Senior Living Markets 2023 Update – Where are we now and what can we expect over the next year?

As we prepare for the Care Homes and Retirement Living Conference scheduled for 22nd November, we were fortunate to speak with Iain Lock. He serves as the event's chair and is also the Managing Director of Health at Avison Young.

Iain is a Chartered Surveyor of over 40 years’ experience and has specialised in the healthcare sector for the past 34 years. He is a past Director of Christie & Co and Savills and is now Managing Director of Health at Avison Young, one of the largest teams in the sector in the UK. As an experienced advisor, agent and valuer Iain has been involved in significant transactions for clients including operators, developers, lenders and investors, covering trading business assets, investments and developments. He is an RICS Registered Valuer.

He has a particular interest in the retirement living with care markets and acts for many of the main participants in this growing sector.

Here’s what he had to say about the current situation in the retirement living with care sector.

Iain Lock

How is the retirement living with care sector currently performing?

The first thing to say is that this sector is strongly aligned to the residential market. As a result, the sales of apartments within schemes will reflect what the residential market is doing. That doesn't mean that prices necessarily fall or that demand isn't there, it just means that the ability for the elderly to make the move is somewhat slowed. Currently, sales have slowed and when that happens, the sector is holding more stock. Its finance costs are increasing as a result and because of the deferred management fee mechanism that's in the leases, it means income slows as a result of a reduction in resales. And that's what we're seeing at the present time.

That has a knock-on effect to the speed of new development which will be slowed whilst the operators, developers and investors are waiting to sell the stock that they've already developed or the stock that's coming through the construction pipeline.

We're seeing fewer land deals taking place and this obviously has an impact on price. Vendors are not selling because they can't get the right value. So, they're holding back and buyers are holding back because they think land price should come down and vendors are not prepared to sell at a lower price. As a result, we’re seeing a period of stagnation in the new land acquisition market.

Finally, there is great consternation over construction costs - the inflation in costs that's been going on for the last 18 months or so is still there. It's difficult to know if you go to tender precisely what you can achieve and that has a build cost impact. It also makes it more difficult to predict profit so we're seeing fewer new builds which has an impact on the whole sector.


What can we expect in 2024?

I think we'll see a slow start to 2024 in terms of activity around new development, sales and land acquisition. You’d like to think that that might start to ease as we go through 2024, particularly if the residential market starts to pick up a little bit, if interest rates come down, then I think we will see it freeing up at the top end of the market, which is where a lot of the elderly market sit.

There's no doubt that investors want to press on in this sector. Money has been raised and the market wants to start utilising this money in profitable projects. You know, this isn't, this isn't something that's going to stop this market. The current economic outlook is putting a dampener on it rather than stopping it. It will come back.

The demand is there and there's great confidence in this sector overall, but it’s not currently bucking the current economic trend.


Does need in the private sector marry up with take up and if not, why?

The subject of how well the private sector aligns with the demand for care home and retirement properties is complex. One key variable is 'need,' which becomes crucial in the planning process, particularly when considering building on Greenbelt land. From a commercial standpoint, the location of such facilities must also be in sync with the need.

We use various metrics to assess need, such as the Housing LIN Toolkit, which is preferred by local authorities, and the 'Activities of Daily Living' metric by the King's Fund. We also draw comparisons with countries like the U.S., Australia and New Zealand, where such properties are more widely adopted. Our findings suggest a prevalence rate for retirement living with care accommodation of 3-5% for the 65+ population would reflect the need (GLA). The UK is at about one tenth of that at present.

Despite this apparent need, the actual take-up rate of these facilities doesn't match up. There are several reasons for this discrepancy. Firstly, people are cautious about moving out of their family homes and take time to make such a significant life change. Secondly, homeowners aim to sell their existing property at the best possible price, which isn't always feasible.

Another factor is the quality and design of the stock being built. Questions remain about whether the size, quality, and outside space meet consumer expectations, especially after the COVID-19 pandemic highlighted the importance of outdoor spaces. Improving these aspects could make the units more attractive and help align take-up with need.

Raising awareness is another challenge. The sector must not only prove the need for these facilities but also make the public aware of what they offer. Increased awareness would naturally spur more development, lowering finance costs and enabling quicker construction of new facilities.

