David Jerrard, chief credit officer at new real estate finance firm, Précis Capital Partners, explains his take on retirement living just weeks after supplying an £80 mln (€92 mln) whole loan alongside Carlyle and Nomura for Tristan Capital Partners to develop a premium later living asset in Hampstead, London.
Writes David Jerrard
When Précis Capital launched in 2021, we recognised that retirement living was an area with huge potential for greater institutional investment and provision. Our recent financing of The Oren, a premium later-living development in Hampstead owned by Tristan Capital Partners and developed by Elysian Residences, has only reinforced our ardent belief in the market.
The Centre for Ageing Better estimates that by 2036, one in four people in the UK will be over the age of 65. It’s therefore unsurprising that both the public and private sectors are increasingly focused on how best to meet this fast-growing demographic’s specific and specialised needs.
One of the most important areas for attention and investment is accommodation: specifically, homes purpose-built to provide optimum wellbeing, comfort and security, as well as a sense of community. Aside from the direct benefits high-quality retirement accommodation can provide residents, the living class also offers wider societal benefits, including reducing pressure on health services and freeing up existing housing stock in a market blighted by chronic undersupply.
Ripe for investment
While many of us are familiar with the fundamentals of retirement communities, it is important to note that the sector is growing rapidly, both in scale and complexity. The Modern purpose-built later-living schemes now offer tailored care that ranges from 24-hour nursing to personalised medical treatment in the comfort of the occupier’s own home. These communities also have a diverse range of leisure amenities which enhance and improve quality of life for occupiers.
Industry giants are increasingly backing ambitious projects which combine mixed-tenure for-sale and rental-only options for residents, in addition to modern amenities including restaurants, gyms and cinemas. Recent examples include L&G’s 15-year net zero retirement venture with NatWest Group and Goldman Sachs and Riverstone Living’s collaboration across ten senior living projects in London.
Why is this happening?
The recent step change in the level of investment and public attention committed to retirement living is best understood as a product of several factors.
The major tailwind driving investment is one of simple demography, with the UK’s elderly population set to increase significantly over the coming decades. One striking statistic illustrating the distinct requirements of this group is that 15% of people aged 65-69 experience difficulty with at least one Activity of Daily Living; amongst those aged 85 and over, this rises to 1 in 3. By 2040 the total number of disabled older people is projected to increase by 67% to 5.9 million, a vulnerability which has been brought into even sharper focus by the pandemic.
Alongside this demographic shift, the attitudes and living preferences of over-65s have also evolved significantly in line with other segments of the market. The boom in purpose-built accommodation for students (PBSA) and renters (Build to Rent), exemplifies operationalisation of residential real estate and “living as a service”, a trend which is increasingly cross-generational. Much like their children and grandchildren, retirees are searching for comfort, convenience and community. The primacy placed on wellbeing is being bolstered, in part, by the fact that older generations have benefited from a historically buoyant UK housing market giving them a store of wealth that they can now unlock for premium living arrangements.
The surge of investment into later living is also being driven by its relative underdevelopment. The UK lags behind the US market by around 20 years, in terms of the volume of ‘integrated retirement communities’ (IRCs) developed. Moreover, only 1% of over-65s in the UK live in IRCs, compared to 6.5% in the US. It goes without saying that a combination of strong demand and historically low levels of development mitigates the risk of oversupply and has convinced developers, sponsors and lenders of the living class’s significant potential.
Enduring challenges
There are, however, challenges facing the segment. Planning policy has long been identified as major hurdle, with Knight Frank’s Annual Review for senior housing in 2021 citing how only a fifth of local authorities have supportive planning policies for bigger retirement developments, while half lack the necessary supportive procedures to implement plans.
Meanwhile, later-living projects have been historically unattractive for investors due to specific complexities in the market which are perceived to result in tight operating margins. Costs associated with construction and maintenance of shared facilities, which can account for around 30% of total floorspace in retirement communities, have fuelled persistent concerns about accurately estimating returns.
Investors also need to consider the reputational impact of “event fees”, a controversial practice which entails certain occupiers having to pay a fee amounting to as much as 30% of their property’s value when they either pass away or sell their property. Although designed to make specialist retirement housing affordable by operating as a deferred service charge, a 2017 Office of Fair Trading report deemed certain fees imposed by operators as unfair and advocated regulation. The industry has sought to increase transparency around these fees, but the issue remains something of a sticking point for wary investors.
Next steps
Local and national authorities must take meaningful measures to remove obstacles to the planning and implementation of later-living projects. These may include creating a government subsidy to recognise local site and land issues for these developments specifically, in addition to supporting local authorities with reforms to planning policy.
Crucially though, these supply-side reforms must be supported by lenders and developers forming strong working relationships. The proliferation of successful later living development schemes is testament to the clear value in fostering partnerships, with these collaborations offering attractive risk-adjusted returns for investors, while helping to deliver and upgrade the types of home the UK urgently needs.
David Jerrard is chief credit officer at Precis Capital with over 25 years of banking experience in origination, securitisation, loan sales, joint ventures and restructurings in a career spanning spells with Credit Suisse, Lehman Brothers, and JP Morgan.
