With the UK’s population ageing and many elderly people sitting on valuable property, the development of specialised retirement housing represents a huge opportunity for construction.
- Market potential
- Specialist development
- Third sector developers
- Differing business models
- Contractor opportunities
- Development constraints
- Dearth of sites
As the baby boomer generation reaches retirement age, the issue of how to house the UK’s burgeoning population of elderly people becomes ever more pressing.
For the government it is a headache, but for the property and construction industries it represents a huge opportunity.
“I think retirement housing is going to make the student housing industry look like chickenfeed,” says Roger Black, creative director at specialist developer PegasusLife.
“It will be absolutely enormous; it will emerge after mainstream market housing as the second biggest segment in the housing sector.
“At the moment there are only 2,500-3,000 units being delivered a year. It could easily be tenfold and then some.”
Mr Black’s confidence is based on a host of statistics (see box) showing a fast-growing number of retired people sitting on billions of pounds of housing equity, together with a market that is chronically under-supplied with purpose-built retirement housing.
Almost all of the small group of private developers operating in the sector are ramping up their construction programmes to cash in on what they perceive to be pent-up demand.
Leading firm McCarthy & Stone sold 1,677 apartments in 2014 and plans to double the size of its business over the next five years to around 3,000 units a year or more.
“I think retirement housing is going to make the student housing industry look like chickenfeed”
Roger Black, PegasusLife
Competitor Churchill Retirement Living also plans to double its output to around 1,000 homes annually by 2018.
New kid on the block PegasusLife, backed by investment fund Orchard Street, has acquired 38 sites since its inception in 2013 and plans to establish a rolling programme of 60 to 70 projects at a time.
At the luxury end of the market, Audley Retirement will deliver 130 apartments this year and is looking to increase that figure to 400 in 2017, while Renaissance Retirement is currently building 167 units and plans to develop 250 next year.
Nursing homes are not the only housing with some level of care available to older people.
Although the care homes market is highly active, that is not the type of accommodation delivered by these developers.
Their schemes are broadly similar in form to the ‘sheltered housing’ delivered in the past by local councils.
They build blocks of one or two-bedroom apartments for sale to individuals over the age of 55 on a long leasehold basis – often 125 years – usually with some shared facilities and onsite management.
Within the broad category of retirement housing, different levels of management and care provision are on offer through a variety of developments.
UK retirement housing: Key facts and statistics
The number of people aged 65 and over in the UK is set to rise from 11.4m in 2014 to 17.2m in 2033.
Research by Legal & General indicates that there are 3.3m homeowners who are aged over 55 and looking to downsize in future.
They are sitting on £820bn of property wealth (rising to £1.2tn by 2020) and 7.7m spare bedrooms, which is equivalent to 2.6m family homes and represents 20 years of housing supply based on current completions.
Property consultancy Knight Frank estimates that there are around 533,000 homes in the retirement or sheltered housing sectors – around 2.3 per cent of all housing stock. Of these, only 106,000 are for home ownership, with the remainder in the rental market.
Around 1 per cent of the UK’s over-60 population lives in retirement communities, according to data from the Housing Learning and Improvement Network. This compares with 13 per cent in Australia and New Zealand, and 17 per cent in the US.
Think tank Demos says only 8,000 retirement flats are being built every year now compared with 30,000 in the 1980s. In 2014 around 3,000 retirement properties were built for sale.
McCarthy & Stone, Churchill and Renaissance all operate a basic model which involves the construction of blocks of between 30 and 50 apartments in urban locations geared towards the ‘independent living’ market.
There is usually a communal ‘owners lounge’, a shared garden and an onsite concierge who can respond to emergencies when alerted by an alarm cord.
Retirement villages of the type built by developers such as Audley Retirement and Retirement Villages Group tend to be larger, self-contained schemes sometimes located further away from town centres.
A wider range of shared facilities is usually available, which may include a restaurant, swimming pool, gym, spa or library.
They also frequently offer care services, but many residents live completely independently.
For older and frailer people, assisted living or extra care schemes offer onsite medical and care provision.
They may be built alongside a care home, allowing residents whose health deteriorates to receive more attention without having to leave their community.
Third sector developers
The extent to which care and shared amenities can be provided depends on the size of the scheme.
Mr Black says: “The larger the project the more facilities you are able to provide – not because of capital expenditure, but mostly because you are constrained by the service charge, which becomes disproportionately expensive for occupants if you have too many facilities and staff.”
Retirement housing is a sector in which third sector providers operate alongside private developers.
Housing associations supported by government grant funding provide for-rent sheltered housing, while charities such as the Joseph Rowntree Foundation, Anchor and the Extra Care Charitable Trust (ECCT) develop mixed-tenure schemes.
“The private sector tends to target the top 5 or 10 per cent of the market, then at the other end you have the housing associations building small grant-sponsored extra care housing developments.
“In the middle of the market you have a big hole, which is what we fill”
Mark Curran, ECCT
“Then in the middle of the market you have a big hole, which is what we fill,” says ECCT development and sales director Mark Curran.
“We do 200-unit-plus retirement villages in which 20 per cent is rented and 80 per cent is sold; of that sold element, usually half is shared ownership.”
Like private developers, charitable trusts are engaged in large-scale building programmes.
ECCT has three schemes totalling 734 units under construction in the Midlands and will have another four projects on site within 18 months.
At Anchor, director of property, procurement and development Dom Hayes says: “We have a five-year development plan to build about 2,500 new units, all of which are leasehold properties.
