Brilliant interview with outgoing McCarthy and Stone CEO Clive Fenton
‘Problem’ that retirement housebuilders have not been spoonfed profits, like others through Help To Buy
Anyway, aren’t retirement housebuilders insignificant given the numbers of pensioners who are downsizing today, asks BBC?
Radio 4’s MoneyBox quizzed retirement housebuilders McCarthy and Stone and Churchill Retirement Living on Saturday about their efforts to escape the government crackdown on ground rents.
The programme was an unvarnished interrogation of the volume retirement housing market, involving two companies that have contributed the most to the relatively small scale of the sector in the UK.
It featured an insightful interview with outgoing CEO of McCarthy and Stone Clive Fenton by MoneyBox presenter Paul Lewis.
The programme began with an interview with “Rosemary”, from Chichester, who bought her retirement flat new from Churchill Retirement Living for £236,000 and has seen ground rents rise from £550 to £655 – while at the same time its value has fallen to £150,000, she claims (see Land Registry data on re-sale prices at St Richard’s Lodge, Chichester, below).
Rosemary told MoneyBox reporter Tony Bonsignore that after she was widowed, and had had a breakdown, she moved into the one bedroom apartment, acknowledging that the community there had helped her get over her husband’s death.
But she was furious about ground rents.
“We pay £655 a year and we get absolutely nothing in it. Nothing at all,” she said.
She admits knowing that the property was leasehold, but had no idea that the ground rent would go up so much.
Rosemary also deplored the flat’s loss in value. “It is an incredible loss to take. One of the reasons for the loss is the incredibly high ground rents.
“As you go on, the value of the property becomes less and less and you are giving more and more to the companies that are demanding it.”
MoneyBox reported that McCarthy and Stone and Churchill Retirement Living are lobbying hard for an exemption from the ground rent ban.
Sebastian O’Kelly, of www.BetterRetirementHousing.com, told the programme:
“How can they possibly have an exemption from the ground rent ban? If these properties were sold to buyers who needed mortgages in many cases they would be ineligible as the ground rents are higher than 0.1% of the sales price.
“The second point is, what are ground rents for? If they are for no defined services and are wrong in the wider housing market how can the retirement housing sector claim an exemption?
“Ground rents are either for a service or they are not, and if not – which they aren’t – then they should go.”
What would be effect on the retirement housing market of a ground rent ban, asked Mr Bonsignore
“The interesting new companies that are coming into this sector don’t believe in this model. The problem is with the volume housebuilders, who have depended on ground rents in the past. They say that their business model does not work if ground rents are taken out. Our view is: change your model.”
Presenter Paul Lewis then subjected outgoing McCarthy and Stone CEO Clive Fenton to tough questioning.
Mr Fenton said:
“For us in the retirement industry ground rents are very important because we provide a significant amount of shared services within the developments which have to be paid for. 30 per cent of the space in our developments is non-saleable.
“Things like lounges, kitchens, dining rooms, house managers’ offices, mobility scooter stores. It is roughly double what you would expect in normal apartments.
“So we use the ground income to pay for those and it stops us having to put the prices up of our apartments.”
Mr Fenton admitted that the company sold on the freeholds.
“We are developers not investors. Our responsibility is to develop more homes for people. If that asset is on our balance sheet clearly it is cash tied up that we can’t use.
“So, we sell that to an institutional investor.”
In fact, McCarthy and Stone in the past sold its ground rent portfolio to a private equity investor, Vincent Tchenguiz through his so-called Tchenguiz Family Trust in the British Virgin Islands.
In spite of assuring LKP that future freehold sales by McCarthy and Stone would be to pension funds and similar, the freehold to Wosley Court in Leicester was to Adriatic Land 4, whose beneficial ownership is hidden by nominee directors of the Sanne Group, based in Jersey.
We believe Adriatic Land to have significant private equity involvement, and it doubtless owns other McCarthy and Stone freeholds.
Ground rents are essential to McCarthy and Stone’s business model – Better Retirement Housing
but leaseholders are concerned it is selling freeholds to anonymous buyers … McCarthy and Stone complains about ‘right to reply’ to LKP / Better Retirement Housing articles McCarthy and Stone told The Times yesterday that there would be fewer of its form of retirement flats if the government reduces ground rents to a minimal …
Mr Fenton continued: “They use the income to fund their pension obligations and they provide us with the cash that we are able to reinvest back in buying more land and more developments.”
MoneyBox established that the freehold of an average 40-apartment site would sell for around £600,000, or £15,000 per apartment.
“When you think that the cost of providing the communal space in our developments is between £1 and £2 million this is part of the receipt that helps us fund that.”
Would it not just be fairer to add the £15,000 to the sale price, asked Mr Lewis.
“All the research that we have carried out shows that our customers would prefer to pay an annual ground rent at a relatively small level compared to the cost we would have to put onto an apartment. The £15,000 …”
“But isn’t that because your properties are sold above market price anyway?” asked Mr Lewis.
