Will Lord Best’s proposals produce a healthy retirement housing market …

… Or help perpetuate what is already wrong with it?

Taxpayers should help the elderly buy retirement properties by underwriting mortgages – just as young first-time buyers are assisted with the Help To Buy scheme.

The aim is that this will encourage the elderly to sell off their large family (often freehold) homes and free up the entire housing market.

And retirement properties under £250,000 should not incur stamp duty, either.

Furthermore: “More sophisticated arrangements — as in some other countries — for deferring some service charges until the property is sold should also be made available more widely.”

These are the recommendations of the All Party Parliamentary Group on Housing and Care for Older People headed by Lord [Richard] Best, former chairman of the Hanover housing association, which itself also sells and manages private retirement properties.

Although the report raises interesting thoughts, it makes no mention of scandals in retirement housing that have eroded consumer confidence in it.

There is no reference to the three OFT/ CMA investigations – into exit fees, the Peverel / Cirrus price-fixing scandal and the current CMA inquiry into leasehold management. Or the dismal record revealed in the property tribunal rulings, or references to parliamentary debates.

The report does not specify that the mortgage assistance should be restricted to new build retirement flats only. Indeed, it appears to be aimed at any downsizing move by the elderly.

Campaign against retirement leasehold exploitation would argue against taxpayers underwriting mortgages with retirement builders – who still have a long way to go to reform a discredited sector of the market.

Given the evidence of wide flexibility in prices of new flats at the same retirement site, these are not really properties that should be bought with mortgages at all.

A number of marketing initiatives – part-exchange schemes and alleged discounts – are highly controversial, as revealed by Channel Four’s excellent Dispatches programme

Nor does Lord Best consider the volatility in prices of retirement properties on re-sale.

Campaign against retirement leasehold exploitation has long argued that a new build retirement flat can be the worst residential property purchase a consumer can make. Re-sale values frequently have no relationship to the wider local residential property market at all.

Here is an article of a couple who sold their freehold family house in Sussex for £220,000 and bought a £186,950 new retirement flat in Bognor Regis.

They now want to sell it after after only seven months.

In 2008 a similar two bedroom flat at the site sold for £243,000. In March 2014 it was re-sold for £125,000 according to the Land Registry.

The retirement house builders are simply in denial about the extreme volatility of re-sale values of retirement flats.

The APPG report claims that while 30,000 of retirement properties were built in the Eighties every year, the figure is now 8,000.

This figure comes from PWC accountants for Hanover and is almost certainly exaggerated.

McCarthy and Stone reported that a mere 1,600 private retirement dwellings were completed in 2012. This rings true as sales were static, and house-building in all sectors was virtually at stand-still.

But even if these figures are accepted they show a marked decline in the retirement housing market. It is difficult to square this state of affairs with retirement house builders assuring the APPG that their product is flying off the shelves and that there is huge pent-up demand.

Campaign against retirement leasehold exploitation is quite used to retirement sites that sell “new” stock for some years after the site has been completed.

Indeed, one reason house builders claim re-sale prices can be low is because families will not keep an empty property (which still incurs service charges) on the market for a sufficient length of time to achieve a decent price.

The APPG has relied on the thoughts of a peculiarly restricted number of executives employed by retirement house builders and care operators.

No leaseholder or consumer organsation is referenced. There is no Campaign against retirement leasehold exploitation or AgeUK or the London Asembly, all of which have written material on this sector.

On the other hand, there is no Peverel, Tchenguiz Family Trust (which owns the freeholds of 55,000 retirement flats) or ARHM.

Secretariat services have been supplied by Demos, the former Blairite think tank, that in September last year produced a report “The Top of the Ladder” that urged oldies to move into retirement properties and so free up family homes.

It, too, failed to report any problems in the sector and the study was funded by the House Builders’ Federation, representing the main retirement developers.

What excites retirement developers in particular is that the over-60s own £1.28 trillion in property wealth of which £1.23 trillion is unmortgaged (Demos).

The APPG report is examined below in detail and the full report can be read here:

Demos_APPG_REPORT

1/ Downsizing to retirement housing is a good thing

Campaign against retirement leasehold exploitation wants a healthy and expanded retirement housing sector.

We applaud Lord Best for emphasising that all these purchases must be done early in a period of calm. Delaying until there is a crisis, with health for example, and then buying in a hurry is very ill-advised.

