staircase" (buy more shares of the equity), thus reducing their unowned share and rent payable on it. Reducing the amount of capital outlay, particularly in a market where mortgages are not used to fund purchases, can vastly increase the size of any local market, and allow people to buy into an aspirational product.
Shared ownership can be provided with or without the help of capital grant from Homes England (or the GLA in London), however, the grant-funded option comes with certain strings, including rent capped at 3%, staircasing capped at 75% (at which point the rent payable reduces to zero) for older people's products, the inclusion of certain fundamental clauses and a requirement to repay/recycle grant on staircasing receipts (along with a portion of the profit, save in the case of not-for-profit registered providers). It also means (at the moment at least) a registered provider landlord is required.
Without grant, shared ownership can be delivered free from any of these limitations.
The authors hope that, in the long term, the UK government will introduce legislation to provide for alternative tenure types outside of the above that balance the need for resident security and consumer fairness, with varied payment options and an attractive proposition for investors but for the time being, there is a space in the sector for more resident choice over tenure – space which we increasingly see both incumbent operators and new market entrants looking to offer to maximise flexibility and create growth.
*When the authors discuss IRCs here, we mean age-restricted housing communities for older people, where occupiers live in self-contained accommodation, accompanied by a range of communal facilities and services, including the availability of meals and care and support.
