I recently had the pleasure of meeting Andrew Johnston. Andrew joined Royal London Asset Management 14 years ago, having cut his teeth on the retail, industrial and office sectors which form the bedrock of real estate investment. He is now head of alternative assets.

The theme of our conversation is RLAM's investment into the retirement living sector via its joint venture with the Audley Group. This is a pioneering step for Royal London and a first for mutual insurers.

What does alternative assets mean, from the RLAM perspective?

A subset of specialist property types that embraces anything other than the core traditional sectors – retail, office and industrial.

Currently, it makes sense to diversify our real estate offering and to look more closely at alternative assets. The retail sector has been going through a period of structural change over the past few years. One of the biggest challenges we face in the UK property sector is how to change our retail model, especially now, given the COVID-19 difficulties that have characterised most of this year.

In past years, we've invested in hotels, some student accommodation, residential, and now the retirement sector. Further investment into student accommodation is presently not for us. This is a good time for stakes in retirement living opportunities.

More generally, do you believe there will be any long-term changes to the UK residential property sector?

Ownership trends are changing.

There's much more mobility amongst young adults, with a more fluid job market. They are much happier than previous generations at the prospect of renting on a long-term basis, rather than buying.

This will boost rental returns and the build-to-rent sector so far as it applies to people in their 20s and 30s.

Where do you think the retirement living sector is going?

For the last couple of years, the top end of the market has been strong.

We have an ageing population and there have been years of underinvestment in the sector. In the UK, the vast majority of our over-65s currently live in mainstream housing. This contrasts with the Australian and NZ markets, where over 5% of over-65s now live in retirement villages. The UK and other markets are likely to follow suit. 

I would expect there to be a cultural shift in the coming years, when homeowners prioritise a more enjoyable retirement experience over leaving the house to the next generation. The retirement village model, with its onsite leisure facilities, social interaction and support, is appealing.

Villages currently tend to be sited on the edge of substantial towns, but personally, I think urban areas with their theatres and cinemas may work just as well, if not better. 

We may also eventually have mixed generation villages; these are beginning to take root in other countries. 

Rental units within villages may also become more popular. Homeowners could rent out their homes and use that income stream to rent a retirement property. This would avoid the need to sell the family home, if preserving this for future generations is a key concern.

Boris Johnson has made some noises about the care homes sector and promised to fix things – what do you think might help?

New retirement housing needs to be built and other properties repurposed or extensively refurbished to meet demand. Demographic changes within the UK are the driving force. There could be some sweeteners to stimulate the construction of new developments, such as expedited planning permission processes and sector protections. 

Long-term and considered structural changes to funding must come in due course. Critical care in the end stage of life, which is not catered for by the retirement village model, will need to be looked at from all angles. There needs to be a range of choices for the elderly, for different budgets and more affordable retirement living options. There have been some well-publicised failures at the bottom of the market, and provision for the middle to lower end brackets needs to be sorted.

The system needs to be "joined up" on funding responsibilities as between central government and the NHS.

I was interested to see you've flagged up retirement living in the fight against climate change: what's the connection?

There is a bedroom surplus in large houses which are owned by those who are 55 plus. They might welcome downsizing, as household responsibilities become too burdensome. If there were more attractive options for retirees, this would free-up supplies of existing housing. 

In turn, that would mean less need to build new properties and the avoidance of some of the negative impacts of construction on the environment.

Tell me more about the Audley-RLAM joint venture

Together, we are building a 25-acre retirement village at Horsleys Green, in Buckinghamshire. The site lies between Stokenchurch and West Wycombe and was formerly owned by Wycliffe Bible Translators, who used it as a training and conference centre. 

In 2014, Salmon Harvester Properties bought the centre and applied for and obtained planning permission. Then in 2018, Salmon sold it to Royal London Pension Property Fund. 

The village will be known as the Audley Wycliffe Park, and will provide 156 retirement living properties. There will also be a restaurant, library, swimming pool and gymnasium. 

There will be a single-stage delivery to the market, with the leisure and dining facilities in place before the units are sold.

Why Audley?

The Audley Group is a very experienced operator in the retirement living sector. It has a wealth of knowledge and know how and Nick Sanderson is very approachable. RLAM prefers to invest in "best in class" products and we very much hope to be working more with Audley in the future.

The timing was right for Audley, which is seeking rapid expansion. To date it has 19 retirement villages around the UK and nearly all have been funded from its own balance sheet, although it has recently announced arrangements with Schroders, Octopus Healthcare and LaSalle Investment Management to bring forward new developments.

Audley approved the plans. It is monitoring the construction, running the marketing and of course, it will operate the village. 

How is construction going?

Graham Construction have been appointed as main contractors. Audley and Graham have an established relationship and RLAM has also previously worked with them. 

Tractors moved onsite at the beginning of October. We're anticipating completion in the fourth quarter of 2022.

What else is happening?

Marketing meetings for the Audley Wycliffe Park have been taking place, with Audley running the marketing using their extensive contacts list. We are aiming for 20 to 30% off plan sales.

How does the money work?

The build cost for the Audley Wycliffe Park is circa £50 million. RLPPF is providing the capital for the development. It will retain the freehold, worth £80 million when completed.

As well as the development profit, Audley will lease the village from Royal London on a 250-year lease. The lease will commence when the units have been substantially sold (ie a threshold number of the 156 properties have been acquired). RLPPF will receive regular payments under the 250-year lease which will provide a stable, long-term and inflation-linked income stream for Royal London pension holders.

RLPPF can elect to keep one of the four residential blocks off-market and the JV is presently considering renting some units rather than selling them. As discussed earlier, this could work quite well with some families' needs. Instead of selling the family home, they could rent it on a long-term basis, using that income stream to rent a property on the Audley Wycliffe Park. 

RLPPF has also retained one plot of land that is not part of the Park. Audley has first right of refusal on the sale of that plot.

Audley will have a new village to operate without the usual capital outlay for construction. It will take its management fee, (typically £850 a month) and a percentage fee on the sale of each property, which generally ratchets up with years of ownership. Eventually, as the village matures, a 10 to 15% yearly turnover is predicted. 

Furthermore, Audley will offer subscriptions to non-residents for club facilities.

Does this dovetail with other parts of RLAM's offering?

Royal London has an equity release product that could sit well with this investment.

To discuss this article in more detail, please contact a member of our Banking & Finance team.