Retirement housing solutions can produce undoubted benefits for the health and welfare of the elderly. To live communally in an attractive setting where there are facilities and the provision of extra care can be life-enhancing.

However, much of retirement housing does not work well, as established by the OFT investigations, the court and parliamentary records, and reports from Campaign against retirement leasehold exploitation, AgeUK and the London Assembly.

We very much welcome new operators to the sector, especially from abroad, as UK house builders seem incapable of viewing retirement housing provision in terms other than short-term monetising.

The first point to make is that the elderly certainly do not need to opt for a retirement housing solution in order to downsize.

In many instances it would be better to avoid this sector of the housing market altogether.

The Leasehold Knowledge Partnership / Campaign against retirement leasehold exploitation has evidence that shows 50 per cent of owner occupiers in prime London apartment blocks are owned by those aged over 60.

Far more pensioners live in ordinary blocks of flats – where the re-sale values DO track the wider housing market – than those who chose to live in designated retirement flats, where re-sale values can be appalling.

Flats in Charles Ponsonby House in north Oxford have been offered for sale at £15,000.

Here is an article of a couple who sold their freehold family house in Sussex for £220,000 and bought a £186,950 new retirement flat in Bognor Regis.

They now want to sell it after after only seven months.

In 2008 a similar two bedroom flat at the site sold for £243,000. In March 2014 it was re-sold for £125,000 according to the Land Registry.

The retirement house builders are simply not going to admit the extreme volatility of re-sale values of retirement flats.

It may be argued that retirement housing is a lifestyle choice rather than an investment. That would only be persuasive in sites providing extra care and services.

(It is a widespread practice in retirement housing to end the important communal service of a live-in house manager. This is usually done with the agreement of the residents with the rationale that EU employment legislation makes a live-in house manager impractical. Freeholders then issue a lease to themselves and sell the flat. This may be unlawful and it is recognised in the sector to be open to legal challenge.)

It is disappointing that APPG / Demos urges the elderly to downsize without pointing out some of these problems.

Buyers must be very wary of schemes such as the part-exchange of a family home in order to buy a retirement flat. Campaign against retirement leasehold exploitation advises potential buyers NEVER to do this and to avoid all such complexities in a property transaction.

Alleged “discounts” that result in such a transaction should be treated with great caution.

McCarthy and Stone part-exchange sales were strongly criticised by Channel Four Dispatches in 2012

Demos says only 8,000 retirement flats are being built every year now compared with 30,000 in the 1980s.

We doubt the precision of this figure (see above) but accept the general trend.

It is worth noting that Churchill Retirement, which provided much information to the APPG, has only built 3,000 retirement flats in its existence.

That is considerably less than Retirement Security Limited in Stratford upon Avon, headed by Bob Bessell, who believes the retirement housing sector needs drastic reform. It appears that the APPG did not consult Mr Bessell.

The bulk of private retirement flats were built by McCarthy and Stone, which sold the freeholds to the Tchenguiz Family Trust (it has the freeholds of 55,000 retirement flats). They are managed by Peverel.

A smaller number were built by Pegasus and other niche retirement developers such as Hallmark 

2/ Retirement housing is good for you and saves money

Retirement house builders may be silent on the subject of appalling re-sale values and on the service charge related scandals that beset the sector. But they are fulsome in providing “research” that purports to show that residents save money after moving in.

The APPG reports these offerings uncritically.

McCarthy and Stone reported in an undated survey that energy bills were 50 per cent less than those paid by residents before they downsized.

In Housing Markets and Independence in Old Age: Expanding Opportunities (2011, Michael Ball, Reading University) claimed that 40 per cent of those who moved into a McCarthy and Stone property released £25,000 or more in housing equity as a result.

PWC accountants found that residents of McCarthy and Stone flats saved £1,419 per person on average for utility bills and maintenance. Similar savings were reported with Hanover (of which Lord Best was chairman).

Matt Campion, director for social impact at Viridian Housing, said there was potential for £500-600 savings on utilities in Viridian properties.

Hanover reckoned there would be a £1,530 saving in a two-bed retirement flat compared with three-bed house.

And society too would be vastly improved if only older home owners would just sell up and get out. Two thirds live in houses with three or more bedrooms meaning that every 5,000 retirement units sold would mean £1.1 billion of property released into the housing market (according to Professor Ball).