“Of these 2,500 leasehold units, we have about 1,300 either currently being built, ready or within planning.”
Differing business models
Retirement housing providers are divided between those that follow a housebuilder-style model, managing their own construction projects and employing subcontractors directly, and those that operate as developers, tendering work to a main contractor.
McCarthy & Stone, Churchill and Renaissance Retirement fall within the former camp.
“We manage the development and then subcontract the trades out,” says McCarthy & Stone land and planning director Gary Day.
“Some suppliers and contractors we use on a national basis and others have agreements with our regional offices.”
“As we start building more, we will look at working with other contractors rather than put all our eggs in one basket”
Kevin Shaw, Audley Retirement
Developers that employ main contractors tend to work with a limited pool of partners in an attempt to keep costs down and quality high.
Audley Retirement employs Balfour Beatty and Wates to deliver contracts for its 100-unit retirement villages, which average around £34m in value.
Development director Kevin Shaw says: “We are a high-end developer and these companies fully understand our expectations.
“We also feel it gives our customers confidence because they know they are big, reputable companies.
“As we start building more, we will look at working with other contractors rather than put all our eggs in one basket, but they will have to be ones that have worked on a retirement village before or have built high-end apartment blocks or hotels.”
ECCT uses the Homes and Communities Agency’s Delivery Partner Panel framework to employ contractors including Bouygues, Galliford Try, Keepmoat and Willmott Dixon.
Anchor meanwhile has a close partnership with specialist retirement and care home builder Castleoak. And PegasusLife will soon be looking to start work on its first developments.
PegasusLife’s Roger Black says: “We are trying to put seven or eight projects into the market now for construction and there will be a lot of work coming down the pipeline.
“We are focused on developing a quality supply chain with people who will have repeat business with us.
“To that end we are working up plans now for a dedicated procurement vehicle which will do all that partnering and relationship building with the construction industry to meet the huge amount of development flowing through.”
“We are focused on developing a quality supply chain with people who will have repeat business with us”
Roger Black, PegasusLife
Development of retirement housing for sale has been concentrated principally in the South of England and the Midlands.
Downsizing buyers need sufficient equity in their properties to secure an apartment and most will move no more than a few miles from their long-term home, so house prices in the locality need to be high enough to render the move affordable.
Several operators offer to buy existing properties under a part-exchange scheme, and for luxury developments to be viable local residential values must typically reach at least £350,000 to £400,000.
The locations where third sector developers can build are also restricted by property prices. “In our middle-market developments the sales cross-subsidise the provision of affordable housing,” says ECCT’s Mark Curran.
“It doesn’t work when we head north of Birmingham because of lower house prices.”
McCarthy & Stone, Churchill and PegasusLife all aim to provide something close to national coverage, but they too are constrained by residential values.
Mr Day says: “There are pockets – Hull, for instance – where there are a lot of older owner-occupiers and very little retirement housing provision, but existing house prices are so low that it makes it very difficult for us to bring forward development.”
When the demographic data suggests an enormous commercial opportunity, why has the sector hitherto remained the province of a small group of specialists building a few thousand units a year?
“Most of the housebuilders have dipped their toes in at some time or another in the past then decided to refocus on their core business activity,” Mr Day explains.
“The whole business model in this sector is very different to mainstream housebuilding. It is about having a continuing relationship with our customer through the care regimes”
Gary Day, McCarthy & Stone
“The whole business model in this sector is very different to mainstream housebuilding.
“It is about having a continuing relationship with our customer through the management and care regimes.”
Churchill planning director Andrew Burgess adds: “Developments have to be completed as a whole so they remain cash-negative for a considerable period.
“On one of our typical developments there is a cash outlay of around £6m and only when you have sold 50 per cent of the apartments does it come into profit.
“Volume housebuilders building family housing can sell individual plots and release cash gradually, so it is a different way of funding development.”
Dearth of sites
One of the principal challenges to increased production is a dearth of suitable sites.
“Location is the key to retirement living,” says Renaissance Retirement development director Nick Watkins.
“People may decide to give up their car, so they want to be able to walk into town or jump on the bus.
“If it is too far out of town, people will not move in, and town centre sites don’t just appeal to retirement developers, so there is a lot of competition.
“Regular developers who haven’t done retirement housing before and buy the wrong site could be sat there with unsold stock.”
“Location is the key to retirement living”
Nick Watkins, Renaissance Retirement
The planning system is another barrier to increased development.
In some cases local planners will accept that assisted living and extra care schemes fall into the same use class as nursing homes, but many retirement schemes are categorised as a general residential use, which leaves them subject to affordable housing contributions and Community Infrastructure Levy charges.
“Government policy for at least the last 10 years has been focused at the other end of the housing chain around first-time buyers, affordable housing and starter homes,” Mr Day says.
“I hope that is about to change, because there is an increasing recognition in government that it needs to be doing more to provide more and better housing choices for older people.”
Developers in the sector argue that retirement housing brings a range of benefits: downsizing releases much-needed family housing back into the market; the elderly tend to be shoppers who support local high streets; and living in age-appropriate accommodation makes it less likely older people will suffer the kind of medical crises that see them occupying expensive hospital beds for long periods.
Those arguments may well sway a government that has shown itself willing to listen to the demands of older voters.
A favourable policy environment combined with the UK’s ageing population could see retirement housing become one of the fastest-growing sectors in the construction market.