July 20, 2024

McCarthy and Stone: we want you to succeed, but you don’t need ground rents

By Sebastian O’Kelly
Trustee, Leasehold Knowledge Partnership

The retirement house builder McCarthy and Stone says that it is struggling, the newspapers are reporting.

Profits are down more than 50 per cent for the first half of this year. And it is worried about the long-term implications of the government’s undertaking to reform ground rents, setting them as low as zero.

The Telegraph says that over the last six months McCarthy and Stone has become more cautious about buying new sites, securing 22 land exchanges and 21 planning consents, down from 30 land exchanges and 34 planning consents in the corresponding period 12 months earlier.

The Times says that McCarthy and Stone feels that it is “caught in the cross fire” over the battle for leasehold reform.

In fact, it has been at the heart of the call for it: LKP is born out of the work of the Campaign Against Retirement Leasehold Exploitation, where the editorial continues as www.BetterRetirementHousing.com.

Other retirement housing providers, which manage their own sites and do not sell their freeholds, have declared that ground rents are not essential to their businesses:

ARCO snubs McCarthy and Stone / Churchill by saying there is no need for ground rents – Better Retirement Housing

The trade body the Association of Retirement Community Operators announced yesterday that ground rents are “not essential” in retirement housing and it backs the government in ending them. The announcement directly contradicts McCarthy and Stone and Churchill. Both have argued that they need ground rents for the viability of retirement housing projects and without them …

An alternative version is that McCarthy and Stone has a pretty large land bank for its size – 1,778 sites according to the below – and the long overdue ending of ground rents won’t affect that.

What land is owned by housing developers?

Photo © Robin Drayton (cc-by-sa/2.0) This post is by Anna Powell-Smith and Guy Shrubsole One issue that keeps cropping up in debates about the housing crisis is whether developers and landowners are ‘land banking’ – that is to say, sitting on undeveloped plots of land waiting for them to increase in value before building on them.

The reduction in profits is down to discounts – also known as incentives – to attract buyers in what is an increasingly tough market.

Similar woes are likely to apply to Churchill Retirement, a private company owned by the McCarthy family.

McCarthy and Stone has 70 per cent of the retirement housing market. 4 per cent of its revenues come from selling ground rents – £27 million last year – and they account for rather more of its profits.

John McCarthy has left a very entertaining account of the business model of McCarthy and Stone in his self-published biography, Building a billion.

Starting in the seventies as small housebuilder in Hampshire, he realised that there was a market for flats on small sites with limited parking for the retirement market.

The leases were relatively short – 99 years then 125 years – and ground rents were high. There were also dubious revenue earners in them, such as the one per cent exit fee on sale – which is for no defined service whatsoever. These were discontinued in 2008 when the then Office of Fair Trading began investigating them, concluding that they were a “likely” unfair contract term.

Other fees apply on subletting, which is normal in leasehold, including a strange one per cent of the flat’s value into the contingency fund on every sublet.

Threat to scrap ground rents hampers housebuilder McCarthy & Stone

Government proposals to scrap controversial ground rents have dented McCarthy & Stone’s ability to buy land, while its profits for the first half of the year dropped by more than 50pc. Ministers set out plans in December to abolish leaseholds amid concerns that home owners were being hit by excessive charges, including ground rents.

This applies in some historic McCarthy and Stone leases and is deeply resented: families, often with an ailing relative to maintain, have to pay considerable amounts (£3,000 in one case) to rent the flat out.

So, theoretically you can rent out your retirement flat at considerable loss if you have, say, four tenants in a year.

But, it must be emphasised these contingency fund payments do not profit the landlord or freeholder: they pay for the site.

Ground rents, which are also for no defined service, were and are high in much retirement housing: currently between £400 and £500 a year. That might alarm mortgage lenders where flats are sold for less than £400,000 – in other words, where ground rents are more than 0.1% of the purchase price – but most retirement properties across the board are bought with cash by downsizing pensioners.

Sale of the freeholds to investors was an early part of the McCarthy and Stone business model.

Unfortunately, the portfolio was not bought by institutional life insurers but by the buccaneering entrepreneur Vincent Tchenguiz, ultimately held in his Tchenguiz Family Trust in the British Virgin Islands.