On the other hand, Campaign against retirement leasehold exploitation has no issue with the Extra Care Charitable Trust (which has never given rise to a complaint to us) providing evidence of the increased wellbeing and health of its residents.

For example, medication is down 25 per cent after residents move in.

3/ Help the elderly buy retirement flats

“There seems no reason why the Help to Buy facility of an addition loan, on the same favourable terms, might not be made available to older people to kick-start an enlarged house building programme for older downsizers and those in their extended middle age.

“An older person might be able to afford to buy a new property with the equity in their home, but surveyors, legal fees and stamp duty can make the process too costly.

The most noteworthy recommendation of the APPG study was to recommend the extension of the Help to Buy scheme to the elderly so that they could buy a retirement property.

This is a bad idea.

Absolutely the last thing that is needed in the retirement housing sector is complicated mortgage finance to prop up new-build property prices dreamed up by the developers.

And the taxpayer should have no exposure to this scandal-beset section of the housing market at all.

Here are some reasons why it is a poor idea to take out a loan to buy a retirement property: rip-off service charges in this tribunal ruling at Strand Court £67,000 returned to residents at Oakland Court over wrongful fees and Elim Court stuck in a right to manage nightmare for four years thanks a game-playing landlord.

Faced with these sort of expenses, the last thing an elderly resident needs in addition is exposure to monthly mortgage charges.

The difficulty of getting a mortgage “excludes many older people” from buying, the report says.

But financial engineers – to use the politest term – have trawled over every asset and revenue stream of this sector – hence the current vogue for selling off the house managers’ flats – and the result is a widespread erosion of trust.

Given the volatility of re-sale values of retirement properties and the established controversies over service charges and other fees, purchasers must be extremely cautious to incur debt to make retirement leasehold purchases.

The APPG report provides interesting insight into those who need additional finance to make their retirement property purchase.

Most people buying a McCarthy and Stone property in 2007-2010 had housing equity of just under £220,000, the APPG reports. 40 per cent of these released £25,000 of equity, but 30 per cent of purchasers had less housing equity than the cost of their new homes.

In other words, they were downsizing but trading up in terms of property prices.

Most used savings or family loans to make up the price, and only a few obtained mortgages.

Andrew Burgess, of Planning Issues Ltd (a consultancy subsidiary of Churchill Retirement), said that 63 per cent of buyers were doing so at a cost lower than the value of their home, while for 21 per cent the move represented an increase in price.

(Around 10 per cent were moving from 1 to 2 bedroom flats, while 11 per cent were moving from two to three bedroom flats. At the other end of the spectrum, 22 per cent were moving from three to five-bedroom detached homes.)

But these figures varied markedly according to location. So 62 per cent of purchasers in Canterbury were buying retirement homes that were more expensive than their current home. (Of course, this could simply indicate that the Canterbury sites were unusually well specced, or simply over-priced.)

Based on Office of National Statistics data, Lord Best’s report estimated that 40-50 per cent of owner occupiers (depending on region) over 65 would not be able to afford to purchase a retirement property outright.

Gary Day, of McCarthy and Stone, said that there were some areas that were “economically unviable for private developers due to the low house prices, which explains why some cities have very little supply”.

He pointed out that in Hull, for example, there was very little supply of private sector retirement housing. With local house values around £125,000, the economics of a development with total costs of £100,000 per unit are “very challenging to sell”.

Campaign against retirement leasehold exploitation accepts the rationale, but would strongly oppose the suggestion that debt under-written by the government would be a desirable solution.

Between the wealthier retirees and the social renters at the lower end, was a “middle market” where there is an affordability problem.

Michael Voges, secretary of ARCO (Associated Retirement Community Operators), said that of the 50,000 units of extra care operated by its members, two thirds were social housing, which was “very affordable”.

In spite of the supposed affordability issue, all the developers claim that sales are brisk and that there is a shortage of supply. This will come as a surprise to Campaign against retirement leasehold exploitation readers who have lived with large for-sale notice boards outside their sites for some years.

ARCO members claim that all of their properties were sold at no less than 95 per cent of the asking price.

Campaign against retirement leasehold exploitation has evidence that the price of new build retirement properties can fluctuate markedly. Here is a example of a new build two bedroom flat in Bognor being priced at £243,000. In 2013 another new two-bedroom flat was sold for £186,950.

