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Which part of the housing sector has the greatest growth potential?

You might be tempted to say build-to-rent. According to research by real estate consultant JLL, there are 4.5 million households in the private rented sector who may be ripe for targeting with build-to-rent products 鈥� and yet only 89,000 units have been built to date.

Or you might think that purpose-built student housing is where it is at. At any one time, says JLL, there are two million first-year and international students who need housing, but only 684,000 purpose-built units have been delivered.

These opportunities pale into insignificance, however, compared with the potential for growth in the later living sector. There are 5.4 million people over the age of 75 in the UK, but to date a measly 89,600 purpose-built later living units have been built.

鈥淭he potential this market has in terms of the numbers that can be built is vast compared to the current pipeline,鈥� says Anthony Oldfield, director of healthcare capital markets at JLL, who talked about the figures to the Associated Retirement Community Operators annual conference this month.

And the gap between supply and potential demand looks set to get even bigger over the next few years as the population ages and the baby boomer generation enters this age bracket.

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To make matters worse, under-occupation of larger homes has become more prevalent. According to the English Housing Survey, 38% of households in England were under-occupied at the end of 2019/20, up from 31.2% in 1996.

The number of households under-occupied has increased by 50% from 6.2 million to 9.1 million during this time. A chunk of these extra three million homes, it is argued, could be freed up to help house families and ease the pressure, especially if the government is struggling to hit its 300,000 homes-a-year target.

There are signs that policy makers are getting concerned about this too. When housing minister Chris Pincher appeared in front of a House of Lords committee last month, media coverage focused extensively on plans to 鈥渆ncourage downsizing鈥� to free up existing homes.

But Pincher also said that he wants to encourage the growth of the later living sector, and to identify barriers to the development of later living schemes. 

鈥淚t鈥檚 something I鈥檓 particularly interested to do,鈥� he said. 鈥淲e鈥檝e been in discussion with the Department of Health and Social Care about that. I鈥檝e spoken to the new secretary of state Michael Gove about it as well.

鈥淪o it鈥檚 something I hope that we can advance still further over the next few months because I think it is an area that we do need to focus on for good economic reasons, good social welfare reasons and good green reasons.鈥�

Pincher is probably well aware also that the UK is well behind some other developed countries in terms of later living. According to a report by construction consultancy Cast, published earlier this year, just 1% of over 65s in the UK live in some kind of retirement housing, compared with 13% in Australia and 17% in the US.

So the demand and scale of the later living opportunity is growing and ministers seem to be keen to exploit it, but what are these 鈥渂arriers鈥� that appear to be preventing investment in this crucial sector?

The planning barrier

Perhaps the most obvious and talked-about difficulty in getting later living schemes is uncertainty in the planning system.

Specialist housing for older people can come in many different forms and combinations, from age-restricted general market housing, which has shared amenities but no support or care, to sheltered housing schemes with communal facilities and some support, to purpose-built extra care, or housing-with-care schemes right through to traditional residential care homes.

The problem is that there are only two planning use classes and there is inconsistency and confusion among some local authorities about which schemes fall into which class (see box, Which planning use class, right).

Councils can designate a scheme as a C2 planning class, which applies to residential care homes and institutions, or they can designate it a C3, which applies to a dwelling house 鈥� a flat or a house where up to six people live as part of a household and receive care or support. In the case of some extra care schemes, they may be individual units, which suggests a C3 but may also have a comprehensive care package that is more akin to a C2.

So why does this matter?

Well, for starters, C3 schemes, unlike C2, can be eligible for affordable housing planning contributions or other developer contributions through the community infrastructure levy.

鈥淪ome of the London boroughs are saying that they want affordable housing as part of these integrated retirement community schemes. Maybe we need to provide affordable housing, but it does quite often mean these schemes are uncompetitive compared to residential because they have to provide much more amenity space in the scheme,鈥� says JLL鈥檚 Oldfield.

He adds that, as a crude example, if you are building a 100,000ft虏  later living development, you might only be able to sell 65-75,000ft虏 of living space, whereas with a general residential scheme it might be more like 80-85,000ft虏 . Oldfield suggests not paying planning contributions is a way that this playing field can be levelled out.

