Move over millennials – the ‘perennials’ are in town

In 2025, almost 30% of the UK population will be over 60, according to the Office for National Statistics, compared with about 18% today. The number of over-85s, meanwhile, is set to double by 2030.

While the costs of caring for an ageing population are a concern, it should be remembered that older people as a group are sitting on a staggering volume of wealth. Indeed, the over-60s age group owns more than £1trn worth of housing, the majority of which is unmortgaged.

Those who are nearing or have reached retirement age should therefore represent a gold mine for the developers of retirement living schemes. Yet so far the sector has not taken off in the same way student accommodation and build-to-rent have.

Could this be the year retirement living, like the other two burgeoning sectors, becomes a proper asset class?

Scope for growth

There is certainly plenty of scope for growth. Currently, fewer than 2% of older people in the UK live in retirement living housing compared with 17% in New Zealand and 19% in Australia.

“Objectively, you would probably say that the market is not booming as there’s not much being built at the moment,” says Kyle Holling, partner at law firm Trowers & Hamlins. “The operators are certainly out there to deliver new products, but it takes time to deliver some volume.”

Holling points out that there are parts of the country where there is a higher concentration of retirement living schemes, particularly in the Midlands and northern England, but that it is “by no means mainstream or widespread”.

Indeed, from a national perspective there is what Ben Rosewall, a director in the healthcare team at CBRE, describes as a “chronic undersupply of age-appropriate housing”.

Needs gap

“For this reason, and because of the demographic pressure the country is facing, the retirement living sector represents a massive opportunity,” he says.

According to Nick Sanderson, chief executive at Audley Retirement, the projected requirement for retirement living is between 1.2 million and 1.5 million units but currently only around 50,000 have been developed.

“The reason retirement living isn’t bigger in the UK is down to volume. Eventually, it will grow to the size of somewhere like New Zealand, where there are already 10 times as many units as in the UK despite it having a population one 10th the size.”

However, while there is huge capacity for growth in the UK, there are a number of significant challenges, not least in raising awareness within the target demographic.

“Demand comes in any market from a certain customer demanding a certain product,” Sanderson explains. “In this particular market, older people, however wealthy, are not aware of the options.”

Holling agrees. “People can’t demand what they don’t know exists,” he adds.

Older people, however wealthy, are not aware of the options - Nick Sanderson, Audley Retirement

It is a classic catch-22 situation. Part of the problem is that the new breed of homes is quite different from the old local authority schemes people tend to think of when they consider retirement living. They are also poles apart from care homes. More importantly, the vast majority of retirement living housing is for sale rather than to rent.

Developers are working hard to challenge entrenched negative perceptions and agree that the best way to do that is by getting more people to visit their schemes so they can show them the difference.

“They look so unlike any care home you can imagine,” says Sanderson. “Once people come in, that’s it; we’ve got them. They realise it’s something completely different.”

There is also a growing variety of retirement living options out there, with the luxury end of the market seen as offering particular growth potential. Auriens certainly thinks so. That is why it is developing ultra-luxury schemes such as Auriens Chelsea at 2 Dovehouse Street, just off Kings Road, which it hopes will set a new standard for retirement living. Such schemes could also help unlock the historically difficult London market.

Principal players

If the sector is to really take off, more players like Auriens will need to enter the market. Currently, just two companies account for 95% of the retirement sector. The first - which builds and sells more than 70% of the nation’s retirement housing - is McCarthy & Stone.

Founded in 1961 by John McCarthy and Bill Stone, the company built its first retirement housing development in Hampshire in 1977. Now, it boasts three retirement housing products: a mainstream retirement living option for people who are, on average, 80; ‘Retirement Living Plus’, which provides extra care to older occupants (the average age is 83); and ‘Lifestyle Living’, a bungalow and cottage option aimed at those in their mid-70s.

