Profit from the ‘grey pound'

by ANDY MARINO

HOMES AND COMMUNITIES PROVE LUCRATIVE TO INVESTORS

THE world is growing older. Demographically, pensioners will one day outnumber the young in the west and this process will not reverse.

Eighteen per cent of the UK is already over 65 years old, and that number will reach one quarter of the population by 2050. Meanwhile, life expectancy is still growing, meaning the old will be older for longer. There will be eight million people aged 80 and over by mid-century.

They certainly won’t all be living alone, which means one property investment reliably set to be­come more attractive over the coming years is retire­ment homes and communities, of which there are still far too few in the UK even for current demand.

Nearly six million UK pensioners want to downsize – meaning more than a million properties to free up and a fantastic customer base for retirement complex­es. Successfully done, it could solve the housing crisis.

Many retirees look to downsize – or “rightsize” – their property when they find the maintenance of a larger house too demanding or the bills too high, if a spouse dies, or if they wish to realise a profit on their current home and enjoy an enhanced lifestyle in a smaller dwelling.

Some might prefer for emotional reasons to stay where they are no matter what, but the fact is that demand for apartments in developments designed specifically for older people is set to explode just as the government is finding it harder to provide spaces in state-run care homes.

Private retirement communities were developed in response to the needs and tastes of ever healthier – and wealthier – pensioners. It is no longer a case of banishment to an old people's home: today’s grand­parents and elderly have their own ideas about mod­ern, serviced apartments with landscaped gardens, on-site facilities, fine dining and good living.

In other words, older people, who hold most of the capital – the “Grey Pound” accounts for 76 per cent of UK financial wealth – are looking more to the pri­vate sector than municipal old-age accommodation.

The retirement home industry has had a bit of a bad press after the financial crash of 2008, and with good cause. There have been around 400 closures of care homes since 2010 – hardly the sign of a healthy sector or an attractive recipient of investment funds, one might suppose.

In fact, the opposite is true. The businesses that went under following the credit crisis were mostly those that had over-borrowed in the boom and were struggling to pay back large debts. It is by no means a sign of chronic weaknesses in new ventures, which have a rosy future with a rich, ageing population, as UBS pointed out in their 2017 Retirement Homes, Retirement Care report.

“We expect the opportunity to generate stable cash flows and significant risk-adjusted returns to materialise,” wrote UBS economist Matthias Holz­hey. In fact, professional investors should be on the alert for outstanding distressed debt in this sector, as the underlying industry model is sound.

McCarthy & Stone is the largest builder of retirement communities in the UK and was the first to spot the market in developing of seniors’ apartments way back in 1977. Since then the company has completed 54,000 properties in 1200 developments across the UK.

The firm has even started to team up with not-for-profit care companies so it can offer accommodation plans to the very old and infirm in a way that extends and increases the independence and dignity of old people.

“For us it’s about the care aspect,” said a spokesman for McCarthy & Stone, “It’s for those who have retired and downsized and don’t want to take care of a big house any more. It’s generally apart­ments with a house manager, five days a week and all the support you need, landscape gardens that are maintained, you get your windows washed. There’ll be guest suites and a club lounge where people can come and relax, watch TV.”

For investors, retirement properties present an interesting opportunity from several angles. On one hand there is pent-up demand from pensioners who want to downsize: 50 per cent of those over 55 have either downsized or wish to. There is a lot of unreal­ised profit in the unoccupied rooms of a too-large house – on average £60k to £100k in capital crystal­lised for each bedroom lost.

Over the next twenty years, 60 per cent of house­hold growth will involve pensioners over 65. But the rate at which retirement properties are being built, even with the best efforts of McCarthy & Stone, means it would take 20 years for supply to meet the demand of just half of pensioners currently interest­ed in buying: in 2011, only one per cent of people in the UK over 60 had moved into retirement housing, compared to 17 per cent in the US and 13 per cent in Australia and New Zealand.

This massive under-supply is where the invest­ment opportunity arises, although it’s not as simple as that. With old people owning the most valuable and high-priced houses, the young are increasingly priced out of home ownership when they most need it, to raise families. This means the old are often un­able to downsize even when they wish to.

As The International Longevity Centre states in its report Generation Stuck: “Unoccupied bedrooms in the homes of people approaching and in retirement have a certain potential to shift the available housing stock to better match different households’ residen­tial needs and therefore help address the wider housing shortage.”

It’s a bottleneck that needs to be sorted – perhaps by eliminating stamp duty for pensioners buying re­tirement properties (“last-time buyers”) after selling their homes. The recent inflation in land prices is also an impediment to new retirement developments.

Hidden costs, such as “event fees” payable on sale of retirement properties from one occupant to an­other (up to 30 per cent of original price), which lead to lower prices for resale retirement properties, are also discouraging retirees from selling their houses and moving to retirement communities. Event fees exist to defray the high costs of development so builders can survive. Re-designating land to retiree development and slashing planning red tape could help here.

Solving these problems is partly the job of govern­ment legislation, but the power of large investors with long-term horizons moving into the sector could also mean a better and more attractive offer to pensioners. The more money in, the better the negotiating power with official bodies who will have to be confronted.

On the continent, many retirees are happy to sell their property and rent apartments both privately and in government complexes (Denmark is a great exam­ple). Elderly tenants have extensive rights and protec­tions in the rental markets, and in return landlords receive a good, reliable source of rental income from their tenants’ pensions and investment income.

With the right public and private incentives a fund could both purchase the houses of retirees and invest in providing long-term retirement accommodation.

What needs to happen is, rather than just purchas­ing individual apartments, investors should think about moving capital into development projects at an early stage. Jonathan Clarke says McCarthy and Stone is already looking at investors as well as pur­chasers of single apartments and “different ways that our customers can potentially acquire our properties – rental, different investments types.”

The demographics tell us that this will have to happen sooner rather than later, so a smart investor should start looking at possibilities and models now.