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Housing an aging, wealthy population

Investment in upmarket retirement facilities is driving demand for finance.

By 2066, one in four people in the UK will be aged 65 and over, according to the Office for National Statistics. Housing this rapidly aging population has been recognised as an important social issue, leading property investors and lenders into the retirement accommodation market.

The recent £125 million (€142 million) financing by HSBC and Israel-headquartered Bank Leumi of UK luxury retirement villages provider Audley Homes highlights the opportunities for lenders in the sector.

The five-year development facility, priced at 3.5 percent and with a loan-to-cost ratio of 45 percent, will fund Audley’s existing properties, as well as financing land acquisitions and construction of pipeline schemes. Audley is currently planning 2,000 units of luxury retirement housing and 500 mid-market apartments across the UK.

“This new facility allows us to execute our aggressive growth strategy,” says Jon Austen, chief financial officer at Audley.

Speaking to Real Estate Capital, Austen says both banks were “enthusiastic” about providing the loan, but admits sourcing bank finance for senior-living properties can still be challenging. “I don’t think they fully understand the opportunities that this business sector has at the moment, with an aging population and strong demand for this kind of product,” he says.

The type of housing that developers are offering to older people is changing. ‘Housing with support’, involving private units with some communal facilities and limited levels of support on the site, became popular in the 1980s, while housing with care, providing self-contained units with communal facilities and on-site care provision, is now the fastest growing part of the retirement housing sector.

In the UK, there is substantial undersupply of retirement housing within the mid and upper market tiers. While in the US, Australia and New Zealand the market share for housing with care exceeds 5 percent of all over 65s, in the UK the rate is just 0.7 percent, according to JLL. Meanwhile, the pace of population growth for over 65s is three times the pace of overall UK population growth.

Crucially, older people are getting wealthier. JLL estimates that almost 80 percent of over 65s in the UK could be classified as mid to high affluence by 2025, largely based on house-price wealth. At present, this population segment has as much as £1 trillion of combined housing equity. This key component of wealth means the older population can pay for retirement housing. Providers of affordable senior-living facilities have been driving the market in the past decade, but an increasing number of firms are developing new, purpose-built stock aimed towards the mid- and high-end markets.

Audley is one of them. It offers a range of housing types including apartments, maisonettes and cottages, sold on a long-leasehold basis of up to 125 years. Schemes, of typically 100 units, are built around central facilities offering amenities such as bars and bistros, beauty treatment rooms, health centres, pools and flexible care. Prices on the firm’s website range from apartments at £140,000 to more than £1 million.

The owners of units are obliged to pay management fees under the terms of the leases, providing the schemes with a regular, secure income, Austen explains. “It’s a defensive business, because even if we had a downturn in the housing market, and we couldn’t sell our apartments, owners of the apartments that we have already sold have to pay their management fees,” he says.

Growth in retirement housing could lead to the release of thousands of family-sized homes back into the UK market. For Hugh Taylor, head of housing at HSBC UK, supporting this business comes as part of the UK bank’s wider efforts to help address the current housing challenge in the country.

“The retirement village sector is an important part of the solution as buyers of such homes are releasing family homes into the market, thus helping to boost availability of much-needed stock,” Taylor says.

The analysis of resale values and price growth of retirement-living properties highlights the strength of the ‘housing with care’ segment, according to JLL. Since 1995 the compound price growth rate for ‘housing with care’ has been 6 percent, with an average price difference between sales of just over £41,000. JLL predicts that, based on this, a retirement home would double in value by 2029.

Attracted by long-term returns, two major institutional investors stepped into the UK retirement housing market last year. In August, Legal & General debuted in the sector with the £40 million acquisition of Inspired Villages, an operator with ambitions to build 3,000 homes for older people by 2022. Two months later, AXA Investment Managers – Real Assets bought a developer and manager of UK retirement villages, Retirement Villages Group, on behalf of a club of investors.

There have also been recent financing deals in the UK sector. In May last year, Investec Structured Property Finance provided a £55 million loan to finance a luxury apartment scheme in London’s Chelsea area aimed at the retirement market. A year earlier, insurer AIG and Bank Leumi financed Audley with a £65 million revolving facility and Bank Leumi extended a £27.5 million development loan.

Richard Martin, property finance relationship manager at Bank Leumi (UK), notes that the retirement sector will see an increased amount of transactions from investors. “This should lead to more news on the debt front during 2018. Audley will be first of a number of key transactions in the sector,” Martin tells Real Estate Capital.

“The bank is seeing strong demand for development funding in the retirement living sector from developers and operators that are backed by both private and institutional equity,” he adds.