McCarthy & Stone ‘caught in crossfire’ of leasehold battle

Plans to ban ground rents threaten to sharply reduce profits at Britain’s biggest builder of retirement homes. McCarthy & Stone complained yesterday that it had been “caught in the crossfire” of government attempts to crack down on companies cashing in at their tenants’ expense. In December, the g

From these residential freeholds – supposedly one per cent of all in the UK – Mr Tchenguiz became one of the most powerful entrepreneurs in the country and was bidding for Sainsbury before the 2008 crash.

He and his brother, Robert, were wrongly arrested by the Serious Fraud Office in 2011 and won a judicial review into the debacle.

The Tchenguiz interests also bought Peverel – once a sleepy Hampshire estate agent – which owing to McCarthy and Stone, which owned it in the 1980s, became the biggest block manager in the country (today, as FirstPort, with c160,000 flats under management).

Even in the early days, the service charges were a source of controversy.

In the early 1990s, a £1 million libel action was launched by McCarthy and Stone against the Daily Telegraph over alleged service charges rip-offs by Peverel, but it collapsed. Shortly afterwards, McCarthy and Stone sold the company.

McCarthy and Stone and a media firestorm in 1991 – Carlex

The Dispatches programme on Monday night is not the first time McCarthy and Stone has been in the eye of a storm. In 1991 in launched a disastrous High Court action against the Daily Telegraph claiming £800,000 damages over articles about service charge fiddles.

The Daily Telegraph fiasco was one of a number of controversies with Peverel and the retirement sector generally.

Exit fees excited the attention of the Office of Fair Trading and then a second investigation found that Peverel’s subsidiary Cirrus, which provides electronic door entry systems, had systematically cheated pensioners at 65 sites with a bid-rigging scam.

Tenders were sent out. Stooges bid higher, and Cirrus won the contracts.

All took place at Peverel sites; all the sites had lots of money in their contingency funds.

The ruling came out in December 2014. No one at Peverel was punished; no one sacked; the company was not fined.

The furore resulted in Peverel changing its name to FirstPort.

A chronology of this scandal is on www.BetterRetirementHousing.com here

The Peverel / Cirrus price-fixing story so far: – Better Retirement Housing

2005 to 2009 Peverel cheats pensioners at 65 site by installing Cirrus equipment through bogus tendering – Campaign against retirement leasehold exploitation alerts police, SFO and OFT, and The Times publishes article on December 4 2009 – But Office of Fair Trading gives Peverel “leniency” for turning itself in at some point in December 2009 – OFT starts investigation a leisurely 18 months later – July 2013 OFT admits the leniency deal with Peverel.

It is a constant lament – most recently at Lord Best’s APPG on retirement housing two weeks ago – that so few over-65s live in designated retirement properties: only 2 per cent in the UK compared with 17 per cent in Australia and 12 per cent in North America.

These scandals help explain why.

Like other housebuilders, McCarthy and Stone has discovered the reputational consequences of selling on its freeholds where dubious practices are subsequently revealed.

Although the housebuilding business model of McCarthy and Stone is unchanged, there have been considerable improvements.

Clive Fenton, the current CEO is a respected property professional from Barratt.

One of his first acts on appointment was to end a mischievous and expensive attempt to bully LKP / Carlex involving one of the more expensive legal media firms in London.

This was a pretty disgraceful episode, and we remain grateful to Mr Fenton for bringing it to an immediate end.

Mr Fenton has introduced other welcome changes: leases are now 999 years and the onerous fees on subletting have been modified.

Most important of all, McCarthy and Stone now manages all its sites via McCarthy and Stone Property Management Services Limited. This is a return to the pre-1990s model of self-management when Peverel was part of the group.

It does this via retaining a headlease at its sites. The policy must be working as we receive relatively few concerns about the management of these sites.

But freeholds are still sold off to speculators for the ground rent income.

We were assured that the buyers would be institutional life insurers, with Aviva being mentioned. In fact, some have been sold to Adriatic Land, part of Will Astor’s Long Harbour fund, where the beneficial ownership is hidden behind nominee directors who are part of the Sanne Group, headquartered in Jersey.

So pensioners won’t know who their landlord is.

Another major problem with McCarthy and Stone – and other volume retirement housing providers – is the often abysmal re-sale values, with falls of 40 per cent from new by no means rare.

Abysmal retirement housing values revealed on the Land Registry – Better Retirement Housing

Campaign against retirement leasehold exploitation examines official re-sale prices for McCarthy and Stone, Churchill Retirement Living, Audley Retirement, Retirement Villages, Retirement Security, Anchor and Pegasus A dismal picture of retirement housing values on re-sales is revealed by Campaign against retirement leasehold exploitation from figures in the Land Registry.