The site, where construction was completed in 2008, is still selling “last remaining” new properties in 2014. Almost certainly these flats have been rented out by the developer and then offered on to the market.

Another unexamined assertion of the APPG is this claim: “Interestingly, many reported that apartments are increasingly being sold off-plan — something older people had previously been reluctant to do.”

This almost certainly refers only to upmarket retirement schemes (such as the New Zealand company LifeCare Residences in Albert Bridge Road in Battersea). Off-plan purchases are very infrequent in designated retirement property.

On the other hand, Campaign against retirement leasehold exploitation is persuaded that some of the care operators do sell their product more quickly than is common among the house builders. Nick Abbey, the CEO of the Extra Care Charitable Trust, said that six of the ECCT’s latest villages sold out within 12 months of completion of building.

Gary Day, of McCarthy and Stone, says the company has set up Ortus Homes to address the demands of the “middle market”.

It aims to serve those who want to “make an aspirational, rather than needs-based move”. As such, the customer profile is younger — 65–75 years old; more likely to be couples; car owners and more active than a core McCarthy and Stone customer.

The marketing terms surrounding Ortus refer to “extended middle age” as the target audience, while “bungalows in the sky” describes the apartments. The model therefore assumes 100% car ownership with allocated spaces and some visitor parking. Ortus Homes currently has two schemes on the market, with more in the pipeline.

However, “in order to make the new, lower-value product a sustainable model, it has been necessary to reduce some communal facilities. For example, there is no day warden in these developments, and to reduce the size of the individual units, apartments are smaller with less storage space.

“While compromising on the core design features opens up greater opportunities to reach new customers, it does represent a reduction in quality.”

The average age of a McCarthy & Stone resident is 79, and the average age of a resident who needs assisted care is 83. Yet a person who is 79 perceives those who are 83 as ‘old’; people are not prepared to pay for facilities they are not ready to use, and may regard such a home as ‘a downsize too far.’

Mr Day has seen potential customers put off by communal facilities and the idea of sharing things (particularly access to parking spaces). Mindset and lifestyle, not age, are often deterring factors.

4/ Stamp duty exemption

“The transaction costs of moving could also be reduced through Stamp Duty exemption for older movers in low value properties: this would create a net gain to the Treasury thanks to the subsequent moves this would generate.”

For residential properties priced between £125,000 and £250,000 stamp duty is payable at one per cent. With legal and moving fees this is an impediment for elderly home owners to down-size, it is claimed.

Les Mayhew, professor of statistics at Cass Business School, said the barriers to moving would include financial constraints from still owing on a mortgage and decreasing pension pots, plus the legal and stamp duty costs. Together these can be “insurmountable barriers to moving”.

In six London boroughs more than 100,000 people aged over 65 live alone in a council tax band D property. They are potential downsizers, but approximately half have been identified as receiving means-tested benefits. For these people, the one-off costs of moving would be too significant.

Both Mr Day, of McCarthy and Stone, and Mr Voges, of ARCO, also mentioned stamp duty as a particular barrier to would-be downsizers. (Mr Voges argued that the elderly face a ‘liquidity problem’, rather than an affordability per se when considering retirement properties.)

“The most commonly mentioned method of tackling these costs [of downsizing] would be to exempt older people from stamp duty, which would significantly reduce transaction costs, stimulate moves and therefore lead to a net gain for the Treasury.

“… Those most likely to be unable to afford to downsize are older homeowners whose homes are worth less than £250,000.”

The APPG cited interesting (but unreferenced) research from Oxford Brookes University which showed that a relaxation on stamp duty could stimulate more people to move, with the potential for a further 20 per cent of people moving (generally among the over 65s).

“Critically, this research showed that such a change would not be a loss to the Treasury, since it would act as a catalyst for subsequent moves in the housing chain.”

“This research estimates that the move of one older person would lead to three subsequent moves. Stamp duty from these additional moves, as well as VAT from greater spending on decoration and refurbishment would lead to a net increase in total tax revenues, estimated at £644 million p.a.

“Michael Voges felt that a stamp duty exemption would also send a clear message from the government that older people moving to more appropriate housing is a socially positive act and might encourage more older people to consider their housing options in later life, rather than feel the stigma or association with frailty and illness.”

