The UK retirement housing sector is positioned at the convergence of three macro trends. First, a housing crisis, the resolution of which is intensifying the need to diversify from traditional housing models. Second, a rapidly ageing population. Third, a growing societal focus on lifestyle, health and wellbeing that is likely to be amplified in the response to the coronavirus pandemic.
From this need to evolve, a fast-growing sector is emerging: retirement communities. These typically range in size from 60 to 250 homes, located in a mix of urban centre and out-of-town settings. They provide residents with their own home, a range of on-site amenities such as restaurants and other leisure facilities and a 24/7 safety net of on-site care services.
"The offer to residents is more than just a great, fit-for-purpose home; it's about promoting wellbeing and active lifestyles, keeping people living independently for longer," Gowling WLG partner Dominic Morris said. "There's a growing body of evidence that living in these communities can help tackle loneliness and have wider, tangible health benefits for residents."
Those championing the benefits of retirement communities put considerable emphasis on the health and wellbeing benefits of the communities. The Associated Retirement Community Operators anticipates that, if the sector grows in accordance with its projections, it can deliver £5.6B of savings for the UK's health and social care systems by 2030.
The coronavirus pandemic has shone a light on the work the sector is doing. In May, Minister of Care Helen Whately wrote an open letter praising the sector's handling of the crisis and pledging continued support for providers. There is growing political recognition, at both a central and local government level, of the role retirement communities can play in meeting the housing, health and care needs of their residents. The wider social dividend this yields ranges from releasing under-occupied family housing back to the market to freeing up hospital beds.
Catching Investors' Eyes
For real estate developers and investors, retirement communities offer many interesting possibilities.
"Real estate investors are increasingly looking to engage in different areas of the housing market and for them, retirement communities offer an exciting prospect," Morris said. "We have seen a [steep] change in institutional and private equity participation in the retirement communities sector over the last few years, but the market is far from crowded. Its appeal as a platform to deliver stable, long-term income streams is only set to increase as existing operators expand and new entrants join the sector."
In a relatively nascent market, there is an opportunity to develop portfolios of scale and to help define the sector's products. At present, less than 1% of the UK's over-65 population lives in retirement communities. In comparison, retirement communities house up to 6% of the over-65 population in the U.S., Australia and New Zealand.
The UK has seen several notable deals in recent years and new entrants are actively engaging in the market. In 2017, Legal & General's later living business acquired Inspired Villages Group and has since set up its urban later living business, Guild Living. AXA has acquired Retirement Villages Group and, like Legal & General, has ambitious plans for growth. Goldman Sachs has set up its Riverstone Living platform and is due to open its first scheme later this year. Last year, Octopus Real Estate and Schroders Real Estate entered into a £400M, four-site joint venture with established sector operator Audley Group.
A New Financial Model
Historically, the sector has been dominated by not-for-profit operators but now private operators form the fastest growing part of the market. The private sector has to date largely focused on the luxury end of the market but there is a growing focus on the mid-market opportunity. Audley has launched its Mayfield brand to focus on this mid-market opportunity and other operators are doing the same. With this trend, the sector is seeing an increasing diversification of tenure and products available to residents.
The sector's core operating model is built around the sale of long, premium leases to residents that generate event fees on re-sale. Within this model, operators are looking at innovative ways to allow flexing of the financial terms of the leases for each new resident. Purchasers have payment options that now include shared ownership. There is also a growing rental opportunity. Some operators, such as Birchgrove, specialise in build to rent, while others are offering rental products alongside long lease products as part of a tenure-blind offer.
The macro trends of the housing crisis, our ageing population and the health and wellbeing agenda, are now converging with the scaling up of investment in the sector like never before. There is now an excellent opportunity for the retirement communities sector to achieve significant growth and become a clearly recognisable and established part of the UK housing market.
This feature was published by the Bisnow Branded Content Studio in collaboration with Gowling WLG.