For John Sneddon, managing director at consultancy Tetlow King, the real barrier is not so much the extra planning contribution spend but the inconsistency shown from one council to the next in their decisions of how the use classes are applied. This, he argues, can make it difficult for investors to come in and invest in portfolios across borough boundaries.

鈥淭he problem is I can go to one council area, and they might have a relatively liberal attitude to C2 extra care, and include within it all different types of supported housing, but then the neighbouring authority might have a very strong and difficult view of what is or is not a C2 use 鈥� and that creates uncertainty, delays and use of time,鈥� says Sneddon.

鈥淚f an investor comes along from a major investment company, a bank or fund of some kind and they say, 鈥楥an you get me permission for an extra care village with many assisted living units?鈥�, then we all have to go and find out what the individual authority鈥檚 view is, and that is before they can even think about putting their money in.鈥�

Confusion over need

Perhaps a more important question is whether this confusion over use classes is part of a wider problem that makes it difficult for local authorities to adequately assess the need for later living in their localities. One example of this difficulty can be found in a planning inspector decision from earlier this month.

The inspector overturned a decision by Sevenoaks council to reject plans to demolish and replace a golf clubhouse and hotel and replace it with a 100-unit care retirement community in Edenbridge. The crux came down to whether the loss of green belt land was outweighed by other matters, such as the contribution of the scheme towards meeting the council鈥檚 local housing need.

The decision notice goes into much arcane detail about whether the scheme should be counted in bedspaces or residential units and the extent to which C2 or C3 needs in the borough are being met. It said the council鈥檚 strategic housing market assessment (SHMA) 鈥� a document that identifies and forecasts future housing need in an area 鈥� treats extra care housing as C3 but the 鈥渃ouncil has calculated the delivery of extra care housing as falling within class C2鈥�.

The inspector, in a statement brimming with exasperation, said: 鈥淒ue to differences in methodologies and assumptions, and recognising that the SHMA is now some years old, it is not possible to reach a definitive position on overall need.鈥�

The inspector ultimately approved the scheme, but it is clear that there was huge difficulty in working out what the SHMA was saying when it came to the amount of extra care schemes needed to meet demand.

鈥淭here should be far greater clarity in development plans and evidence documents to take account of the projected need for this type of accommodation.鈥�

鈥淭he SHMAs are not sophisticated enough to break down the figures and it can be difficult to tell what they are actually saying when it comes to extra care housing need,鈥� says Sneddon.

鈥淭here should be far greater clarity in development plans and evidence documents to take account of the projected need for this type of accommodation.鈥�

The government appears to recognise the problem. In 2019 it updated planning policy guidance to try to ensure greater clarity. The guidance says that, when determining whether later living housing falls into C2 or C3, 鈥渃onsideration could, for example, be given to the level of care and scale of communal facilities provided鈥�.

While this may help councils in making their decisions, it does little to ensure consistency across borough boundaries and was described as 鈥渕ost unhelpful鈥� by Sneddon.

Oldfield suggests that it may be time for a new use class specifically for extra care and other types of integrated retirement accommodation, along with a target for councils to aim at with, say, 10% of new housing earmarked for specialist older people鈥檚 needs.

While clearer planning rules and targets may focus minds, Charles Taylor, director of new business at care home operator Anchor, suggests a bigger barrier is simply a lack of understanding at local authority level about the full range of older people鈥檚 housing need.

Local authorities鈥� role

He also questions, planning aside, whether there is enough drive in local authorities to try to ensure greater provision of later living housing, although in part he puts this down to a lack of council resourcing.

Taylor says: 鈥淚t probably comes down to somebody, maybe councillors, saying, 鈥榃e鈥檝e got to do more鈥�, and the director of social care or director of housing saying, 鈥榃e should be doing that鈥�.

鈥淚t鈥檚 not a criticism of councils 鈥� they are under a lot of pressure, their budgets have been restricted and they鈥檝e got competing demands, And they鈥檝e got councillors and planning committee members who may not necessarily be in favour of much development.鈥� 

Taylor says that leading councillors also have the wider housing crisis to contend with, although he says the activities of specialist housing developers such as Anchor, which manages 48,000 homes and 114 care homes, are playing a crucial role in tackling this issue too.

鈥淭here should be far greater clarity in development plans and evidence documents to take account of the projected need for this type of accommodation,鈥� says Taylor.