Mr Fenton replied: “There is a small premium [above local market prices], but not very much, frankly, in terms of the payment of this. This is just a small charge which goes on top and it is very transparent. We communicate it to our customers and they know exactly what they are paying.”
Mr Lewis pointed out that MoneyBox research last year showed that the average McCarthy and Stone flat sold for 17% less when it was sold second hand.
Mr Fenton replied: “We have been tracking the value of our properties sold over the last five years that we manage ourselves which we have been doing since 2010. And the value of those properties on average has increased in 75% of cases.”
[By selecting only the last five years of resale data, Mr Fenton avoids referencing the catastrophic falls in value of earlier McCarthy and Stone sites.]Mr Fenton was asked why the volume retirement housing should you be exempted by government from the ground rent ban.
“In the event that we are included in that ban we cannot pass that cost on to our customers. The only way we have is to reduce the amount we can pay for our land. If we reduce the amount we pay for our land, we will simply buy less land and produce less apartments for the market.”
Mr Lewis then said: “So, it is a blackmail of the government, really. If you make us bear this cost we will build less retirement housing?”
Mr Fenton replied: “It is honestly not blackmail. It is a sheer fact. You can see it already in our numbers. Our land acquisitions are down by one third since the announcement of the government on 21st December.”
MoneyBox then asked whether this loss would matter much: McCarthy and Stone only expects to build 2,100 units this year and there are one and half million retired people who want to downsize. “You are insignificant in the market,” said Mr Lewis.
Mr Fenton replied: “Well, we think there is something like 4.5 million in the UK who would consider downsizing …”
“But that makes you even more insignificant,” said Mr Lewis.
Mr Fenton replied: “There have only ever been 161,000 retirement homes ever produced for sale …”
Mr Lewis said: “So it is a broken model, isn’t it? People do not want it. They don’t want to pay ground rent. They don’t want to pay big service charges. And they don’t want to pay more than for an ordinary flat locally on the open market?”
Mr Fenton said: “We don’t think it is a broken model. The problem is that there has been no government support for our sector compared to the first-time buyer market. We have been working hard, us and all the other retirement housing builders, to try and increase our output. We were seeking to increase our homes to 3,000 homes per annum. Over time that would be a significant input into the market.
“And this is just making it significantly more difficult for us.
“Our ability to buy land will be reduced [if we are not exempted from the ground rent ban] and that will affect supply. And the corollary of that is that we will end up employing less people.”
Land Registry sales history of St Richard’s Lodge, Chichester, built by Churchill Retirement Living
Apartment 14, St Richard’s Lodge, Spitalfield Lane, Chichester, PO19 6SJ
2008-11-20 £223,950
44, St Richards Lodge
2012-04-20 £199,950
1, St. Richards Lodge
2014-04-16 £180,950
10, St. Richards Lodge
2016-06-09 £152,500
2011-11-22 £187,950
12, St. Richards Lodge
2011-05-27 £179,950
15, St. Richards Lodge
2011-07-29 £196,000
16, St. Richards Lodge
2012-05-04 £90,000
2010-02-26 £199,950
17, St. Richards Lodge
2016-01-19 £150,000
2011-07-06 £169,950
18, St. Richards Lodge
2014-01-23 £178,950
19, St. Richards Lodge
2014-05-23 £230,000
2, St. Richards Lodge
2012-05-31 £212,000
20, St. Richards Lodge
2017-07-19 £149,950
2009-05-15 £230,950
21, St. Richards Lodge
2017-03-24 £140,000
2009-08-14 £199,950
22, St. Richards Lodge
2011-11-28 £189,950
23, St. Richards Lodge
2015-09-25 £175,000
24, St. Richards Lodge
2014-10-09 £165,000
2009-11-06 £219,950
27, St. Richards Lodge
2017-03-16 £177,250
2010-05-28 £209,950
28, St. Richards Lodge
2011-04-28 £184,950
29, St. Richards Lodge
2017-02-20 £275,000
30, St. Richards Lodge
2016-08-16 £255,000
32, St. Richards Lodge
2015-03-27 £159,995
2011-10-27 £187,950
33, St. Richards Lodge
2016-03-18 £149,995
2011-05-20 £169,950
36, St. Richards Lodge
2012-02-15 £269,950
37, St. Richards Lodge
2016-03-17 £170,000
2009-02-05 £195,950
38, St. Richards Lodge
2015-04-29 £214,450
39, St. Richards Lodge
2011-12-08 £209,950
40, St. Richards Lodge
2011-04-15 £199,950
41, St. Richards Lodge
2011-08-31 £279,950
42, St. Richards Lodge
2013-10-14 £226,000
5, St. Richards Lodge
2010-05-18 £219,950
7, St. Richards Lodge
2011-09-27 £289,950
8, St. Richards Lodge
2017-10-12 £275,000
2014-10-24 £235,000
9, St. Richards Lodge
2011-11-30 £189,950
Michael Hollands
Will Clive Fenton be trying to make his case with the APPG group next month.
