What does the latest JLL Housing with Care Index say about the sector?

Dominic Morris: Hello. I am Dominic Morris, head of the Senior Living Team at Gowling WLG. Today in our Senior Living Podcast series I am joined by Anthony Oldfield, a director in the Healthcare Capital Markets Team at Jones Lang LaSalle (JLL). We are going to be talking about the findings of JLL's Housing with Care Index report that Anthony and his team have launched this week. So, hi Anthony.

Anthony Oldfield: Hi Dominic, good to be here.

Dominic: Great to see you. Could you tell us a little bit about yourself and your team, and the work you do?

Anthony: Yes, sure, thank you. So JLL is a global professional services firm specialising in real estate and investment management. We are a big firm but within that, my team specialise in healthcare property and we have a particular focus on care homes and later living assets, and the housing of care parties is in that later living bracket.

Dominic: Fantastic. So today we are going to talk about your Housing with Care index. Can you introduce that to our listeners, what it is all about, what its origins are and what you are aiming to do with it?

Anthony: Yes, sure thanks. So we are obviously really keen to be producing quality research that helps our clients understand this part of the property sector. It is a nascent part of the property sector, it is growing a lot but clearly investors, advisors and landowners need data. If they are going to build more accommodation and invest because, you know that is important to us, we believe the UK needs more of this housing division that really benefits older people. So we have produced a number of reports over the last few years, including one looking at demand where we were saying what the potential demand picture out there is in the UK. Another one on how to actually get into later living, what do I do, what is housing with care, all that sort of thing, so that is in our How to Deliver It report. Then interspersed with those we have done what we call our Housing with Care Index, so that is now in its third edition, which we have just launched this week (May 2021).

The point of the Housing with Care Index really is to track the performance of the sector. So it looks at how the units are growing in value. Really the point behind that, or the reason it came about is, a few years ago there was quite a lot of bad press over retirement housing and the fact that values were falling on re-sales and disgruntled families saying, well hang on my granny has paid £200,000 for this flat and I am selling it for £100,000, what is going on? So we wanted to look into this on behalf of our clients to see what the re-sale performance was. So just to get a little bit "techy" at the start, just to sort of explain what we are talking about with housing with care, we are not talking about sheltered housing, which has been around for a long time. We are talking about housing where an older person will have their own apartment and there will be on-site amenities, including a restaurant, 24-hour staff and a care provision on offer.

What we have done with our Index is we have taken the Elderly Accommodation Counsel's definitions. They categorise all the schemes that are targeted for older people across the UK and we have taken their housing with care ones, which they sub-categorise into extra care, enhanced sheltered and close care. So it does not include what they call the housing with support, which is your basic sheltered housing with a warden and a lounge. So we think there is a distinction between those two buckets, I know it is a bit "techy" if it is the first time anyone has come across later living, but it is important to understand that distinction.

Dominic: It is probably worth saying for our listeners that much of this space is sort of self-regulated by ARCO, the Associated Retirement Community Operators, so their members will all fit into this housing with care model, but it goes slightly wider than that.

Anthony: Yes, yes it does. You are right. All the ARCO members are in there, but there are others. So McCarthy & Stone is a good example - some of their units would be classified as housing with support and others would be housing with care.

Dominic: Perfect. Our listeners probably do not need to be told, I guess, the demographic context of this, but there has been a recent excellent report from Octopus Real Estate on the opportunities presented by the sector and looking at the buyer retiree perspective. But they are citing figures saying by 2039, 25%25 of our population will be over 65, and even now they have identified potentially 2.5 million retirees who could be interested in buying into this sector and this space. So in that context, are you able to sort of give us a helicopter view on the findings from your index?

Anthony: So, yes, one of the first things to note I suppose is that housing with care is the fastest growing part of the later living market. There are more beds and units being produced in there than there are in care homes or housing with support, and we are seeing a bit of a trend towards the more high-end product. There are a lot of operators who are looking at London in the south east and London has historically been really, really undersupplied and really very few units at all being developed there, so that is an interesting trend.

I guess one of the key takeaways from what we have looked at is that prices in this market do increase over time. That is an increase that we have looked at over the last five years of 29%25, so units have gone up by 29%25. What does that mean? Well if you compare that to the mainstream residential market, that has increased by 22%25, so it is actually growing, or the values are rising at a higher rate than they are in the mainstream residential market.

Dominic: And what are some of the factors behind that do you think?