Campaign against retirement leasehold exploitation is far more sympathetic to this relatively minor change to stamp duty than it is to government-backed mortgages.

But the exemption would have to apply to transaction on ALL properties, both new and old, rather than solely new build offerings from the retirement house builders.

That is a sector of the housing market that needs to improve before anyone throws money at it.

5/ Pay service charges on sale

The APPG favourably considers the practice of deferring service charge payments until the sale, where they could be paid off in the form of a large exit fee.

The study rightly acknowledged that the initial purchase price was not the only affordability issue affecting older buyers. There was also the service charges and other fees.

There “are also a considerable concern for older people, as these have to be paid from any equity released by the sale of their home or, alternatively, from savings or pensions income.”

Making a large deferred payment on the sale of a property does exist already with some care providers.

It is the business model of the New Zealand company LifeCare Residences, which caters for upmarket buyers who are likely to be financially sophisticated, as well as buyers with the ExtraCare Charitable Trust.

Residents here chose to pay a fixed service charge, deferring a considerable amount to be paid on sale.

It is an arrangement that works with a provider that is committed to managing a site for the long term, and business model is more as care provider than simply a house builder.

Given that the existing retirement house builders have created onerous leases and sold freeholds on to monetising interests, trust in the sector is in short supply. A deferred service charge payment can only work with clients who have a high degree of trust and confidence in the housing supplier.

It was acknowledged by Michael Voges, of the trade body ARCO, that trust in the sector is an issue. This was the only reference in the report to problems in the sector.

“… Mr Voges felt the biggest problem facing housing providers in this country was not the size of the fees per se, but rather the unclear or opaque way these have been communicated to buyers, which has given some retirement providers, mainly in the retirement housing sector, a bad reputation.

“Upfront transparency, so prospective buyers know what they will be paying, when and for what, is clearly vital — and, given the variety of ways fees might be charged (e.g. where a lower risk of unexpected costs might be achieved for a higher fee), prospective buyers need advice on this aspect of their purchase alongside the other aspects associated of moving. Mr Voges informed the APPG of the ‘ARCO charter’ which its members sign up to — this requires them to clearly articulate fee structures, what and when fees are due, and how to access further information regarding the accounting of these fees for the services delivered.”

In New Zealand deferred payment of service charges of 20-30 per cent of the property’s value was a popular model.

“However, in New Zealand it is often the case that providers take this exit fee as well as the capital growth of the home when it is then sold — something that would seem unreasonable in the UK where the majority of housing providers do not claim the capital growth of their customers’ properties on sale.”

(LifeCare Residences, a New Zealand company operating in the UK retirement market, points out that retirement village housing in NZ has customarily increased in value. The capital uplift is an accepted cost among buyers who appreciate clearly understood service charges.)

6/ Easier planning for retirement housing

Local planners could do more to help the provision of retirement property by including land designated for this purpose in the Local Plan or setting aside public land, says the report.

This would mean “that retirement developers do not have to compete with commercial developers (who can pay significantly higher prices) for the same plots”, said Mr Day, of McCarthy and Stone.

“He felt local authorities needed to value land in more than monetary terms, evaluating the best use of land, accounting for the social and economic benefits within communities that come from private housing as well as social housing, for example by understanding the link between good housing and health.”

Campaign against retirement leasehold exploitation is wary of the special pleading by the private retirement house builders. Mr Day, Mr Voges (ARCO) and Mr Burgess (Churchill) all felt that retirement house builders lose out on building land as commercial developers [we believe this includes non-retirement house builders] can pay more.

This means that are areas that are economically unviable for McCarthy and Stone due to land prices, making unit prices in excess of local house prices.

Given that Campaign against retirement leasehold exploitation is critical of many practices in private retirement housing, it would be wary of supporting special treatment for the sector. But it is more receptive to the argument of social benefit coming from the social housing providers.

The APPG reports the sale by York City Council of more than 50 acres of land for development to the Joseph Rowntree Housing Trust.

On the other hand, Campaign against retirement leasehold exploitation is sympathetic to the New Zealand company LifeCare Residences’s very upmarket site in Albert Bridge Road in Battersea, which faced local opposition because it was a retirement site.

It was extraordinary that the local “Nimby” protestors even favoured the existing student accommodation on the site rather than retirement flats.