The company vehemently contests this through its PR channels, arguing that registered purchase prices don’t account for “incentives”, so the price falls are less.

We are not persuaded by any of the unverifiable arguments. The evidence from the Land Registry is the only evidence that counts, and it is damning.

Besides, the falls are often continuous in repeated re-sales, not just the first re-sale from new.

The issue has been raised in Parliament, on BBCR4 MoneyBox and in the press. The Elderly Accommodation Counsel is carrying out a study of this issue.

So what should McCarthy and Stone do?

The old business model – sell off “granny flats”; load the leases with income streams; flog the freehold; and run for it – is obviously over.

To some degree, the company is already moving forward, renting out unsold flats rather than trying to sell them.

For years we have been asking would-be buyers: is it really the right decision to make a complex property purchase when you are in your late seventies or early eighties?

Rental models, or licences to occupy, may be a better option – especially if the capital value of the property purchase plummets.

Curiously, in November when I addressed the annual conference of the ARHM (the Association of Retirement Housing Managers (ARHM) about whom we have been deeply critical, I was expecting push-back on this.

On the contrary, experts in the leasehold sector – such as Jeff Platt – were in strong agreement: a property purchase through a long lease in advanced old age makes little sense. So we need alternatives.

Sebastian O’Kelly addresses the retirement property managers. Were you lynched? No, they agreed: leasehold ‘granny flats’ have no future – Better Retirement Housing

Not a single voice was uttered in favour of the leasehold volume retirement flat model at the annual conference of the Association of Retirement Housing Managers. The keynote speaker was Sebastian O’Kelly, joint trustee of LKP and director of BetterRetirementHousing.com, who said: “The era of knocking out “granny flats”, loading the leases with sneaky fees …

It is also the case that retirement housing is changing.

The trade body the Association of Retirement Community Operators has a creative and dynamic approach to the sector.

It is to be welcomed that new operators are emerging – such as Legal & General, which has also publicly deprecated the nonsense of ground rents.

Families want their elderly relatives to be safe, secure and – to lesser or greater degree – cared for. They also don’t want to be ripped off. And they prefer more transparency than assets being sold to secretive entities such as Adriatic Land.

None of this is to deny that many McCarthy and Stone sites are successful and the residents are content. One widower told us how supportive his neighbours were after his wife died and how much he loved living in a community.

He was happy with his decision to purchase, although he regretted that the property was now worth 40 per cent less than he had paid for it new.

McCarthy and Stone should not be given an exemption from the end of ground rents: they need to end, as do a raft of other imbalances in leasehold.

But it, and all the retirement providers with an appetite for ground rents, should be given every encouragement to improve. Easier planning, for example.

We should want them to succeed. 

In McCarthy and Stone’s case that will mean moving on from its volume housebuilder roots to something more suited to an age where people have the means to be better informed.


  1. Mr KJ Playforth
    McCarthy & Stone Flats

    McCarthy & Stone (M&S) were known to provide financial Incentives but not for the Early Bird, as stated.

    The incentives were for the Late Bird after the first buying frenzy subsided. This could have been once 50% of the 125 year leases had been purchased – so how does this effect the resale prices?

    I believe the initial cost to purchase flats near to where I lived were 20% to 40% overvalued.

    The Leasehold purchaser were not only purchasing 125 year lease, but was overpaying because it included the following:-

    *Car Park

    A flat purchased in 2005/06 for £135k a so called Early Bird was in fact 12 months after the first leaseholder moved in. A £2k reduction in the price meant original cost was £137k.

    In 2015/16 – 3 similar flats were on sale in the same development for £75k each, until it was mentioned on a website, and within 2 weeks these 3 flats were seen on sale for £109K each.

    Strange that 3 flats for sale at £75k had overnight jumped 20%. I had spoken to the Estate Agent the week previously.

    It had been suggested the Freeholder/Landlord had insisted the price rises, from £75k to £119k. The development would have been devalued by as much as 40%. This means the value of the development had dropped so much it was no longer collateral as it had recently been re-mortgaged and revalued for Insurance at a much higher value?

    Now 7 months later some of the 1 bed flats have again dropped in value and the 113 years left on the lease can be purchased from as little as £85k

  2. Michael Epstein says

    Should the appointment of Paul Lester CEO of the highly indebted Knight Square Ltd (parent company of the highly controversial Firstport) to the board of McCarthy & Stone be cause for concern for McCarthy & stone residents?