Where’s the work and who is doing it in this growing sector

You may not have realised it, but in the world of housing, providing accommodation for older people is – fairly suddenly – sexy.

It’s certainly quite a turnaround. Because with builders struggling to overcome the lingering stench of a 2013 Office of Fair Trading investigation into “hidden” exit fees from retirement properties, and displaying poor commercial performance compared to mainstream Help to Buy-backed housebuilders, retirement housing has been in the doldrums for much of the last decade.

But reinvigoration is happening thanks to a new breed of private sector “extra care” providers, who build homes that include extra facilities and access to personal care for those that need it. These firms are raising the prospect of large-scale institutional investment into a sector which has in recent years built fewer than 10,000 homes annually, less than half the number seen in the 1980s. Financial institutions including Schroders, Goldman Sachs and Legal & General have been among the first to pile in, while traditional retirement living providers like McCarthy & Stone are starting to test the water.

Certainly, the potential demand is huge – with L&G’s later living chief executive Phil Bayliss describing it as a £100bn market opportunity. So, is the reality matching the hype around “extra care” housing? What’s the evidence that change is now really taking place, and why has the sector hitherto been so slow to grasp the opportunity?

 

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Source: Shutterstock.com / Silent Corners

Transformed

Despite the current hype around private sector extra care housing (also known as housing with care), the vast majority of the housing stock targeting older people remains traditional retirement housing. In the whole of the UK, according to the Elderly Accommodation Counsel (EAC), there are 734,136 homes for older people (excluding nursing homes), of which 70% – 521,485 – are retirement housing or sheltered housing (the term more often refers to the affordable version of the same thing). This is the type of housing made popular by the likes of McCarthy & Stone, Pegasus Life and Churchill, where people live independently and without personal care in developments with some communal space, a site manager and sometimes additional facilities (see Older people’s housing – what’s on offer?, below). In the private sector there is also – still – far more new traditional retirement housing being built each year than there is extra care housing: 3,148 private retirement homes were built in 2018 compared to just 1,824 private houses with care.

In the private sector there is also – still – far more new traditional retirement housing being built each year than there is extra care housing

According to the EAC, more than half of traditional retirement housing is built by McCarthy & Stone, with the vast majority of the rest completed by Churchill and Pegasus. Spencer McCarthy, chairman and chief executive of Churchill Retirement Living, admits the last few years have been “tough”, but says: “We constantly review every aspect of our product and the service we offer to meet the needs of our customers, from our design specifications to materials and the range of services we provide to help facilitate their move. We have not needed to reinvent the wheel, we’ve simply looked to realign it and keep it tuned.”

However, listen to the likes of the recently formed Arco – which stands for Associated Retirement Community Operators – and you’d be forgiven for believing the days of traditional retirement housing are numbered. This body represents the new breed and executive director Michael Voges says the traditional model doesn’t work because the inability to adapt to changing care needs means it can’t guarantee people a home for rest of their life. “It doesn’t always meet the aspirations of todays older people,” he says. “A model that doesn’t offer support just doesn’t work for people in the long term.”

As a result, he claims: “I’m not aware of any investment going in to the retirement housing space,” while, in contrast: “There is a lot of long-term capital going in to housing with care. The market is fundamentally transformed.” New players include Octopus Healthcare, backed by investment bank Schroders, Guild Living and Inspired Villages, both backed by L&G, and Goldman Sachs’ Riverstone Living business. Goldman Sachs says it has a £2bn development pipeline, while L&G’s Bayliss plans to build up to 10,000 homes in the next 5-10 years. Voges says that by 2023, Arco members will boast an annual development pipeline of 7,500 homes a year.

New players include Octopus Healthcare, backed by investment bank Schroders, Guild Living and Inspired Villages, both backed by L&G, and Goldman Sachs’ Riverstone Living business

These new entrants claim to be taking advantage of a gap in the market. For the very wealthy, high end properties with on-site care have long been available, from operators such as Audley, while for those that qualify for social care funding, many local authorities and housing associations such as Anchor Hanover offer accommodation with an equivalent level of support in less swish surroundings. Arco’s Voges says: “The reality is that if you’ve got too much money to qualify for local authority housing, but not enough for the high-end, you’ve not had many options.” Aimee Squires, associate director of planning at consultant Savills, says: “It is the middle-bracket that is the new emerging sector. There is huge potential in the sector.”

The investment is bringing with it rising political interest. Last week an all-party parliamentary group report on rented housing for older people followed a RIBA report, also published this month, on older people’s housing. Recent months have seen the publication of discrete government planning guidance on housing for older people for the first time, as well as an influential House of Lords report on intergenerational fairness which made wide-ranging recommendations.

Evidence suggests that older people living in purpose-built accommodation are commonly half as reliant on NHS services and live independently for longer

After all, the prize is potentially as tempting for politicians as for investors. Evidence suggests that older people living in purpose-built accommodation are commonly half as reliant on NHS services and live independently for longer, saving the government money – think tank Demos said the existing stock already saves the UK £486m a year in NHS and social care costs. But even more interesting is the opportunity to ease the general housing crisis by giving the 3.8 million older people in England living in homes with spare rooms viable options to downsize. “There are around six million empty beds [in older people’s homes],” says Bayliss. “If more people downsize, you could free up 20 years of housing supply.”

