It’s no secret that the UK’s population is aging, with one in seven people predicated to be over 75 by 2040. Retirees are now thinking about the care they will need in old age earlier and are becoming more discerning in their choices. Some providers are taking inspiration from America, where the variety and scale of retirement care options are far greater, and establishing community style retirement villages in the UK. However, plans for increased regulation of the sector will require investors to consider the practices of individual operators, and whether their business models will be compatible with additional scrutiny of the fees charged to residents and their families.
Often less reliant on local authority funding than standard retirement homes, investors are already swooping in to provide retirement communities with much needed capital to expand and keep pace with rising standards (and demand for beds). AXA Investment Managers, L&G Capital and Goldman Sachs have all entered the retirement living market in the UK in recent years, taking advantage of the scale of the potential opportunities presented by the sector. Retirement villages have captured the ‘luxury’ end of retirement care, offering older people an alternative to conventional care homes or sheltered accommodation. This model is certainly attracting attention, with estate agent Knight Frank predicting that the value of the retirement living private market will increase by over 50 per cent by 2022 to £44 billion.
The model is proving so popular that some of the larger retirement village operators, such as Audley, are now expanding their business to include a ‘mid-range’ offering – the same model of care but with a lower price tag. Their first community of this type is due to open in late 2020. Despite demand, the UK still lags behind other countries. According to Michael Ball, Professor of Urban and Property Economics at Henley Business School, owner-occupied retirement housing represents just two per cent of Britain’s total housing stock, compared to 17 per cent in the US, and 13 per cent in Australia and New Zealand.
Though the risks are lower than conventional retirement homes, this newly emerging style of retirement living is likely to attract regulatory scrutiny in the coming years due to a series of media stories relating to poor practice. Often, residents will buy their own home as a leasehold, then pay an annual service charge to the operators to cover the cost of additional care they require. This model has run into difficulties when occupants or their relatives look to sell the property, with the “exit fee” payable each time the property is sold often being at least 12.5 per cent of the sale price, with some companies charging up to 30 per cent.
The Law Society published the results of a consultation on these exit fees in 2017, finding that there are “major problems” with the fees and recommended that retirement villages be regulated to protect residents from agreeing to pay fees they are not fully aware of. The government has provided an interim response to the consultation, pledging to “align these recommendations and help ensure that they can be fully implemented.” Some in the industry, including estate agent Savills, have said that the delays to introducing regulation are hampering the growth of the sector, as investors and businesses face ongoing regulatory uncertainty.
The details of how the sector will be regulated have not yet been announced and are likely to face delays in the face of pressure caused by Brexit. However, it is likely that a code of practice, potentially accompanied by additional inspection powers, will be introduced to assess the financial responsibility of retirement village operators. While this will affect the way some operators do business, particularly in terms of the contracts offered to potential residents, a clear statement of intent from the government is likely to be positive for the industry as a whole, and in particular for those businesses that operate with residents’ interests at heart. Investors looking to take advantage of this lucrative sector will have to consider whether potential investments will be compliant with likely regulatory requirements, or if they are willing to take on the additional costs of transforming businesses that are set to be subject to regulatory scrutiny.