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Covid-19 and its impact on UK Retirement Living Developments

18 May 2020

The retirement community sector is a nascent real estate market, expected to follow a similar trajectory to purpose built student accommodation (PBSA). We are at an inflexion point which is seeing more demand and supply.

The market is primarily driven by the significant projected growth in the older demographic age group, who remain active and engage in a social lifestyle. Retirement communities are gradually becoming a better-known product, and the quality within the market has improved, now with a focus on delivering a range of facilities to address the wellbeing of residents.

This presents a very interesting market opportunity with investment potential, and we’re seeing new operators of retirement communities emerge, with new concepts and the ability to grow.

Octopus has been invested in the sector for about 8 years now, and we have seen new investors coming in recently, especially after regulatory changes have improved the transparency and communication within the sector. The likes of L&G, AXA and Goldman Sachs are growing their presence in the market. But how has this sector been affected by the global pandemic we are all experiencing?

Property transactions in the retirement community sector

Contrary to institutional care settings, where the spread of infections is more prevalent,  prospective residents are looking at retirement communities as safe environments – especially given the current lockdown – offering the ability to self-isolate in their own homes whilst having access to an infrastructure of support, supervision and social interaction which is not available or paused in their family homes.

Retirement developments with available units have seen residents with reserved units eager to complete and move in, even during enforced lockdown. There have also been a number of new reservations after lockdown began, with pricing premiums unaffected.

Whilst move-ins are currently restricted and sales efforts limited, it is anticipated that the retirement sector will fare especially well once some normality returns, and even more so if stricter restrictions remain for residents over a certain age.

UK residential property market transaction recovery

The health of the residential property market has a direct impact on the level of demand for retirement communities. One of the key triggers for residents moving into retirement communities is a feeling that they no longer require a large 4 or 5 bedroom house, and the maintenance that goes with it. The move to a retirement community therefore is typically financed by the sale of a resident’s main home.

There is consensus among real estate advisors that the pandemic will see a marked reduction in transactions with a short-term fall in values followed by a recovery. The residential market is expected to follow a V-shaped recovery, in line with the expectations for the overall economy, as the underlying demand and supply imbalance remains.

CBRE and Knight Frank both expect a sharp fall in transaction volume to be followed by a sharp uptick in 2021. The volume of residential transactions and sales prices increased following the UK General Election and this is expected to continue once the markets stabilise, with pricing under upwards pressure given the lower rate of new homes completions expected.

Knight Frank estimates both number of transactions and sales prices in the UK, and more acutely in London, to strongly rebound to pre-pandemic levels by 2021.

Knight Frank residential price growth projections

Knight Frank residential price growth projections graph

Knight Frank transactions growth projections

Knight Frank transactions growth projections

As the volume of available retirement community units is significantly less than the market appetite, it is anticipated that irrespective of deflated residential property prices, the demand for retirement communities should remain strong.

Road to recovery for construction

As of the date of this report, the UK Government remains committed to maintaining construction activity during the pandemic; however, activity has been impacted in relation to labour (self-isolation and maintaining safe working practices) and the availability of materials (due to lower production rates and distribution problems), both of which will put pressure on the survival of smaller or highly indebted businesses.

It is anticipated that the construction industry will not follow a V-shape recovery, but rather experience a gradual improvement as projects re-commence and labour and material supply returns to normal. Labour (60% of the construction cost base) is heavily flexible and overall cost is expected to reduce as a lower number of projects come forward. Materials (40% of cost base) will experience an upward pressure as supplies become depleted and manufacturing takes time to fulfil the backlog of orders.

Overall, a number of construction consultants anticipate that there could be an overall cost reduction in construction in the short to mid-term, although unlikely as deep as the one experienced following the 2008/2009  Global Financial Crisis (20-25%).

Debt lending and COVID clauses

The debt markets have paused and are suspending deals but have not reneged on existing commitments and have expressed an eagerness to return to the market once markets settle. Valuations now include market uncertainty related caveat clauses, which are further limiting lending activity. Homebuilders have maxed out available drawdowns under their revolving facilities and lines of credit.

Lenders appreciate the current downturn is created by a pandemic rather than by a financial meltdown, and there is significant capital needing to be invested. It is anticipated that once the markets restart, lenders will initially reduce their risk appetite compared to their pre-Covid parameters, potentially leading to reduction in loan to cost (LTC) and loan to value (LTV) and increase in margins.

In the meantime, Homes England have expressed intent on increasing their lending activity on very competitive terms. This may be attractive for the retirement sector.

Planning will unlock the market

Whilst in the short term some delays are expected in the planning process due to the disruption created by the lockdown, it is anticipated that planners will be much more focused on enabling developments, which may both increase massing potential and planning resolution times.

We also anticipate lower affordable housing and other S106 requirements, which should benefit retirement developments in front of planners, as it levels the field with standard residential developers.

Octopus is an active investor in the retirement community sector. If you would like to explore the market more, understand the drivers and what it could bring to your portfolio, then get in touch. We’d love to talk to you about partnering to create social impact for the older generation.