Top builders in 2018      
             
Group Sector Schemes Units total Units rent Units s/ownership Units sale
McCarthy & Stone Ltd Private 68 2,773 0 40 2,683
Churchill Retirement Living Private 30 1,287 0 0 1,287
ExtraCare Charitable Trust Non-profit/charity 2 521 133 242 146
PegasusLife Limited Private 11 430 0 0 430
Audley Private 2 228 0 0 228
Pennaf Housing Group Non-profit/charity 3 196 196 0 0
Rapport Housing & Care Non-profit/charity 3 184 109 24 0
Optivo Non-profit/charity 3 142 98 44 0
Liverty Non-profit/charity 2 132 116 16 0
Lifestyle by ENGIE Private 1 129 0 0 129

Game changer

Key to the potential success these new entrants spy is a new “operator” business model, in which the provision of services becomes the core of what the firms are offering – not simply the bricks and mortar. Providers such as L&G are getting around the off-puttingly high cost of these services by allowing steep discounts on the basis the operator gets a share of the cost of the house when it’s ultimately sold – generally after the occupier has died. Interest has exploded since a 2017 Law Commission report effectively confirmed these types of arrangements would continue to be legal.

The EAC’s figures undoubtedly show growth in this area – with an average of 1,680 sale units built in each of the last three years – more than double the equivalent figure from a decade ago. In 2018, for the first time, more extra care homes were built for sale than for rent. John Galvin, chief executive of the EAC, says: “It’s a very interesting model and it is potentially a game-changer in the market.”

Nevertheless, despite what Arco and its members say, most believe there will be an ongoing need for both traditional retirement housing and extra care. As of now, the EAC’s figures show that none of the ambitious new breed count among the top 10 players in the market. And the fact remains that private extra care homes make up a miniscule proportion of the existing stock of homes – less than 2% - most of what has been built are instead available for rent at affordable rates via local authorities and housing associations. The EAC’s Galvin says: “The evidence of the most recent years is that the two models can co-exist. Not everyone goes in to their 70s or 80s believing they’re going to need social care or even wanting to think about it. The traditional model has still got legs.”

Savills’ Squires says: “There’s so many benefits for the extra care model, but different people want different things. Some people will want the extra facilities but not everyone wants to be in a big village environment.”

Annual housing supply by type since 2000 
         
         
Year Without support Supported With care All
2000 703 4,780 1,087 6,570
2001 779 4,595 914 6,288
2002 544 4,360 1,691 6,595
2003 997 4,998 1,764 7,759
2004 625 4,801 2,118 7,544
2005 400 3,851 1,823 6,074
2006 630 4,417 3,575 8,622
2007 406 5,796 3,168 9,370
2008 441 4,770 3,583 8,794
2009 525 3,456 4,786 8,767
2010 397 3,392 3,780 7,569
2011 395 2,468 3,923 6,786
2012 569 3,854 3,445 7,868
2013 330 3,473 2,968 6,771
2014 945 3,139 3,632 7,716
2015 626 4598 5689 10913
2016 1821 4010 5291 11122
2017 682 4574 4229 9485
2018 831 4545 4025 9401

 

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Source: Amberside / Shutterstock.com

Stacked against us

A bigger question is why neither sectors are currently coming close to meeting demand. Overwhelmingly, the providers themselves blame the planning system, claiming it fails to recognise retirement housing as anything different from normal housing. Both traditional retirement housebuilders and extra care operators include significant amounts of communal space in their developments, limiting the saleable area of any given development. Gary Day, land and planning director at McCarthy & Stone, says this commonly means there is 30% less area available to be sold than in a mainstream development. Because retirement homes are liable for exactly the same kind of planning obligations and policies – such as provision of affordable housing – as open market housing, this means developers can’t afford to pay as much for land.

For extra care operators the situation is more complex. Planning use classes make clear that residential nursing homes should be subject to different rules

For extra care operators the situation is more complex. Planning use classes make clear that residential nursing homes should be subject to different rules (a C2 use class as opposed to C3), which commonly free them from planning obligations, but say nothing specifically about extra care. Hence developers commonly have to prove to councils why the development should benefit from the C2 use class and consequent lesser obligations. With recent planning appeals setting conflicting precedents, developers can end up in protracted negotiations with councils about their development’s status prior to application. Ultimately, it is often impossible to know what obligations will be imposed upon the development when the developer is trying to buy the site.

In both cases, the end result is that developers struggle to buy sites as they find themselves outbid by mainstream developers who can make more profit. Khalil Rehman, design manager at Pegasus Life, says the firm is sometimes adapting the level of care it is offering solely to tackle the “use-class” issue. “The issue is securing sites, competing against housebuilders. The planning system needs an overhaul, to recognise what we’re offering is different.” Charles Taylor, head of new business at the largest housing association provider, Anchor Hanover, says: “Planning is a big challenge for us. Our average C2 development takes nine months in planning. It feels like it’s all stacked against us.”

