Legal & General has developed a reputation as an early mover into new, underinvested markets - witness its move into build-to-rent (BTR) and modular housing - and last month, it was at it again, this time announcing its intention to build 3,000 retirement homes over the next five years.
L&G aims to make early headway using its own capital and the expertise of recently-acquired operator Inspired Villages, and is hoping to persuade other like-minded investors to work alongside it.
So what does it see in the retirement market, why has it decided to get in now - and how does it intend to attract investors looking for a regular return to a model that offers homes for sale rather than rent?
The insurer already has two retirement villages, in Tattenhall, Cheshire (pictured) and Warwickshire, and is a few months away from announcing its next site for development with a strategic partnership. In 2018 it will begin looking for new institutional partners in earnest.
L&G says its entrance into the market is a long-term play.
Phil Bayliss, head of senior living at L&G, said the firm’s approach is to ask, what are the biggest economic and social investments we can make? “They aren’t always the ones that offer quick returns.”
Bayliss took L&G Capital into the build-to-rent sector several years ago, purchasing the company’s first three sites. He says this has given L&G insight into the type of objection it could face from potential partners.
One of the factors that has put institutions off retirement living is the prevalent for-sale model. Bayliss argues that the key to overcoming this is to create sources of income that are not derived from the sale of homes.
Under L&G’s model, residents buy a home in a purpose-built community, and long-term income is derived from charging homeowners for the costs of running that community. An event fee of up to 10% of the property value will be charged when the homeowner leaves, depending on the duration of their stay.
“This is recompense for delivering the community’s services to residents at cost,” says Bayliss.
Further income is derived from on-demand services such as food preparation, wellness and fitness.
The long-term nature of the yield profile is attractive to institutional investors, he says, adding that he is confident more institutional investment will be forthcoming in due course.
When it comes to investment, this market is about five years behind the buzz around BTR - Phil Bayliss, L&G
“I’d say when it comes to investment, this market is about five years behind the buzz we are seeing around build-to-rent.”
Henry Lumby, head of Savills’ retirement living team, agrees that the sector is set for significant growth, noting that several firms are eyeing the market with interest.
“There is a mix of private equity, sovereign wealth funds and pension funds looking at the UK market from a domestic and international perspective,” he says.
The UK market lags some way behind Australia and New Zealand, but with a “weight of capital” currently being aimed at it, it could make significant moves forward, Lumby adds.
With L&G putting its money where its mouth is, the retirement sector could well follow BTR and student living into the mainstream.
4 August 2017