Anthony: I think one of the key things in this is that with housing with care, it is generally built by operators, so they are not necessarily just in it to make a return on the property. They are in it to run for the long-term. There is a development profit for all the work that goes into buying sites and building accommodation and selling it out, but they want to run it in the long-term and that then aligns their interest with the occupier. So both parties have a vested interest in seeing the scheme developed, , capital expenditure being spent and keeping it looking new and well-presented and that seems to really hold values up at a high level.

Dominic: And to what extent do you think a lack of supply is a factor in pricing?

Anthony: Lack of supply is definitely a factor in pricing and we talk about that in the first report that we did. It is grossly undersupplied, and even with housing with care as a sort of mini-sector itself, about 60%25 of it is actually at the affordable end of the spectrum built by housing associations over the past few years. So it is not, you know, just flats for the rich. Most of it is affordable. But there is, we think, an undersupply of units that are for sale because, if you look at the demographic of the older population, yes there are lots of older people, but they have a significant amount of housing wealth, about £1.3 trillion is the latest estimate in terms of what they have. So there needs to be more product available to service that market and I think the fact that there is very little, yes, is another factor in prices holding.

Dominic: And it is worth saying, that in respect of that affordable housing provision, the vast majority of that is rental. So in terms of shared ownership product, be that affordable housing or private, the market is small at the moment and there is a huge opportunity to grow that as well.

Anthony: Yes, shared ownership is only about 6%25 at the moment, so clearly has a huge opportunity to grow in that area, as does rental, but maybe we will come onto that a bit later.

Dominic: Yes. Great. So, going back to this probably key principle that housing with care is an operational model, despite the fact that it has a development arm to it, that the operating piece is absolutely critical to those looking to invest. A key to that investment decision is re-sale performance and, particularly in this model, that is underpinned by event fees, and operators have to think very carefully about how they structure and frame those. So, what are you seeing in terms of statistics in terms of re-sale performance?

Anthony: Yes, that is a key part of why we did the Index again, because a lot of investors were saying well we understand this product, we understand selling apartments, we understand the operation that goes into running them. But what is this event fee? What is this deferred management charge or fee at the back end and how on earth do we price that? And so operators were saying well obviously there is a ratchet, the longer people stay the higher percentage they pay and that can be run, you know, there is a value to that, that somebody would pay for. And one of the things investors are saying is how do I know that prices are going to keep rising if they fall off and clearly the capitalisation of those event fees is going to fall.

So we wanted to show that there is evidence to suggest that re-sales do increase in value, so that gives confidence then to the investors that that part of the business model, as it were, stacks up. So we very much focus on re-sale performance, that is the point of the Housing with Care Index really. In 2020 re-sales showed that 71%25 of re-sales within the Index increased in value from their original purchase price. Now that is actually a little bit lower than when we did it before, when it was 81%25 and we think probably that is because we have expanded hugely, so we have trebled the size of the numbers of sales that we have captured in the Index this year.

It includes a lot of other developers that are not part of ARCO, so it has spread the net very widely. If we had just narrowed it down to just looking at the ARCO members then 77%25 of those re-sales have increased in value. Now you might think that 77%25, well is that good, is that high? I think you have questioned me on that before, but I think you are never going to get 100%25 of units going up in value because you have got to allow for house price inflation and sometimes house prices go up and sometimes they go down. There have been various economic downturns and Brexit has happened obviously during our Index, and then also you probably need to allow for things like incentives. So when you are looking at a new build apartment, the operator developer will be able to offer some non-cash incentives to try and get the move through. You know that could be carpets and curtains, it could be Stamp Duty, it could be moving costs and you will not get that on a subsequent re-sale, because it will only be doing party to party on that one. Then there is also a bit of a new build premium for new products, we would never expect it to be 100%25 percent. So 77%25 shows a good deal of confidence that these units do continue to rise in value, sale, after sale, after sale.

Dominic: Yes, so in light of, as you say, all the economic, social and political issues over the last few years, those are pretty robust figures still. Interesting that you were talking about that continual re‑sale performance and whilst, I think it is fair to say, there has been pretty massive grow relatively in the sector in the last say five years, housing with care as a product has been around for a good number of years. And some of the retirement villages or retirement communities are getting on for sort of 20 years plus. So we have got quite a body of evidence to be able to track sales value by age and that is something you have also done in the Index. Are you able to talk a little bit about that?

