Retirement accommodation: When I'm sixty four...
The UK is getting older.
11.1 million of us are over 65 – for the first time ever the over 65s outnumber the under 16s.
In 20 years the numbers will be 15.5 million and by 2050, 19 million – one in four of the estimated population, and of those, 8 million will be over 80.
Until recently, retirement accommodation has consisted largely of nursing homes, usually with a high level of support for the very elderly or frail and, at the other end of the spectrum, sheltered housing with a resident warden and a panic call button for emergencies. Increasingly, one finds retirement homes designed for the active elderly but, until recently, these have provided quite limited support.
This is beginning to change with the arrival of CCRCs – Continuing Care Retirement Communities. The model is well established in Australia, South Africa, Scandinavia and especially in the US, where there are an estimated 25,000 CCRCs – some of them a considerable size.
So what is a CCRC?
As the name implies, a CCRC is intended to offer a continuum of care and support. Typically, the entry point will be the purchase or rent of a flat or terraced house with its own front door and small garden. Centrally situated will be a gym, a pool, a restaurant/café, a small shop, a hairdressers and other communal facilities. For planning reasons there will also often be a minimum of two hours domiciliary care such as household and garden maintenance, shopping etc. with an occupier selecting the level of assistance needed. The average age of a new resident is, typically, in the late 70's.
It is possible subsequently to buy additional personal care services as required. This can be physical help with eating, drinking, washing or dressing, and can include nursing and medical care.
The facility is also likely to provide extra care units for acute care and a care home, in both cases with the ability for residents to move from one to another.
This offers a high level of reassurance both for the residents and their families. The care facilities mean that support is always available either to deal with a short term crisis or longer term problems.
For the purposes of this article, we are looking at privately funded schemes, although it should be noted that some are operated by charities and some may be obliged to provide a number of affordable units as a condition of planning.
What are the key issues?
These will depend on the perspective of the reviewer: a potential resident will have different questions from a developer, an investor or a funder.
A resident will want to know what services are provided, what they will cost and how they are paid for and, crucially, whether they are guaranteed. He will be concerned by the covenant strength of the operator, especially if he is buying a house or an apartment – its value is likely to depend on high standards of maintenance and the continued operation of the Village as a whole. He will want to know if facilities are open to non-residents and, if so, what happens to any income they generate.
A developer will be interested in how the local planning authority view this sort of development from a planning perspective. There are some interesting planning angles here which can be very helpful in a number of ways, particularly in finding sites and in the cost of development.
It is not unusual for the developer's financial model to incorporate an exit fee, typically recovered by exercising a pre-emption at what can be a very material discount to market value, on sale. Sometimes this will be treated as a "deferred management fee" and all or part of it used towards reducing the service charge. In some cases it is not. This practice was the subject of an OFT investigation in 2011 and is now being considered by the Law Commission.
An operator has a number of obstacles to consider. Perhaps the most important is that the provision of health care services is regulated by the Care Quality Commission (CQC) and any providers will need to be registered and comply with CQC requirements. This leads to the need for an Operating Company which in practice is likely to be separated from the organisation that carries out the development and construction and provides continuing property services.
As will be seen there are a number of issues for funders here and these will depend on the nature and extent of the funding provided, whether it is development funding only, whether it is to the Op Co or Prop Co or both, or to a parent company. In brief:-
- The success of the business model overall could be tainted by some of the operator problems that have been making headlines recently.
- A funder is likely to want to be sure that the financial model will work absent the deferred management/exit fee given the OFT report and the current Law Commission review.
- Logistics. There may be difficulties in obtaining funding prior to registration of any registered providers by the CQC, which may not take place until the relevant site is purchased and the construction work completed.
- Tax. Careful tax structuring will be required to avoid tripping over complex legal provisions and have the tax rules back-fire expensively.
A combination of otherwise unfavorable demographics and the introduction of new forms of retirement accommodation suggest the likelihood of a new form of housing asset with the ability to outstrip materially the growth seen in recent years in student housing.
Currently there are a number of operators, no standard operating model and a number of complex legal and practical problems. The players in that market will need to understand the legal issues and their inter relationship, from planning through construction, to funding and tax, transfers of the units, service charge, service contracts, management and the various regulatory regimes.