His argument will be torn to shreds.
My advice to M&S and Churchill would be to come clean and either scrap or considerably reduce ground rents now. Otherwise this will “snowball”, become a massive issue, and their reputations will take a huge dive.
In December 2016 I strongly advised Taylor Wimpey to properly sort out their Ground Rent problem. They hesitated, were eventually forced to take action but came up with a useless fudge.
Whereas they could have enhanced their reputation, by not acting properly and fairly, their reputation has taken an almighty plunge.
So wake up M&S and get it sorted now.
Michael Epstein
This will not be the first time the McCarthy & Stone business plan has gone awry?
Previously McCarthy & Stone developments were funded by debt to such an extent that at their nadir they ended up nearly £900,000,000 in debt (before being re-financed and effectively run by the banks)
The real issue McCarthy & Stone will face if ground rent charges a presently constituted is outlawed they lose a substantial income stream that not only serves to support their business model, but Crucially it serves to disguise the true cost implications of the McCarthy & Stone “lifestyle experience”
That Mr Fenton makes mention that 30% of the development is unsaleable. Didn’t stop Firstport flogging off the leaseholds of McCarthy & Stone development house manager’s flats did it?
Liz Wynne
1. Is Mr Fenton seriously trying to kid us that the communal areas represent 30% of the total area of each Development?
2.I notice he avoided saying that the continuing repair, maintenance and refurbishment of the communal areas is paid for by the residents out of the Service Charges.
3. He also implied that restaurants were a common feature in retirement developments. In fact they are not; they tend only to be in McCarthy & Stone Assisted Living blocks, and I have been told that they are partly subsidised by residents through the Service Charge.
Michael Epstein
Significant changes were made under Mr Fenton’s stewardship of McCarthy & Stone. However, those changes impose inherent future risks to the company and their residents.
That so much income is dependent on ground rent fees is a risk if those fees are challenged and as with “exit fees” have to be dropped.
Whilst trading successfully McCarthy & Stone have enhanced their performance figures by selling developments off plan (which they never used to do in the past)
This increases the number of current sales that can be booked on McCarthy & Stone accounts at the expense of future sales.
McCarthy & Stone have taken development management “In house”. Ostensibly this is to maintain good and consistent standards of management the reputation of. McCarthy & Stone was undoubtedly trashed by the Peverel/Firstport connection.
It has to be acknowledged that the purpose of taking management “in house” has largely been vindicated.
That said dangers lurk ahead. Suppose profits fall at McCarthy & Stone and McCarthy & Stone are put under pressure to increase income?
Though McCarthy & Stone present themselves as a cuddly friendly company whose sole goal is to look after the interests of the elderly, never forget that behind McCarthy & Stone are asset managers(ACMO, M&G, Canada Pension Plan,Royal London asset Management, Soros Fund Management, FIL Investment Advisers, The Vanguard Group, Franklyn Templeton Group , Aviva Investments, Goldman Sachs) whose purpose in life is to maximise returns on behalf of their investors.
How many potential McCarthy & Stone customers would buy into the McCarthy &Stone” lifestyle experience” if they used the name of one of their owners such as Goldman Sachs?
So if McCarthy & Stone do come under pressure (especially if they lose the ground rent income and sales fall) where do they find streams for increased income?
We do not have to speculate. We only have to look back in history to see what happened the last time McCarthy & Stone slid into financial pressure when connected with Peverel/FirstPort and the Tchenguiz Family Trust.
Service levels declined. Costs for those services rocketed. Bogus charges were introduced. Residents were systemically price fixed. Unnecessary work was carried out. Leases were “created” and borrowed against in circumstances that have yet to be explained.
The need to raise extra funds has been flagged up. The means to raise extra funds is in place. It may all prove to be too tempting for those that own McCarthy & Stone.
Michael Hollands
What a frightening prospect that is. If M&as cannot charge their £600 annual ground rent then there is a prospect of the business being sold off to someone like Tchenquiz or managed by a company like Peverel.
Maybe best to keep paying the £600pa.
It must be a constant worry to those elderly residents who understand the situation, but my experience is that many have not a clue about leasehold and accept the good and happy news that the Management Companies tell them.
After 10 years of banging my head against a brick wall, l am beginning to wonder whether it has been worth it, When all that time I could have been in the happy brigade.
Lynda Legget
After 10 years of banging my head against a brick wall, l am beginning to wonder whether it has been worth it, When all that time I could have been in the happy brigade.
How I agree with your comments above
Lynda Legget
In response to Liz Wynne
The communal areas are well and truly covered by the initial cost of the flats, then the upkeep
of these areas are covered as you say, by the residents, its a win win situation for Management.
We are manipulated on a daily basis, if I had my way, there would be no lodge manager, whose
duty is to serve Millstream and to form a clique of buddies that will support him/her, when opposition
arises.
Lynda
A huge ‘thank you’ to LKP for an outstanding service appreciated by so many