Why retirement living investment needs to get more innovative

An ageing population is causing a serious supply and demand deficit in UK retirement housing.

April 30, 2019

An ageing population is causing a serious supply and demand deficit in UK retirement housing. But investors need better access to the sector.

The proportion of over-65s is set to rise to 20.7 percent of the UK population by 2027, up from 18.2 percent in 2017, according to the UK government. At the same time, ARCO, the housing with care industry body, has set a target of 250,000 over 65s living in housing with care facilities by 2030.

Based on this growth target, over 11,000 housing with care units would need to be built each year to meet demand up to 2026 - but over the last decade an average of only 3,220 units a year have been built, according to data from JLL.

“There’s a real gap between demand and supply. We are well below the level of building needed to satisfy future demand,” says Philip Schmid, JLL UK’s director, living capital markets healthcare.

Yet in the absence of income producing platforms at the scale investors require, Schmid says the focus needs to be on developing more innovative ways of deploying capital into the sector. The evolution of student housing over the last 15 years and the rapid increase in the build to rent sector more recently provide a loose template for how the retirement living sector can grow.

“From an investor point of view, this sector could become another successful operational-led sector, like build-to-rent or student housing,” Schmid says.

Accessing the market

While the retirement living market is in its infancy in the UK, investors are starting to take note. In the last 18 months, AXA, Legal & General Capital and Goldman Sachs have all actively invested in the sector.

“The private sector has a key role to play as people stay active for longer and want retirement living homes that reflect the lifestyles they’ve led in their earlier years,” says Schmid.

Given the scale of development activity required to stimulate the UK market, investment volumes could reach £2 to £3 billion per annum over the next five years, driven through partnerships or forward funding, according to JLL data.

Homes for England, the NHS and local authorities all represent potential partners to help increase supply. Bournville Gardens, near Birmingham, for example, was created as part of a partnership between the ExtraCare Charitable Trust, Bournville Village Trust and Birmingham City Council.

Meanwhile, Bupa’s acquisition of Richmond Care Villages gave it a portfolio of completed retirement developments across England, together with other sites that had already secured planning permission.

“For the longer term, investors need to create a more operational-led proposition to see the market grow,” says Schmid. “It’s all about how you can create income tiers and considering how you can use tenure or can structure the payment model to create returns.”

Making renting attractive

With their high specification apartments, hotel-style leisure facilities, restaurants and activities communities, and on-site care, if needed, many existing UK retirement villages target the higher-end of the market. The mid-market is, however, starting to gain ground.

“There’s good opportunity for investors at the more affluent end of the market where people are looking for a mixture of a comfortable lifestyle with care and also in the mid-market, as this represents most of the population,” says Schmid.

Yet challenges remain in changing perceptions over rental homes, especially among today’s older generation.

Schmid says: “Home ownership is dominant in the UK housing market, but I’m a huge believer in rental, because if you are 80, is buying property the best thing to do? I think people will start to consider other models, provided people have security of tenure, especially as this market develops and as younger generations used to renting get older.”

Changing attitudes will be key to the growth of the sector. “Appetite from investors continues to circle the rental proposition or other forms of income generating business models which will encourage lower cost of capital into the market and accelerate supply,” says Schmid.

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