ARE SECONDHAND RETIREMENT FLATS UNSALEABLE?

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ARE SECONDHAND RETIREMENT FLATS UNSALEABLE?

“Tens of thousands of families have seen their inheritances decimated after elderly relatives paid inflated prices for new retirement homes that have collapsed in value, an investigation by The Times have found.  Prices of retirement flats in developments by some of Britain’s biggest housebuilders have plummeted by up to 90% in the face of costly annual management charges and ground rents”.

Sometimes you read things that are so incredible that you cannot believe they can possibly be true.  But if the massive investigative power of the Murdoch empire (or at least The Times bit of it) has been delayed on an investigation, I hesitate to cast doubt on the results of their investigation.

Traditionally, as a rough rule of thumb, the cost of a house has been roughly 30% land, 30% construction, 30% development profit and 10% other expenditure.  Accordingly, a 90% reduction in value not only means that the building has become worthless, but in addition that the value of the land itself must have fallen by two-thirds.  That seems so unlikely that the claim of a 90% fall is wholly incredible.  Even if a greedy developer added 100%, the value of the land would have had to have halved.  And people are not wholly stupid.  If a developer of retirement flats tried to sell them at twice the market price of a similar flat in the same area, it is hard to believe that he would have found many purchasers.

Of course, I am not suggesting that in some parts of the country the value of retirement homes has not fallen.  Property prices can fluctuate.  But if they had fallen anything like as much as The Times claims, it is puzzling that, prior to The Times investigation, no-one seems to have noticed such an incredible phenomenon. 

Of course, if “management charges and ground rents” turn out to be much higher than a purchaser expected, the value could well fall to some extent.  The price that someone is prepared to pay for a serviced flat will obviously take account of the amount he will be required to spend each year in service charges and possibly also ground rent (although this is not normally a significant annual figure).  But not by 90%.

The largest builder of retirement homes is probably McCarthy & Stone.  A quick look on their website shows that they tell purchasers how much to expect to have to pay in service charges – and ground rent except where a property is purchased off-plan so the ground rent has probably not yet been fixed.  For example, I can buy a one-bedroom flat at a property in Trowbridge for £175,000 or a two-bedroom flat for £270,000.  They tell me that I can expect to pay a service charge of £39.73 per week for 1 bedroom and £59.66 for 2 bedrooms.  Also, I can expect to pay ground rent of £8.17 per week for 1 bedroom and £9.52 for 2 bedrooms.  That works out (for the two-bedroom flat) as an annual £3,102 service charge and £495 ground rent.

That certainly looks a lot for ground rent.  The website does not state the length of the lease, but it is probably either 99 or 125 years.  £495 a year for 99 years is getting on for £50,000, so a prudent purchaser would take that into account in determining how much he is prepared to pay.  But a prudent purchaser 10 years ago (or his solicitor) would have done so too, and it is unlikely that the ground rent increases every year, or even every 10 years.  It may well however increase at regular intervals (I would expect 15 or 25 years) but again the figures would almost certainly be stated in the lease, so could readily be reflected in the price someone is prepared to pay.

Although the ground rent looks high, the service charge seems modest.  I get for my £3,102 an intruder alarm, a house manager, access to a communal lounge, a camera entry system, 24/7 call system, landscaped gardens and, if I want it, the ability to rent a guest suite, the income from which reduces the service charge.  All those facilities need to be maintained and many are useless unless there are staff on hand to react to alarms, keep the lounge clean, etc.  Commonsense says that the service charge in a retirement development is likely to be greater than in a standard flat, because the main benefit of a retirement home is that there are facilities available to meet the enhanced needs of elderly residents.  Service charges inevitably increase each year in any serviced flat.  A person who chooses to live in such a flat surely cannot believe that the services are provided for free!

The Times tells us that they looked at nearly 500 retirement flats in 15 developments built between 2001 and 2015 and that “almost 80% of the homes sold since their first purchase had fallen in value with an average loss of £38,846.  15 developments is a very small sample but, leaving that aside, it hardly reflects prices “plummeting by up to 90%”.  If a flat has suffered a 90% loss of £38,846, it would have cost only around £43,000.  Even in 2001, it would have been very difficult to find a newly built flat at anything like such a low figure.

The Times did give one sad example.  A lady had bought a flat in a development at (I assume) Risingholm Court, East Sussex in 2009 for £197,000.  She died in 2015.  The executors put the flat on the market at £105,000, but it generated no interest.  They reduced the price to £65,000.  It still did not sell and the estate did not have the funds to pay the service charge (and presumably none of the 12 beneficiaries was willing or able to fund it to do so).  It therefore was forced to sell to Home to Home Exchange Ltd (who generate profits by buying a property for which they need a quick sale and marketing it in a more leisurely manner) which was prepared to pay them only £18,000 plus a percentage of any profit on resale.  Home to Home sold the flat a year later for £53,500.  The total amount received by the estate was £25,875.  The Times describe this as “Beneficiaries lost nearly £200,000, but the flat actually sold for £53,500, so the fall in value was actually only around £144,000.  The extra £28,000 was nothing to do with the fall in value.  It was attributed to the families’ unwillingness to wait until the market improved.  Nevertheless, a loss of £144,000 on a £197,000 property is shocking.

The difficulty is that no-one knows why such a large loss was suffered.  It seems unlikely that it had much to do with increases in the service charge.  One possibility is that there is less demand.  Risingholm Court consists of 47 flats.  It is in the centre of Heathfield but not many of the flats seem to change hands.  There are currently two one-bedroom flats for sale, one at £87,000 and the other at £20,000.  The reason for the huge disparity is not readily apparent.  Most people looking to move to a retirement home are in their 60s or early 70s.  That means that 10 years later most of the residents are likely to be in their 70s or 80s.  It seems likely that a 60-year old purchaser would rather choose a new development where most of the neighbours are likely to be his own age.  That may be the real problem with retirement homes.  That moving into such a home is held out as joining a community, but no-one is keen to be a newcomer in an established community.  If so, the price of peace and security in one’s old age may well be a large part of the cost of the house as retirement flats are unlikely ever to be readily resaleable. 

ROBERT MAAS