Surprisingly, Gary Day, McCarthy & Stone’s land and planning director, says he is not happy about the monopoly his company holds. “From a business perspective, someone would say it’s pretty good, but in terms of delivering housing choices for older people, it’s not great,” he reasons.

“We’re delivering fewer than 2,500 units a year. It’s a drop in the ocean. We have an ageing population but there are not many other housebuilders coming into this market space. The more companies we have working in the sector, the better the reputation of retirement living will become, leading to increased demand.”

The other major developer of retirement housing in the UK is Churchill Retirement Living, which sold 580 units last year, all within eight months of completion.

There’s a ticking time bomb with the ageing population - Spencer McCarthy, Churchill Retirement Living

Its chairman, Spencer McCarthy - son of John McCarthy - believes that the government needs to get more involved. “We are all living longer,” he says. “I think there’s a ticking time bomb with the ageing population and if the government helps in providing better accommodation and encourages housebuilders to build more, then great.”

Barriers to entry

While the potential profits are significant, McCarthy warns that barriers to entry are also substantial. “In 2016, we achieved net margins of +30%, which is the highest in the housebuilding industry and way above our competitors,” he says. “It’s difficult for people to get into the retirement living business, though, because it’s a big investment.”

He says a typical site would comprise 40 units and require an investment of around £8m. “We don’t see a return until 95% of the development is completed, whereas a lot of the national housebuilders will be looking to pre-sell. Because of the long process, it would be very difficult for small regional builders of retirement living to get funding from the banks.”

Mike Adams, chief executive of Octopus Healthcare, which manages £1.3bn of healthcare investments in the UK, adds: “The issue with these schemes is that they take quite a long time to get planning, quite a long time to build - often 18 to 20 months - and then you have to sell them. So the gestation period is quite long.”

It hasn’t always been this way. In the 1980s, around 30,000 units of retirement housing were delivered each year. Now there are fewer than 5,000.

“That’s because the mainstream housebuilders that were in that space at the time have moved out,” says Day. “All the incentives from government encourage them to provide starter homes.”

Starter home focus

As as result of the impetus to build being focused on the other end of the housing spectrum, between 40% and 50% of units built by mainstream housebuilders are starter homes.

“Why would they take the risk of developing retirement living?” asks Day.

McCarthy & Stone, Churchill, Octopus and others are lobbying the government to introduce planning policies to re-energise the market, such as exemptions on affordable housing obligations to make it easier to compete in the land market.

Ultimately, it is in the government’s interests to support the retirement living sector, they argue. “The government recognises that it’s going to be a huge cost to look after older people and there’s a strong correlation between better housing and better health,” says Day. “If we can encourage older people to downsize to retirement living housing, which is an accommodation that better meets their needs, it reduces the demand on housing.”

That is the other key argument in favour of the retirement living sector - it frees up under-occupied family housing for younger generations.

Find out more: Auriens makes capital gains in retirement living

“For every apartment that we sell, there are at least two house moves in that chain,” says Day. “There is a high percentage of situations where those go to a first-time buyer. We make better use of housing stock and we create opportunities for first-time buyers.”

If the sector can be broadened from predominantly for-sale homes to include rental properties, it will also create opportunities for an increasing number of developers and investors.

There is evidence it is already starting to happen. This June, Property Week reported that Bridges Fund Management was financing a new assisted living business called Birchgrove, which will operate a rental model. The hope is that more institutional investors will in turn commit to the sector, as they have to build-to-rent and student accommodation.

The sector should also get a boost demand-wise from the conclusions of a recent investigation by the Law Commission into controversial ‘exit’ or ‘event’ fees payable by the owner when they leave the property, which ruled that as long as the fees are disclosed in accordance with consumer rights, such charges are lawful, but added that improvements should be made to transparency of the process.

All of this suggests we are at a tipping point in terms of supply and demand in the sector. As Adams puts it, it is still “early days”, but the golden age of retirement living may not be far away.

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