Anthony: The Index actually covers 25 years' worth of sales. So over the last five years, the average price has gone up by 23%25, which is 20%25 higher than mainstream residential. So there is that premium that they are getting over and above mainstream residential. That has been fairly consistent over the life of the 25 year period that the Index follows. So we also track, basically, the growth rate index of housing with care against house price inflation and the two lines follow each other very closely, so it definitely sticks with what is happening in the wider residential market. Which again, is a comfort to investors to think well, you know, if I think house prices are going to grow over the next few years then I can be confident that my investment in housing with care will also grow at a similar rate.

Dominic: And is it fair to extrapolate from your statistics that they, to some extent, demonstrate the benefit of quality product? Perhaps in an evolving and a maturing market, operators now know what their customers want perhaps more than they did, and things are perhaps a little bit more tailored and more on site amenity, and all those sort of factors which all help to drive value?

Anthony: Yes they do. I think generally speaking older people are becoming more aware that this is an option and it is something they can do. There is obviously more awareness out there and that obviously helps with generating demand.

Dominic: Great. now looking at performance by regions, you have touched on some of the high-end schemes that are coming through in London, which are driving numbers in that region. But even London has got some definite supply challenges. Are you able to characterise from the statistics you have looked at as to what the picture is nationally? London and the south-east and more widely?

Anthony: Yes we do. We do track regional performance as well as the national. It is funny you should mention London because there is quite a big regional variation and in London, 92%25 of units that re-sale increase in value. So that is actually the highest performing region of all. I did say it was fairly undersupplied in terms of units in London, but there are over a 1,000 in the Index that we have looked at. So next you have the south-east, which is 81%25, so again I guess not surprisingly a lot of operators are focussing on London and the south-east and areas where house prices are higher because it makes the economic viability of the scheme easier to stack up when they know there is plenty of downsizing potential in those markets. So that is where a lot of effort recently, I guess, has been focussed by the new operators coming in and that is therefore partly why we are seeing that growth in unit price in those locations.

Dominic: I think the focus obviously of the Housing with Care Index is sales, so property is sold on long leases typically. Again, there is an emerging trend of rental coming into the senior living/later living space. So how do you think that plays into the analysis? What are the future trends do you think for rental and what are Jones Lang LaSalle going to do to be capturing that evidence for its Housing with Care Index going forward?

Anthony: We would very much like to, this time next year, do one on rental as well, or include rental in the Index, because it is very much a growing part of the sector. We did a very short survey of operators who function in this space and we said to them, look, you know, what are you thinking in the next 24 months, what percentage of your units do you think are going to be rental? And the conclusions that came back did surprise us with about 25%25 of them coming back saying that they think that between 25%25 and 50%25 of their units will be rental in effectively two years' time. That is a seismic shift to where we were before with operators saying we are definitely not doing rental. There is no demand out there, a lot of people do not want to rent, they want to buy, an Englishman's home is his castle and that sort of thing gets tripped out a lot. So, that is a big shift. Most of it, at the moment, is pepper-potted units within existing schemes. I think that predominantly it is being driven by people coming through the door and saying well I really like this accommodation it is really great, but actually I would prefer to rent it rather than buy. Then operators have been scrambling around saying well can they rent it? I do not know and what would it be? And actually the more that has happened the more it has grown. McCarthy & Stone has just done a big rental portfolio. They have seen a huge upsurge in demand for rental and it has been other operators, smaller operators, that are definitely follow suit. So there will be plenty of data to capture on that. In a couple of years' time we will monitor Lloyds and rental uptake and rental growth and I think there will be more operators who will perhaps take that brave step of moving away from just pepper-potting units to do a full build-to-rent retirement scheme a bit like Birch Grove or Hawthorns.

Dominic: Which, to some extent, is arguably a simpler model to operate, because when you are trying to craft a rental proposition within an existing, long-lease proposition, both in terms of running the numbers and also in terms of how you actually operate the units and how you charge what you charge for, it can get pretty complicated.

Anthony: Yes, it certainly makes a valuer's life very difficult.

Dominic: Great. Ok. So that is, if you like, the sort of backward looking piece of the Housing of Care Index and the findings which I think are all pretty positive across the piece. So, to wrap this up would you be able to future-gaze for us? Look at some of the key trends that you have seen coming across the Index and where you think the market is going over the next say five to ten years?