He adds: 鈥淲e think that what we can do is be part of that solution to the housing crisis, because often, when we build a bungalow or house for an older person, it frees up a family home.鈥�

He suggests a wider distribution of this message could help the drive for later living housing investment and opportunities at a local authority level. He also cites figures from the thinktank Demos showing that specialist housing for older people saves the NHS 拢486m a year in reduced demand for services.

What older people want

Another indirect barrier affecting councils鈥� prioritisation of later living 鈥� and indirectly affecting investment opportunities as a result 鈥� could be some outdated views of what later living housing is like and what older people want.

Martin Jones, director at the global interdisciplinary design practice BDP, says: 鈥淧eople sometimes think older people are happy in their big properties in the suburbs, but the reality is people need to be closer to the community 鈥� Intergenerational living could help to rejuvenate the high street as well.鈥�

BDP recently carried out master planning and design work on the 1,000-home regeneration of the Sheerwater estate in Woking, Surrey.

This Canalside project, developed by Woking council鈥檚 developer arm Thameswey, features an assisted living facility at the centre of the development along with 鈥渁ge-friendly鈥� homes mixed in among the family properties.

Jones argues that a greater understanding of the benefits of this new approach, which can boost the local economy and reduce loneliness of older people, may also remove a barrier to greater later living activity. There is certainly a pressing need to tackle loneliness among older people in the UK. According to Cast one in 10 over 65s in the UK are 鈥渃hronically lonely all or most of the time鈥�.

Leasehold model

While planning issues, developer contributions and a lack of awareness of the model may be hindering development, there are also a couple of other hurdles to investment in the sector, says Oldfield. 

One of these concerns the preponderance of the leasehold model in specialist housing for older people, which is seen by some as rigid and inflexible and potentially off-putting to investors.

Oldfield is of the opinion that the UK would be better off adopting the system in use in New Zealand and several other countries which requires new contracts to be issued when a unit is resold.

鈥淟ots of operators are saying that the long leasehold tenure doesn鈥檛 really work that well and isn鈥檛 really fit for purpose鈥� 

鈥淟ots of operators are saying that the long leasehold tenure doesn鈥檛 work that well and isn鈥檛 really fit for purpose because you鈥檙e agreeing a contract that lasts for 125 years or whatever 鈥� an extremely long time 鈥� you鈥檙e providing a lot of services and things can change,鈥� he says.

He also believes that the UK can learn from countries that have more regulation over sheltered housing, to provide clarity, protect customers and boost investor confidence and appetite.

鈥淚f you look at Israel or New Zealand, they have a sheltered housing act which tells the operator what they need to do and sets the standards and then, from an investor鈥檚 point of view, they know what they are doing is legal. They know how to protect customers and that they are not going to get any bad reputational issues. It de-risks the investment.鈥�

Oldfield also believes measures to enable greater deferment of management fees may also increase investor confidence.

Solutions

So there is no shortage of potential solutions to the barriers to greater investment in later living. These include bringing in a new extra care planning use class, new regulation, targets for older people鈥檚 housing and ways of selling the benefits to local politicians.

But what is the government likely to be looking at right now? A spokesperson for the Department for Levelling Up Housing and Communities (DLUHC) would not be drawn on the specific measures being discussed by Pincher and his colleagues in the Department of Health and Social Care (DHSC).

However, the government鈥檚 adult social care reform white paper earlier this month has been welcomed as a good start by many.

The proposals include 拢300m of funding over three years for councils to build more specialist accommodation and 鈥渋ntegrate housing plans into their health and care鈥� although it is not clear yet exactly how this plan will operate.

The government also intends that 10% of the 180,000 homes it is aiming to deliver through the 拢11.5bn affordable housing programme should be 鈥渟pecialist housing鈥�, although this category also includes supported housing for people of all ages with particular housing needs.

Despite this lack of clarity there is real optimism among many in the later living sector that the problem might finally be being addressed within the corridors of Whitehall.

Taylor is hopeful of an overarching strategy coming out of DHLUC, DHSC and the Treasury on health and social care. 鈥淚t sounds like that鈥檚 where we are heading, and that鈥檚 a real positive, isn鈥檛 it?鈥�, he says.