Unlocking affordability: The impact of flexible fee structures in senior living

Opportunity for growth

The UK’s over 65 population is set to grow by 34% by 2050, yet much of the current housing stock is inadequately equipped to meet older adults’ evolving needs. Integrated Retirement Communities (IRCs) offer a promising solution, combining age-appropriate design with care on hand to support independent living and ease NHS pressures. Despite strong demand, resident take-up is inextricably linked to the wider slowdown in home sales, highlighting the need for innovative strategies to increase occupancy.

Consumer confidence surrounding affordability

One of the key challenges to sales uptake involves senior housing being often perceived as solely a needs-based solution, compounded by the deep emotional attachment individuals have to their own homes. Additionally, concerns around ongoing costs can impact consumer confidence.

According to Experian, 74% of the population aged 61 and over in the UK own their own home, indicating a substantial amount of housing equity that could be leveraged to facilitate ‘right-sizing’ into IRCs. However, the income and wealth of pensioners vary, and existing IRC stock does not accommodate all income brackets. Most older people do not qualify for sheltered housing and simultaneously find themselves lacking the confidence to sustain the ongoing fees associated with some IRC models.

In CBRE’s 2023 Senior Living Survey*, individuals aged 55 and over were most concerned about the annual costs (54%) and upfront costs (53%) associated with senior living schemes. The Older People’s Housing Taskforce report that senior citizens express concerns in managing rising service charges and unforeseen expenses within an IRC, particularly because pension incomes are typically fixed. With the median pensioner income at £23,348 per annum before housing costs (BHC) and largely unchanged over the past decade, unpredictable or opaque annual charges can make budgeting difficult. To accelerate resident take-up beyond current levels, payment models need to adapt in order to widen the affordability threshold to a larger market and broaden customer profile.

*Findings are available upon request

Figure 1: Pensioners’ income per annum

Current IRC sales model

For the sales model, most IRC residents purchase through the sale of their previous home, leaving them responsible for paying utilities, council tax, and a service charge or management fee. Annual charges typically rise yearly with inflation and operational costs. Additionally, most residents incur an event fee, sometimes known as a deferred management fee (DMF), which pertains to maintenance and operational expenses and is deducted from the property’s value upon resale, ranging between 1-30% of the property’s value.

Annual charges generally cover property maintenance, communal area upkeep, security, recreational activities, 24-hour site staff, and optional amenities like an on-site restaurant or beauty salon. While these offerings enhance quality of life, individuals must feel confident in their ability to meet the associated financial commitments.

An alternative payment model

To appeal to a wider market, some operators are introducing more flexible fee structures including lower fixed annual charges in exchange for higher DMFs, shifting greater cost and operational risk to the operator and, crucially, moving costs for residents to the end of residency.

For example, Audley Villages offer customisable payment plans, including an option to pay a service charge at around half the standard rate, paired with a higher annual DMF and cap.

Similarly, Riverstone Living has introduced a three-tiered payment model: one; a standard, annually increasing fee and lower DMF, two; a fixed fee and higher DMF, and three; a fixed fee, 50% lower than the standard rate, carrying the highest DMF.

Retirement Villages Group (RVG) has introduced ‘Thrive Living’, which features lower annual charges offset by a higher DMF upon resale. Residents pay an average of £120 per week, compared to £212 under the traditional model. In addition, annual charges end two months after a resident leaves, after which RVG takes responsibility for refurbishing and reselling the property, guaranteeing the original purchase price is maintained (minus the deferred fee). The guaranteed repayment option alleviates the burden on families to manage the resale, while RVG manage the refurbishment.

The combination of a fixed annual charge alongside more manageable ongoing costs works to enhance consumer confidence and increase appeal to a wider market. Therefore, operators willing to take on greater financial risk may gain a competitive edge – provided their offer is backed by a strong service package with quality amenities and access to care.

Has take-up increased?

We have spoken with several operators who have moved to a lower annual fee / higher DMF, all of whom have reported a noticeable increase in interest in new developments which include a two or three-tiered payment structures. Notably, within a new North London development, all pre-sales to date have been secured under the lowest management fee option.

The shift towards more flexible fee structures is already influencing customer choices, as Nick Sanderson, CEO of Audley Group, shares:

“Since Audley introduced the option of deferring a proportion of costs to the point of future sale, we have seen a continual rise across our villages of customers choosing this option. At our Mayfield development in Watford, we have seen over three quarters of our homeowners choosing to lower their annual charge in exchange for a higher deferred cost. Our homeowners want to enjoy their retirement now and lower annual charges is helping many to do exactly that.” 

This trend underscores a clear preference among prospective residents for lower manageable and predictable ongoing annual costs, with higher deferred charges, which plays a role in their decision making. The introduction of greater clarity and flexibility in payment models, has had a positive impact on resident take-up of units.

Conclusion

While several challenges remain in unlocking the full potential of the UK senior living market, affordability and consumer confidence around annual costs are critical. We will explore these topics in more detail later in this series. The adoption of new payment models which lower ongoing tenure costs for residents, offer a way to boost sell down rates and provide operators with a more sustainable path to market growth.

If you are interested in learning more about the results of our Senior Living Survey, get in touch with our team today.