Retirement villages – beyond development profit?

The doors open, prospective buyers flood in, and in less than an hour, all the available properties (more than 20) are reserved, with many interested buyers leaving empty-handed.

No, I’m not talking about yet another Hong Kong or Singapore property frenzy - these scenes actually occurred at a recent phase-two launch of a retirement village in the south of England. Demand for retirement properties in the UK is extremely high, yet supply is woefully low.

This is especially the case in the retirement community market. In the UK, only 0.5% of over-65s live in a ‘housing with care’ environment - and most of this is made up of the socially rented extra-care market, which has thrived during the past decade. In the US, New Zealand and Australia, more than 5% of older people have moved to retirement communities that include care provision.

And it’s not only older people who are interested: the government is also keen to promote these options as it frees up family homes and can cut down on health and social care costs. Investors are also eyeing up the retirement community sector, and we have seen very strong interest in our inaugural conference in July, which will look at the future of the retirement community market.

But why have we not built more?

The main reason is that no clear pricing or charging structure has emerged that responds to customers’ needs and wants, and that provides secure income streams for operators.

Many developments do not - to put it bluntly - offer sufficient returns for developers and operators to offset the risk they take on when developing large and complex care and support businesses.

In other countries, the use of some form of deferred payment helps to compensate for this - in the US, New Zealand and Australia, the use of ‘exit fees’ or ‘event fees’ is widely accepted. Deferred payments are also used to reduce service charges or set aside some development profit in exchange for building more attractive facilities.

This can create income streams that, if managed well and disclosed transparently, are greater than the foregone profit and service charge subsidy. Consumers can also benefit as deferred fees allow them to use the equity in their homes to fund lifestyles they may not be able to afford on a ‘pay-as-you-go’ basis.

Of course, the use of deferred fees is not without controversy in the UK. Poor practice by a small number of developers and property managers - who, for example, did not disclose ‘transfer fees’ in sale documentation - led to residents feeling rightly aggrieved. The Office of Fair Trading decided that these fees were potentially unfair, created funding risk, and cast doubt over pricing and charging models.

However, the Law Commission is developing proposals for how deferred payments can be charged lawfully and fairly. This would entail explicit upfront disclosure before a purchasing commitment is made, and a clear framework for residents to challenge deferred fees if the correct procedures were not followed.

Unusually for a trade body, ARCO has argued for higher levels of consumer protection in this respect. Greater disclosure and consumer protection would increase consumer confidence and provide certainty to operators and investors, allowing them to come up with innovative funding models that benefit consumers and operators alike.

The best operators in the retirement community sector offer not only housing, but also high-quality hospitality and leisure facilities as well as care and support. Developers and housebuilders need to look beyond development profit and accept that services and long-term customer relationships are keys to success. For those who accept the challenge, a bright future beckons.

Michael Voges is executive director of the Associated Retirement Community Operators