None of us is getting any younger. Yet, at the same time as ministers are fretting about young people getting on the housing ladder, there are precious few homes for the older age group to step down to.

Alastair Stewart

A curious dichotomy emerged this month. The Institute for Fiscal Studies hit the headlines with a study indicating the proportion of middle-earning 25- to 34-year-olds owning homes had fallen from 65% 20 years ago to a mere 27%.

Then a Commons Select Committee report urged that planning policy “should be amended to emphasise housing for older people”. The constraint at one end is affordability while at the other it is lack of supply. A new Knight Frank report calculates that retirement housing is only 2.6% of the housing stock – 725,000 – while 18.9% of the population are of pensionable age.

More needs to be built, but serious constraints remain. The Commons report criticised “sporadic and inconsistent” implementation of existing guidance. Some councils that did provide elderly provision focused entirely on rented or affordable options. Privately owned housing only accounts for 162,000 of the 725,000 purpose-built retirement units – 0.6% of the UK’s total stock.

This suggests potentially rich pickings for niche private developers, by far the largest of which is McCarthy & Stone, with a market share of 70%. The sparsity of competition highlights the high entry barriers to what would seem to be a good demographic bet.

Shared space

There is a big hurdle for these companies buying land. In a typical development of flats, up to 35% is shared space, which is double that for standard housing. That makes it harder for developers to justify the same prices in the land market.

Part of this was eased by developers selling portfolios of ground rents. These upfront lump sums also help cashflow: developments of 30 to 40 apartments suck up more funds into work-in-progress than individual family homes.


Source: Shutterstock/Ewelina Wachala

But the sector was knocked by the government proposal to ban ground rents on new long leases. McCarthy & Stone argued that profits from selling these ‘freehold reversions’ partly mitigate the disadvantage in bidding for land and help to fund communal areas and facilities. Ground rents average just over £400 a year and rise at the higher of RPI or 2% per year.

The housebuilding industry’s reputation took a beating last year from sales of leasehold houses to homebuyers who then faced rapidly rising ground rents and it seems hard to justify this. But McCarthy & Stone argues that changing its model would mean adding the value of lost future ground rents to selling prices (harder to sell homes) or taking the equivalent off land bids (harder to buy land). It will have to take around a £33m hit to 2018 profits from freehold reversionary sales, unless it can persuade government to grant an exception.

Old folks loved bungalows but the planners didn’t, and the low densities didn’t stack up for developers

One blast from the past is that McCarthy & Stone is considering reintroducing bungalows. In the late 1980s these accounted for around 15% of the sector’s annual production, yet last year they made up just 2%. Old folks loved them but the planners didn’t, and the low densities didn’t stack up for developers. The rationale in this case is that the company can buy sites that are larger than their standard footprint, but smaller than those favoured by mainstream developments, but at only slightly higher prices, given muted competition. A retirement block will take up most of the site, with bungalows around it, providing extra revenues.

It’s a nice idea, but more serious innovation will be required from government, planners, developers and housing associations in the forthcoming rejig of the national planning policy framework to provide a more ‘joined up’ solution to an increasingly chronic problem.

Alastair Stewart is an equities analyst and commentator