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From exit to event
– Unlocking investment in retirement communities

Michael Voges explores the benefits of retirement communities and how a change to their funding structure can encourage investment and boost the market.

Delayed discharge. Care crisis. Loneliness. At this time of year in particular, as charities ramp up their campaigning and newspapers report on hospital bed shortages, we’re all made acutely aware of the crises surrounding older people’s care, housing and support.

Perhaps less is made of the extent to which housing-based solutions such as retirement communities can help address these issues, and how important private sector funding streams – rather than just government funding – are to the sustainability and growth of this socially-beneficial sector.

Retirement communities – also called ‘extra care’ or ‘housing-with-care’ – are a form of housing for older people. They offer older people the independence of their own home and front door but, in contrast to traditional retirement flats or general needs housing, they also provide on-site care as and when it is needed, 24-hour staffing, and access to communal wellbeing and leisure facilities and activities such as gyms, craft rooms, greenhouses and cafés.

Benefits of retirement communities

As a result of their mix of housing, support and social activities, retirement communities can dramatically improve and maintain older people’s wellbeing and reduce NHS and social care costs. In a recent study by Aston University comparing residents in retirement communities with a control group, NHS costs were reduced by 38% for those moving into extra care housing. Added to this, the local authority costs of providing lower and higher level social care were reduced by 18% and 26% respectively per person, per year when compared to providing the same level of care to those outside retirement communities. Unplanned hospital stays (which contribute to delayed discharge) reduced from eight to 14 days, to one to two days for those in retirement communities. For new residents, measures of depression were reduced by 15% after 18 months, with those with low mobility seeing the greatest reductions in this mood measure.

These are impressive figures, meaning that retirement communities can save the NHS and local authorities millions of pounds. On a human level, they mean that older people are enabled to regain the joys of friendship and fitness, whilst their relatives can be confident that they are well supported.

Yet despite the benefits of extra care schemes (and their popularity amongst those who live in them), only 0.5% of those over 65 live in a retirement community in the UK (compared to around 5% in countries such as New Zealand, US and Australia). There is definite scope for the sector to grow in order to meet demand and various reasons for this, including a lack of planning focus on older people’s housing and lack of awareness of the model amongst practitioners and older people alike.

Investment in the sector

One, often overlooked, obstacle to the growth of retirement communities is private sector investment, and whether there is an appropriate legal framework to allow operators to lever-in this investment, relating to the middle market, in particular.

This is because making the operation of retirement communities stack up can be tricky when targeting those older people – a majority – that want to buy a leasehold rather than a rented property.

Firstly, extensive facilities can be costly to run, but bring a wealth of benefits to older people. While the service charges for these facilities may be no higher than maintaining a large family home in need of various minor repairs, it can mean that older people worry about being able to afford the ongoing service charges on their often modest incomes.

At the same time, the Landlord and Tenant Act aimed at leasehold properties, in general, means that operators are constrained, via the legislation’s formulae, in the management fees they can set. While the Act has been invaluable in protecting leaseholders in ‘normal’ leasehold housing, the reality is that operating care services, dining options, activity services and other housing-related support services on site is expensive and involves business and reputational risk which is difficult to price into fees to be recovered via the formulae.

Combined, these liquidity issues for residents, who may have considerable assets which are locked up in their properties, and profitability issues for operators mean that new forms of charging and payment are needed to address the chronic undersupply of retirement housing.

Event fees

Business models such as ‘event fees’ can overcome this. These fees are paid when a retirement community property is sold. Rather than paying up-front or during occupation, these fees are taken when residents leave the retirement community. When transparently disclosed, event fees can be a practical way of making retirement properties affordable, especially for those on middle incomes or who are asset rich but cash poor.

For example, an operator might set a fixed service charge that only rises in line with inflation. This provides certainty to residents. The service charge could even be capped and fixed, giving residents the reassurance that their, often modest, pensions will be sufficient to pay for their living costs and service charges for the foreseeable future. In exchange, the resident would give up a certain level of equity in their home. This may range from between 1% to 30%.

However, it could suit some older people to give up larger parts of their housing wealth, for example 50%, in return for no service charge. They could benefit from extensive social, support and wellbeing services while still having money to spend as they wish.

In essence, these fees can be a way for older people to access their housing equity to contribute to their occupation costs while living in a retirement community. In addition, these fees can be critical to the business models and viability of operators as they offer a secure income stream. This model of event fees also presents an opportunity and incentive for new retirement communities to be built and operated, which, due to the crossover of housing and care, require specialist skills to run and carry additional financial and regulatory risks.

The legal view

The benefits of these fees are acknowledged by the Law Commission, which is looking into the legal framework surrounding this income stream. It recently published a consultation document on the issue. The Law Commission’s verdict, so far, is that event fees can be a useful tool to reduce service charges and provide incentives for investment.

However, the Law Commission is also crystal clear that event fees need to be disclosed up front – prominently, clearly and transparently. This is something ARCO’s members fully agree with. Our Consumer Code is explicit in its insistence on transparent disclosure of all fees, including event fees.

In 2013, the Office of Fair Trading produced a report on ‘exit fees’, as they were previously known. This was triggered largely by undisclosed use of event fees in the market for retirement flats, those without care. It is this abuse which the Law Commission’s work will hopefully put an end to.

Increased investment

In my view, older people will be able to make up their own minds as to whether they want to pay these fees or not, if they are prominently displayed and residents can make informed decisions about them. In other countries, such as Australia and New Zealand, event fees of around 20 to 30% are well-known and accepted by residents. As such, it is probably no coincidence that these countries have much higher levels of people living in retirement communities.

If followed through to law, we are confident that the Law Commission’s review will increase investor confidence and enable new offers to emerge that make occupation costs more predictable and/or affordable. This will persuade new operators, both private and not-for-profit, to increase their investment in the sector. Investment that is needed, and should be welcomed, in a sector that can play a significant part in how we deliver care for older people in the future.

Continued government investment, for example continued housing benefit support for those with more moderate means, is clearly needed to sustain and develop this part of the sector. In addition to this, it is also evident that we must shine a light on private sector investors and individual homeowners, who will not require a direct government subsidy or support. Levels of housing-with-care provision for homeowners are currently far lower than in the affordable housing sector. The lowest levels of provision are in the ‘middle market’.

We must ensure that the right legal environment exists to enable this part of the sector to develop. If the Law Commission’s work can deliver a legal framework that ensures robust rights for consumers while allowing operators to develop creative business models, the sector is bound to thrive.

Michael Voges is the Executive Director of the Associated Retirement Community Operators (ARCO). Email: Twitter: @ARCOTweets

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