Anthony: Yes absolutely. There is probably one other thing that I probably did not mention that I should have done in the Index, which is that we also look at the average hold period between sales. That is quite a key thing because if you are running an event fee model on a for sales basis, you want to know how often are your units likely to resell. In this year's Index the average period between resales is 5.1 years, which will probably surprise some people, who are perhaps well-read in the sector and think well hang on surely it is seven to eight years, because that is what everybody talks about. I guess our working theory is that perhaps the average will increase over time because there is a number of units that have not resold within the sector. We had somebody in our Index who had been there a long time.

Dominic: You quoted about 30%25 of units that had not been resold?

Anthony: That's right, so then we would expect that average to go up, but I do think there is an element of we are seeing older, older people, if you like, moving in. So late seventies, early eighties, so perhaps there is not the market for sixty-five year olds that are going to be there for twenty years. So that gives investors again an indication as to help with their model with their event fee.

Dominic: Yes, I guess the issue on that is that the event fee has to be structured to peak at the appropriate time. So if people are moving out after five years rather than seven, that needs to be factored in.

Anthony: That definitely is a consideration, yes.

Dominic: Yes. Great, that is a very good point to bring up. So in terms of this future-gazing piece as to where you see your sector going in terms of size, new participants and generally how housing with care is going to sit alongside care homes, which are obviously a valued and important part of the market as well, and sort of more general retirement housing at the other end of the spectrum.

Anthony: I think that is a good place to start really, that where does it sit? Because if you look at the care home sector, we do a lot of work in that. It is not actually growing in terms of total bed numbers, so year by year you have new care homes built, absolutely coming on line, but you will have older, poorer stock dropping off the end as well. So overall the number of beds is about 470,000 in the UK and has remained pretty static.

Over that period of time, the older population has increased quite a bit, so what we are seeing in care homes and I suspect your clients are seeing this as well, is a higher acuity of residents. People are moving in later with higher levels of need, particularly dementia. So you have got a whole cohort of older people there who are not perhaps considered eligible for care homes any more but do need a bit of support and a bit of help. That is where I think the housing with care really kicks in to fill that gap between perhaps living in your own home, which is perhaps becoming unsuitable, and not being ready for a care home. This is where, I think, we are going to see a lot of growth in the next few years in this.

So I expect in five years' time the size of the market to be much larger than it is now. The planning pipeline is filling up with operators with, you know, big aspirations to build lots of units. You know IVG and RBG have made big announcements about the number of units they are going to be building in the next few years. So yes, one thing is it will be bigger than it is today, but the older population like you stated at the start is going to also be a lot bigger, so there is plenty to do.

I think that will attract a lot of new entrants and a lot of new participants. I mean we are seeing care home operators coming in saying hang on, we could do this. We could do some housing with care. People who have been in hospitality, stepping in thinking I know how to run hospitality, I know how to run good services and good facilities. This is a sector that I could work in as well. So I think we will see a lot more accommodation being built. I think, again, there is no homogenous model, it is not like everybody is doing the same thing. If you look at the ARCO members for example, they are all different in terms of price point, the market they target, the structure of how they run their businesses - I think we will see greater diversification in that as well.

I think you mentioned it earlier, in terms of shared ownership - I think that could be a really big opportunity for somebody to come in and try and crack that mid-market nut, and shared ownership could be one to watch. I expect we will see more operators coming in doing that.

Dominic: Fantastic. To some extent it feels to me as though the market is ready to snowball. You almost need the schemes to demonstrate proof of concept and we have spoken about a number of schemes that are now established and are doing extremely well. In a sense you need more of those to be, I guess, flying the flag for housing with care so that the consumer actually has a good example of the product and the concept in their locality. It is only when you start to generate that critical mass that the momentum to really kick on will come. Hopefully I think the publicity the sector has had, which is generally positive publicity over the last year, will help to give that a shot in the arm.

Anthony: Yes I think a lot of our operator clients have done very well at looking after their residents during the pandemic and it has definitely helped combat loneliness and a number of other factors, which I think older people will be aware of. I think it will be a good choice going forward for them to move into these schemes, I think.

Dominic: On that positive note…that is great. So thank you very much for that insight into your Housing with Care Index. So our listeners, I would fully recommend having a look at the Index itself. There are some really interesting graphics there which are probably a whole lot more articulate than certainly me, possibly Anthony. So Anthony, where can they find that report?

Anthony: The report is available on the JLL UK website. If you go on there and search for Housing with Care you will find it. Or you can email me or message me on LinkedIn and I will send you a copy.

Dominic: Thanks very much Anthony and thank you to our listeners.

Anthony: Yes, thanks Dominic.