Response to MHCLG's announcement on leasehold reform
7th January 2021
McCarthy Stone ('the Group'), the UK's leading developer and manager of retirement communities, notes today's announcement by the Ministry of Housing, Communities and Local Government (MHCLG) regarding reforms to leasehold properties.
The Group is disappointed to see that as part of these reforms MHCLG has reversed its previously announced exemption for the retirement housing industry from the zero rating of ground rents.
Since December 2017, McCarthy Stone and other retirement operators have engaged extensively with Government on this issue. The Group has made every effort to highlight the way the sector uses capitalised ground rent income fairly and for a dedicated purpose: to help fund the construction costs of its highly valued shared areas.
The provision of these unique communal areas is critical to the building of happy and healthy retirement communities and cost the Group between £1-2 million to build per development. These areas need to be appropriately funded in order to ensure the continued financial viability of sites and that sale prices remain reasonable. The Group has also shown the impact that zero rating ground rents will have on the future supply of this type of specialist accommodation.
As part of the proposed exemption, McCarthy Stone had agreed with the Government's proposal to offer future customers of retirement properties a clear choice between an economic ground rent or a higher purchase price that reflected the cost of constructing the communal areas. This choice would have given consumers full control over how they paid for their purchase.
John Tonkiss, Chief Executive of McCarthy Stone, commented: "Following three years of engagement with Government on this matter, today's news is disappointing. The retirement community industry has been caught in the crossfire of leasehold reform which was intended to address bad practices elsewhere in the housebuilding industry.
"Our ground rents have always been charged on fair, transparent and stable terms and fixed for 15 years. They have been used for the dedicated purpose of helping fund the construction of shared spaces within our developments which provide a clear and substantial benefit to all our homeowners.
"As has been demonstrated during the Covid-19 pandemic and the very low rates of infection in our communities, retirement living is much more than bricks and mortar; it is about the lifestyle, care, support and sense of community it provides. Our homeowners live happier and healthier lives supported by dedicated on site staff who work tirelessly to help and protect them.
"While we are supportive of Government efforts to protect the elderly, this decision will likely have the opposite effect. It could lead to higher purchase prices and adversely affect the supply of specialist retirement accommodation at a time when it is needed more than ever."
Background on ground rents
Ground rents charged by McCarthy Stone are on fair and stable terms, averaging £466 per annum, depending on the size of apartment and location, and are fixed for 15-year periods, with increases linked to inflation, and accumulated yearly. All new leases are also for 999 years. The Group remains as the landlord on all new developments, retaining full management and operational responsibilities to ensure customers are fully protected.
This capitalised ground rent income helps pay for the construction of the extensive communal areas provided within McCarthy Stone developments, which typically account for c. 30% of total floorspace and cost between £1-2 million per development. These areas are unique and integral to retirement communities and include communal lounges, restaurants, mobility scooter rooms, well-being suites, guest suites and staff accommodation.
c.90% of the private retirement housing sector uses capitalised ground rents to help pay for the construction costs of its shared spaces. While some others do not use ground rents, they use exit fees to recover part of their capital costs which can total up to 30% of the resale price and can mean consumers pay more overall.
Download McCarthy Stone's briefing note on its ground rent position here.
MHCLG's original leasehold consultation paper, October 2018
The following are excerpts from MHCLG's original leasehold consultation (pages 25-26) following engagement with McCarthy Stone and other retirement operators. The full paper is available online here.
"Unlike most parts of the leasehold market where the leaseholders do not gain any tangible benefit from paying ground rent, it is evident that they do in the retirement sector." (section 3.20)
"The Government wants to see a thriving specialist housing sector for older people, which provides them with choice and meets their individual and often complex needs. To ensure older people continue to have access to good quality home ownership with appropriate services and facilities which meet their lifestyle choice and needs, special arrangements need to be put in place for the retirement sector to reflect its unique character in the home ownership market." (section 3.29)
"There is a risk, therefore, that by reducing future ground rents, there could be a knock-on impact on the affordability of properties available to older people, and the availability of sites which require capitalised ground rents to be financially viable." (section 3.28)
For more information, please contact:
Powerscourt, 020 7250 1446 / [email protected]