Lastly, we must consider tenure choices. The sector is examining whether the types of tenures offered are broad enough to attract a diverse demographic. This is an area that requires more work and flexibility.

In summary, while there's a substantial and quantifiable need for retirement living with care accommodation, several factors, from decision-making timelines to design and public awareness, contribute to the slower-than-expected take-up. Both commercial and societal angles need closer examination to better align supply with demand.


Are the tenure choices available those that the elderly market most desire?

Tenure choices for elderly housing in the UK have largely been influenced by legislation and investment trends. Initially, the focus was on selling units to recycle capital for future developments. Recently, however, there's been a partial shift toward rental models, appealing to investors seeking steady cash flows.

Despite this attempted shift, the majority of the market—those who have built wealth through home ownership—are hesitant to rent. These individuals, often too young to require any significant level of care, prefer the security and benefits of ownership. Therefore, the current emphasis on selling rather than renting seems aligned with this demographic's preferences.

However, there's a gap in addressing the needs of the 'mid-market,' those who cannot qualify for affordable housing but can't afford high-priced facilities either. Current entry costs often exceed £400,000, a stark contrast to the average house price of around £270,000-£280,000. Solutions like shared ownership or 'life tenancy' arrangements, where one buys an equity share or a set number of years of occupation, are being considered to address this gap. These models could offer a more flexible approach, but they come with their own challenges, especially in accurately predicting how long tenants will stay.

ARCO is exploring legislative changes to offer more diverse tenure options, which is crucial for matching the high demand with adequate supply. The disconnect between need and take-up is partly due to limited tenure options and solving this could pave the way for better alignment between supply and demand in the sector.


Is the sector set to expand, can it be the next “big beds sector”?

While the sector is drawing attention from investors in markets like hotels, student housing, and build-to-rent, it's not poised to become the next 'big beds' sector anytime soon. This is primarily because the decision-making process for elderly individuals differs significantly from students or young renters. The elderly market is not yet ready to embrace mass renting, which is currently the investment focus.

That said, it's essential to resolve tenure, pricing, and take-up issues for significant expansion. Also, delivering care services adds complexity, as most investors are not hands-on care providers. Partnering with care operators, especially when higher levels of care are needed, remains a challenge. Unlike the student housing sector, which saw rapid transformation from substandard to premium accommodation, growth in the elderly housing with care sector will likely be incremental.

Another critical element is that the industry still needs to find an optimal operating model that combines care, hospitality, and deferred management fee income. Although the sector has been growing steadily, it's still in its infancy in many aspects. Investors may find this sector attractive but are still struggling to fully engage, partly because of these unique challenges.

While the sector is expected to grow, it faces unique hurdles, from customer preferences to care delivery, that prevent it from aligning closely with other 'big beds' sectors. Although there are obstacles, the growth potential remains, but it will require more time and innovation to reach its full promise.


Any final thoughts?

Looking ahead to 2024, I expect the year to be easier than 2023 but still challenging, particularly in its early months. The economy will grapple with inflation and high interest rates, which will induce caution across all property markets, including elderly housing. While investment is waiting on the side-lines, it may take another year to see significant 'green shoots' in this sector.

However, I'm optimistic that pent-up demand from the elderly population will eventually fuel rapid growth. Many have delayed moves due to economic uncertainty, but this demand won't disappear. It will only be deferred, and when it does come flooding back, it will expedite the sector's recovery, much like what we observed in 2013-14.

It's crucial to highlight the broader implications of a sluggish elderly housing market. When the elderly stay in their homes without proper care, the strain extends beyond just this sector. The impact ripples across healthcare systems, resulting in more frequent hospital visits and a slower discharge rate due to lack of at-home care. Moreover, it results in 'house blocking,' where larger family homes remain occupied by the elderly, affecting housing availability for younger families.

Although the sector faces near-term challenges, there's significant pent-up demand that promises future growth. This growth is not only beneficial for the sector but also essential for the broader economy and healthcare system. We need to continue nurturing this sector for the well-being of society as a whole.


To learn more about care homes and retirement living, book your ticket to our conference here.