Response to MHCLG’s consultation on ground rents

22 October 2018

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 its latest consultation on leasehold reform and capping ground rents for future new-build housing.

The Group is pleased that MHCLG is proposing to allow an exemption for the retirement community sector to continue to charge ground rents after they are capped elsewhere. The proposal recognises the unique way the sector uses ground rents compared to the mainstream housebuilding industry. The retirement sector capitalises and sells the ground rent income to recover much of the construction costs of the significant shared and communal areas within its developments that are integral to the retirement living lifestyle.

Charging ground rents in retirement developments therefore enables average selling prices to be maintained in line with the wider property market, ensuring they are kept affordable for customers. This is essential to ensuring the Government meets the critical need for specialist elderly accommodation caused by the UK’s rapidly ageing population.

However, the Group notes that this remains a proposal and is subject to further consultation and passage through Parliament. It will review the detail of the consultation paper and respond to the government in due course. The Group will provide a further update on the impact of the consultation paper on its recently announced new strategy and on its forecasts at its full year results announcement on 13 November 2018.

John Tonkiss, Chief Executive Officer for McCarthy Stone, said:

"Today’s announcement is a positive step for the retirement community sector and, more importantly, our customers. However, we recognise that these are still proposals. We will continue to work closely with Government and will respond to the consultation paper in due course.”

McCarthy Stone remains committed to very high levels of transparency on all costs and services for its customers. The Group’s focus on its customers is one reason why it is the only developer to have achieved a Five Star rating for customer satisfaction for the past 13 consecutive years, which is every year this survey has been run. In 2017, 93.5% of its customers would recommend the business.

Ground rents charged by McCarthy Stone are on fair and stable terms, averaging £466 per annum and are fixed for 15-year periods, with increases linked to inflation and accumulated yearly. The Group remains as the landlord on all its managed developments, retaining full operational responsibilities to ensure customers are fully supported and protected.

Capitalised ground rent income helps pay for the construction of the extensive communal areas provided within McCarthy Stone’s developments, which typically account for c. 30% of total floor space 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, wellbeing suites, guest suites and staff accommodation.

Within the Group’s representations to Government, it has been made clear that the loss of ground rent income would make the sector less competitive in the land market, resulting in fewer properties being built. In response to the uncertainty resulting from the Government’s initial announcement on ground rents, the Group exercised additional caution throughout FY18, exchanging on just 54 new sites compared to 75 in FY17.

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 large exit fees to recover part of their capital costs. These exit fees can total up to 30% of the resale price and can mean consumers pay much more overall.

Download McCarthy Stone’s briefing note on its ground rent position here.