July 17, 2018

APPG July 11: The case for ground rents from McCarthy and Stone

By Clive Fenton, CEO McCarthy and Stone

Hello, my name is Clive Fenton and until 31 August I’m the CEO of McCarthy & Stone. Thank you for inviting me here today.

Today was never destined to be my easiest day in the office. I recognise that as a promoter of retaining ground rents for retirement housing I’m likely to be facing a hostile audience.

So, to get us off to a good start, I wanted to begin with a couple of important points that I think we can all agree on.

Firstly, there’s a woeful under-supply of specialist elderly accommodation across all tenures throughout the UK. And in the face of a rapidly ageing population and, in the absence of any political support, this under-supply is only likely to increase…… even if output levels stay the same as they are today.

And secondly, there is absolutely no place for any aggressive ground rent charges, such as those which sparked the recent Government inquiry…… or indeed for any costs which are not fully transparent to customers at the point they make their buying decision.

So today I’d like to explain why we firmly believe that a ground rent exemption for the retirement industry (with appropriate governance) is in the best interest of consumers and why it’s so important to future supply into this market.

However, before I come to that I would just like to briefly touch upon the very positive impact that retirement living has on the lives of older people at a very challenging time in their lives

Here’s what a lady in her 90s, who lives in one of our managed developments in Sussex, recently told us, she said:

“Before I moved here, I lived on my own after my husband passed away, I had different carers visit at different times of day, sometimes getting me ready for bed at 6pm. Since moving here, I’ve made many new friends and no longer feel lonely. I go to the quiz night on a Monday and the film night every month. We have a coffee morning every Wednesday and Fish and Chips night on a Friday. I love the restaurant and homeowners’ lounge, and feel so much better in myself. I feel like I’ve got my youth back.”

Please be assured this isn’t just one customer saying this. We see these benefits across the 54,000 apartments we’ve built and sold. Let me give you some statistics:

  • Almost 9/10 of our customers say we improve their quality of life.
  • 8/10 say they now experience a sense of community, compared to 51% of older people generally.
  • 96% say they feel safe and secure.
  • And last year 93.5% of our customers said they would recommend us. We’ve achieved a 90%+ score for the past 13 years and currently have the highest customer satisfaction rating in the house building sector.

Clive Fenton, CEO of McCarthy and Stone, accepted that ground rents were unlikely to be popular with the audience at the APPG. But how else do retirement developers pay for communal spaces that add up to eight lost apartments on average, he asked

This positive impact has at its heart the opportunity for our residents to socialise and engage within their development, primarily in the significant shared spaces we provide.
Companionship is the central benefit of retirement living; this is why retirement living is successful. The overriding feedback I receive from my customers is that they were really scared about making such a big move, but having done so, they wish they’d made it years ago.

While our developments vary, we provide shared lounges for events, guest suites for family and friends to stay, restaurants in which to eat and socialise, hairdressing and well-being suites, function rooms, laundries and electric buggy storage rooms to help people with mobility issues.

These spaces are social hubs. 30,000 activities take place in them yearly, including coffee mornings, yoga classes, arm chair aerobics and even tribal dancing sessions. These events are integral to a healthy retirement community making this form of housing very distinct from mainstream housing.

All retirement home providers face the same issue. How to pay for these spaces whilst still providing a product that ordinary people can afford?

They amount to around a third of the total floorspace, or up to eight otherwise saleable apartments.

Most normal developers would maximise returns and put in more apartments. We can’t do this.

These spaces cost us c.£1m-£2m to build on average. In larger schemes, even more.

To recuperate this cost, it’s not possible to simply add it to the sale price without significantly reducing our addressable market. This would add c.£15-18,000 to our prices and put our properties out of kilter with local markets. If it was this simple, we would already have done it – we are after all commercial people.

All retirement operators face the same problem. And as far as we can see, they all seem to have some form of additional income stream to recover the construction costs of these spaces.

  • Many rental operators use public subsidy, but this is not available to us.
  • The retirement village operators charge exit fees, sometimes up to 30% of the resale price.
  • We, like 90% of the private retirement housing sector, charge a small yearly sum via a ground rent, which is then securitised to provide a lump sum which pays, in part, for this cost.

We therefore use capitalised ground rents to help fund the construction of our developments. And we do so in a very fair and transparent way, and in a way that ensures our customers are fully protected.

