Navigating investment demand in the senior living sector

19 November 2024

The UK has a growing older population, but the living market targeted at seniors isn’t as mature as markets such as the US, Australia and New Zealand. It isn’t a straightforward sector to navigate for investors, but there are opportunities.

According to ONS data, the population of people over 65 is growing and is expected to continue to grow. That we are living longer is evident in the forecast that the 85 years and over age bracket is projected to increase from 1.6 million to 2.6 million in the next 15 years.

“The demographics only push you in one direction, both in terms of age, but also housing wealth and pension wealth. There's a lot of capital in unmortgaged housing wealth sitting in over 65s, and as the baby boomer generation moves into this cohort their expectations for quality in housing, services and experience will match their ability to pay for those things” says Kyle Holling, Partner, Trowers & Hamlins.

However, senior living can be a sensitive subject among those it targets. This is partly because of a perceived stigma attached to moving into ‘specialist’ accommodation but also because of the way residents pay for additional amenities and services.

“While the ageing demographic supports sector growth, these issues can’t be ignored because they impact sales rates,” says Lizzie Pillinger, Partner, Trowers & Hamlins.

Senior living is the broad label for several types of residential offerings specifically for the older generation.

At one end of the spectrum, there are care homes where residents have definite needs; at the other is age-restricted housing where once you’ve bought your property, you are left alone.

Integrated retirement communities (IRC) sit somewhere in the middle where, in addition to housing, there is support and amenities, which might include a restaurant, hairdresser or gym. The level of amenities and services can vary depending on the market, but community plays a big part. Some type of in-home care and support service is readily available for those who need it, when and if they need it.

Trowers & Hamlins work across all parts of the senior living market but have a particular market leading expertise in the IRC sector both in depth of understanding of applicable regulation and participation in major transactions.

It’s a market mostly utilised by those 75 years and older and, following in the footsteps of the previous government, it is something the current government is exploring as health and social care services come under increasing pressure.

“IRC types of housing demonstrably reduce demand for public services and you can deliver more of it with private capital that then allows people to use the housing wealth they have accrued over the course of their lives to truly enjoy their later life – this is not a market crying out for Government financial support,” says Holling.

But housing wealth isn’t a bottomless pot of cash. The market has changed over the last decades, and in the future fewer older people will have accrued the same level of housing wealth. In addition, operators are increasingly finding that some customers prefer a rental product which is easier to access, can release existing capital and does not attract stamp duty.

The senior living market is already adapting to this and is increasingly offering rental products alongside senior homes for sale, or in some cases as a bespoke standalone product offer. While offering choice, this also gives operators options to respond to market demand.

Cost of amenities and services has to be factored in, whether it is properties for sale or rent, whether that is providing space for things like cinema rooms or putting on community events.

“Anecdotally, I’ve heard operators saying their residents put on the community events themselves, but the cost of providing communal areas and staff to support events still has to be factored in” says Pillinger.

The mechanisms for recovering the costs of amenities in owned properties are generally through a service charge – unlike other for sale living sectors this is often a fixed charge to the customer, which adds a level of operator risk. To mitigate this, such a model is coupled with what is delicately referred to as an event fee or deferred fee, which is typically in the range of 20% of the value of the property. This model is the one which has seen the New Zealand and Australian markets hit the mainstream and become deeply understood and highly investible and the UK market is expected to follow this lead, with the regulatory landscape clarifying the efficacy of the model.

Because of the level of services offered in these types of development, this helps keep the service charge down.

“It’s a sort of "buy now, pay later" model. The payoff is, there's a bit of the value that goes back to the operator at the end of the term, which helps mitigate their operational risk, but residents have got a more manageable ongoing cost whilst there. It also gives the operator a pot of capital to constantly adapt to what the market wants and keep the buildings, services and the whole offer fresh,” says Pillinger.

However, event fees can be a sensitive subject; they can impact sums left as an inheritance, which might put off some people from taking on this sort of property.

That said, IRC operators tend to attract institutional money with the likes of Legal & General and Octopus Group invested in the senior living sector. Outside of investing in operations, it’s a development-led model, simply because the sector needs to deliver more units to grow. There is an evidence base that IRCs with deferred fee models hold their value on resale (to the benefit of both operators and customers) highlighting the alignment of incentives this approach can offer.

For now, deals to deliver new sites are typically structured with the operator buying out the investor on the last sale. The valuation may include an element that reflects future income streams the operator will receive.

“Funding development means investors get their money out more quickly. And, in principle, the operator will give an enhanced return based on a value of that deferred fee income on top of the unit sales. We do see the market moving to a position where the operations including the event fee income are equally investible and that will create some interesting opportunities for first movers,” says Holling.

There is a regulated care risk, but that can be ring-fenced away from investors by partnering with an operator that delivers a good service.

Development has its own challenges as there isn’t enforced land allocation for senior living.

“There is a limited supply of land with appropriate demographics and level of wealth around it that would allow a developer/operator to competitively bid against house builders. But we see that changing as the market becomes more mainstream and more capital is deployed into it, and as the policy landscape – in particular planning policy changes recommended to Government by a recent sector taskforce – are given effect,” explains Pillinger.

Added to this, not all local authorities who make planning decisions understand the sector.

While there aren’t any specific Labour policies aimed at senior living yet, there seems to be a recognition that its overall housing target of 1.5 million new homes in its first term will need to include older people’s housing.

“There's a potential quick win if the government does support this product in that if you could increase the percentage of older people moving into specialist accommodation, it would free up family homes,” says Pillinger.

Senior living products in the for-sale market are sold on a leasehold basis because of the amenities provided, which potentially conflicts with the government’s leasehold reform plans.

The current Leasehold and Freehold Reform Act, which bans leaseholds on houses, has an exemption for retirement housing. There is an acknowledgement that some sort of operational system needs to remain in place.

Trade body and lobby group ARCO, which represents IRC operators, is working with those in the industry, including Trowers & Hamlins as a longstanding strategic partner, to explore alternative forms of tenure that would give the investors, operators and consumers more confidence.

The previous Government also set up a Housing With Care Task Force, which made a number of interim recommendations including implementation of the Law Commission's 2019 recommendations on event fees and consideration of seniors housing in the revised NPPF. Their final recommendations were not published before the election, but it is hoped that the new Government will pick them up.

Regardless of the challenges the sector faces, the fundamental demand remains strong. “Even if a relatively low percentage of older people opted for this type of product, it would require 1,000s of new units to satisfy demand. Investment is needed to deliver this and we have and will continue to facilitate the deployment of capital into this market as it inevitably grows into a mature asset class,” concludes Holling.