Planning is a big challenge for us. Our average C2 development takes nine months in planning. It feels like it’s all stacked against us

Charles Taylor, Anchor Hanover

Savills’ Squires says the planning problem, which the government sidestepped in its recently-issued planning guidance for housing for older people, is seriously damaging growth in the market. “It’s a huge challenge. It’s a very different model and it’s struggling to compete.” The House of Lords joined calls to sort out the use class problem in its Intergenerational Fairness report earlier this year, saying extra care should be unequivocally badged as C2.

Stock of housing by type in 2018   
           
  All housing without support All housing with support All housing with care All extra care housing All housing types
England 117,953 448,645 17,554 55,010 639,162
Northern Ireland 1,018 8,314 507 113 9,952
Scotland 5,221 24,495 436 2,266 32,418
Wales 9,100 40,031 2,672 851 52,654
UK 133,292 521,485 21,169 58,240 734,186

 

Boycott

The situation is even worse in the capital, as mayor Sadiq Khan’s draft London Plan says extra care should never be considered as C2 – even though many appeal decisions suggest it can be. Both Bayliss and Squires say that extra care developers are now effectively boycotting the capital. “We don’t go near London,” Bayliss says, “We know what authorities will say,” while Squires says: “Several clients have come to me and said they can’t make it work in London and they’re now looking elsewhere.”

Developers also want local authorities to identify the need for homes for older people in their local plans, and develop policies to encourage them, and that these simple steps would return the industry to rude health. L&G’s Bayliss, for example, says sorting out these planning issues could allow the firm to double its 10,000-home growth target.

The government’s failure to address these concerns may be in part because different parts of the sector are calling for different things. Arco says it just wants clarity that extra care housing can be classed as C2 (and is happy to face tougher regulatory hurdles to make it happen), whereas the retirement providers want a wholesale re-evaluation of planning use classes to also benefit their traditional product. The EAC’s Galvin says: “The fact you have different voices all fighting their corner really only serves to confuse both the consumer and the policy maker. The industry pulling together is where we need to be.”

The fact you have different voices all fighting their corner really only serves to confuse both the consumer and the policy maker

John Galvin, EAC

In the absence of any movement – from a government that has other things on its mind – John Sneddon, managing director at planning consultant Tetlow King, says the sector needs to learn a few tricks from the volume housebuilders by trying to buy (or get options on) unallocated sites and promote them through local plans – thereby getting them cheaper. “The problem is simple, it’s about access to sites,” he says. “Where housebuilders take a long-term view, working with the local plan process, the care industry is much more opportunity-driven, working with sites that come on the market.”

The industry will now seek to persuade Boris Johnson’s new administration of the case for supportive reforms. But his government may be more receptive to what could be regarded as special pleading by this industry if the latter can prove it is doing everything it can to fix its long-standing problems on its own.

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Source: Kirk Rogers / Shutterstock.com

Older people’s housing – what’s on offer?

The government recently published planning guidance which for the first time clearly divided housing targeting older people into four distinct types. All four types of housing are available in both private and public/affordable varieties.

Age-restricted general market housing: Homes restricted to those aged 55 and over who want to live independently, which may include limited shared amenities. Neither support nor care is provided.

Current UK stock: 133,000

Built last year: 831

Retirement living or sheltered housing: Purpose-built homes for independent living with communal facilities, typically a lounge, laundry room and guest room. Some support, such as 24-hour on-site assistance (alarm) and a warden or house manager is provided, but no personal care.

Current UK stock: 521,000

Built last year: 4,545

Extra care housing or housing-with-care: Purpose-built homes catering for either independent living or those with care needs, provided for by registered care providers. There are often much greater communal facilities, such as gyms and well-being centres, and additional services such as meals. These can be combined with standard retirement living to make up retirement communities or villages in which residents benefit from varying levels of care as time progresses.

Current UK stock: 58,000

Built last year: 4,025

Residential care homes and nursing homes: Rather than separate homes, these have individual rooms within a single building, and provide a high level of care instead of support services for independent living. This includes dementia care homes.

 

Housing for older people – what’s the need?

There is no single answer for the amount of housing for older people that is needed, because demand depends on what proportion of older people choose to live in purpose-built accommodation. Currently just a tiny fraction do, but conceivably, if there were more options, far more would choose to do so. Office for National Statistics population projections show that the population of pension-age people is set to grow by 160,000 every year till 2041, with the over 65s representing more than half of all household growth in the years ahead. A study by Savills last year estimated an existing demand for 400,000 additional homes for older people, while industry organisations commonly cite an annual need in the region of 30,000 homes per year – equal to the highest supply level ever achieved (in 1989). L&G’s Phil Bayliss says that even if just 10% of those older people wanting to downsize decided to opt for retirement housing, it would equate to demand for 300,000 homes – a market worth £100bn. The EAC’s Galvin advises treating industry-generated estimates with caution, but says: “Whatever you estimate, what we’re currently building is very very small numbers.”

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