Our ground rents are on average £466 a year and are fixed for 15 years, which is longer than the average stay of our customers. Increases are linked to inflation. They do not double every few years like some.

The ultimate beneficiaries of the income stream are all mainstream UK pension and annuity providers. They are the companies who pay our pensions and those of our customers. The pension funds value the stable and secure income stream to meet their pension commitments and we value their cash because we can reinvest it back into providing new developments.

Importantly we remain as the landlord in all our developments. Our investors cannot change any conditions of the lease or make any other charges. And they have absolutely no management responsibilities.

This is a fundamentally different model to how many mainstream housebuilders use ground rents.

In addition to these benefits, we’ve been working hard to ensure the consumer is at the very heart of our developments.

  • Remaining as the landlord on all new developments built since 2010 means we ensure the long-term quality of our developments.
  • Since that same date we provide our own management, care and support services.
  • We’ve abolished all exit fees that go to the developer.
  •  Our new leases are for 999 years.
  •  We don’t sell leasehold houses. Our small number of cottages / bungalows are freehold.
  •  We have improved our space standards, our car parking standards and our specifications.
  •  Those who point to poor resale values and attempt to link this to ground rents fail to recognise the major improvement these changes have had on resale values of our properties built in more recent years. c.70% of the resales of our managed stock over the past 5 years have increased in value. Each year we see further improvements. After all, ground rents are common across all leasehold properties and simply cannot be used to explain value drops on retirement properties.

As you know we’ve been talking to Government about how our sector uses ground rents differently and we’ve called for an exemption from the proposed changes.

We’ve explained that we don’t use ground rents for windfall profit like other housebuilders. Instead, we use the capitalised income to cover the construction costs of our important shared spaces.

We’ve noted that a ban on our sector would mean a dramatic decrease of supply of private retirement housing. This is not by choice: it simply means that these shared spaces in our developments will no longer be affordable to build, which in turn means we will be less competitive in the land market.

This is not a threat. The impact is very real. Our land buying has slowed down by a third since December, as it has across our entire sector. Our industry will inevitably now shrink at a time when it should be expanding.

I still don’t think the reasons for this are fully understood. It is quite simple. On our average 40 apartment development the capitalised ground rents are worth c.£600k. In the absence of this income the price we can pay for the land reduces by £600k (20% of our average land price). We target one acre brownfield sites in, or adjacent to local communities. Our competitors are supermarkets, care homes, hotels, leisure providers – in short, uses not impacted by the proposed ground rent changes. Against these uses we’ve already become significantly less competitive.

So, Ladies and Gentlemen, thank you for bearing with me because this now brings me to the key part of my argument…… why offering a clear choice is in the consumers’ best interest.

We genuinely believe that a modest and appropriately regulated ground rent is a small price to pay for the massive benefit of the shared services we provide. And is far preferable to paying a much larger purchase price. All our customer research confirms this to be overwhelmingly true.

In discussions it’s been suggested that if we’re so confident about this why wouldn’t we offer our customers the choice…… between an annual ground rent of say £500 linked to inflation and say a £15k increase on the purchase price, and we think this is a sensible suggestion. Surely it must be right to let the market decide.

Those who can afford to, and want to pay the full cost upfront, are perfectly free to do so. Those who can’t afford to pay or decide that the ground rent option makes more financial sense at a later stage in their life still have this option available to them. And those who prefer to pay an Exit Fee are perfectly free to choose a product from our ARCO competitors. I’m sure they will increase their supply if the demand is there.

It’s a big market and it should be a free market that provides the widest possible choice for consumers, as long as it’s totally transparent, properly regulated and appropriate codes of conduct are put in place and enforced.

So, thank you for hearing me out.

In conclusion, I would implore you not to be swayed by the one size fits all argument that all ground rents are bad.

As well as my job at McCarthy & Stone, I work as a Board Adviser of Pocket Living. For those of you who do not know Pocket Living, they are a provider of affordable, key worker homes.

They have the same issues as we do but for different reasons because their sales revenues are capped as their sales prices are linked to the incomes of key workers. Without ground rents,
their ability to buy land becomes far more challenging than it already is.

So please consider the very real benefits that ground rent income can bring to delivering more, much-needed, retirement accommodation in this country. And let us work with you to find a solution which properly protects and informs the consumer and provides the widest possible choice to help the elderly downsize …. with all the many benefits to society which that brings.

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