The role of ground rents in creating retirement communities
In December 2017, the Government announced that it was considering removing ground rents on all future new-build properties.
Since the announcement, companies building c.90% of owner-occupied retirement communities in England have requested an exemption from this change to recognise the fact that retirement communities do not use ground rents in the same way as mainstream housebuilders. We use them to help fund the construction costs of the large shared spaces that are integral to our developments. Without this additional income, we could not afford to provide these communal areas.
In October 2018, we were pleased that the Government proposed that the retirement communities sector would be granted an exemption to these changes. The information below explains why fair and stable ground rents are so important to our sector.
Our ground rent terms
- Typically between c.£400-£500 per year
- On fair and stable terms
- Fixed for 15 years, longer than the average stay of our residents
- Increases linked to inflation or two per cent per annum if higher, and compounded yearly
- We remain as the landlord with all management responsibilities
How ground rents help pay for the construction of shared areas in our retirement communities
our shared spaces include communal lounges, restaurants, mobility scooter rooms, well-being suites, guest suites and staff accommodation. These areas are essential to the lifestyle that retirement communities provide and are the equivalent of 3-8 otherwise sell-able apartments.
- Shared areas in retirement communities account for c.30% of total floorspace, much more than mainstream flats.
- £1 million – the cost of building shared areas in Retirement Living developments.
- £2 million – the cost of building shared areas in Extra Care developments (Retirement Living Plus)
We therefore use ground rents differently to mainstream housebuilders as they underpin the viability of retirement developments. Ground rents are not a windfall profit for us but an essential part of development viability as they help pay for the construction of these shared areas.
Retaining all management and landlord responsibilities
Our fair and stable ground rents provide a one-off contribution of c.£600,000 on average per development. This is because the right to receive the ground rent is sold to investors when a development opens. Importantly, while we sell the freehold to an investor, we retain the head lease in all managed developments, and therefore remain as the landlord.
- Accordingly, all management responsibilities stay with McCarthy & Stone.
- This means the freeholder has no contact with our residents and cannot change any of the terms of the lease. All they have is the right to receive the ground rent.
83% of over 65s would rather pay a ground rent of c.£500 a year to a higher purchase price of c.£15-£18,000(Populus survey, 2018)
What would happen without ground rents
Removing ground rent income from retirement communities will hit the sector hard. The proposed reforms in December 2017 had an immediate impact on our business and reduced our ability to compete for new land. Without this income stream, we will not be able to buy as many sites as we have been at a time when the sector should be expanding quickly to meet increasing demand. This will limit the growth plans of the industry. In FY18, we exchanged on 54 new sites, compared to 75 in FY17 due to this uncertainty.
We believe there is a strong case for retirement housing to be exempt from the proposed reforms and to continue to charge fair and stable ground rents. We are engaged in discussions with Government, which is reviewing the case we have put to them.
We believe there is a strong case for retirement communities to be exempt from the proposed reforms and to continue to charge fair and stable ground rents. We remain engaged in discussions with Government and will respond in full to their latest consultation.
Offering consumers a choice
As part of the exemption, the Government is proposing to provide older people with a choice of how to pay for their retirement property. Purchasers will be provided with a choice of either paying a higher sale price at a ground rent of £10 per annum or a lower sale price with a specified economic ground rent. This will be subject to various controls, including full explanations, no charges, independent legal advice and a complaint or redress mechanism. We are happy to agree to this proposal as it puts the consumer in full control of how they wish to pay. . The Government’s plans, including providing different payment options, remain proposals and are subject to the ongoing legislative process. No changes are therefore planned to our ground rent terms until this process is concluded.
The alternatives to ground rents are not in the residents' interests
We would need to raise prices by c.£15-£18,000 per apartment to cover the costs of building the communal areas without ground rents. This would severely impact affordability for our customers and result in the cost of our products being out of kilter with other properties, thereby significantly reducing our market. Our customers would rather pay a small yearly charge (c.£400-£500) in ground rent, rather than a much larger cash payment up front.