The Subplot | Senior living, big money from Bolton

Welcome to The Subplot, your regular slice of commentary on the North West business and property market from Place North West.

THIS WEEK

• The Generation Game: North West developers and investors are looking for ways to make mixed-age and senior living BTR a commercial success.
• Family Money: Bolton-based Pitalia Real Estate lines up £180m deals, including a monster subject-to-planning buy. What is its strategy?
• Chasing Yields: at what point do urban logistics yields get silly?

SENIOR MOMENT

The big opportunity in later life property

Moorfield Group, well known for its Manchester and Salford build-to-rent investments, is now edging into the care-heavy end of senior living. North West developers and investors are watching.

Moorfield has agreed its first buy as it builds a nursing home portfolio. In partnership with Allegra Care it has acquired Sentinel Health Care and its portfolio of five Hampshire nursing homes for £125m. This is the first seriously big-money mainstream move into this end of the senior living spectrum. Moorfield will grow its portfolio as it fills the missing steps in its ‘residential pathway’ of investment – a pathway that starts with purpose-built student housing (PBSA), moves on to post-university BTR, and then to retirement villages. Adding nursing homes gives Moorfield almost the full set.

Cheshire bound?

Moorfield is already looking North. Speaking to Subplot, Moorfield’s chief investment officer Charlie Ferguson Davie explains that this is a premium product, and one it plans to grow in clusters to reap economies of scale. “There are plenty of parts of the North of England where that would work,” he says, smiling broadly at the suggestion that Cheshire could be one of them. North West developers and investors are heading down the same route.

Generation rent

Meanwhile, there’s serious work going on regarding how to commercialise senior living in the North West, says developer Glenbrook’s residential director Shannon Conway. She sits on a Greater Manchester Combined Authority panel on senior housing. The most obviously viable audience, with money to spend, good reason to spend it and amenity demands that are not impossible to satisfy, is the 55-70 age group. Developers and investors moving into this sector include Legal & General, via its Inspired Villages and Guild Living brands. Birchgrove and Belong are in similar territory.

Boomers say ‘no’

The trouble is the 55-70 group may not be very interested in senior housing. “Nobody that age wants to sit around watching people do their knitting,” says one specialist whose own late-60s mum has been backpacking round Latin America. Another spoke disparagingly of Axminster carpets: you get the idea. Says Conway: “Why would anyone want to be segregated at 55? They don’t. The answer has to be about creating intergenerational communities, and BTR can do that.”

One big happy family

That’s why so-called intergenerational BTR could be the answer. Glenbrook is working up a template it hopes could thrive in the North West. “We’re modelling a genuine later-living opportunity as part of a mixed-age scheme,” Conway says. “So we have the security and support a later living scheme provides, but within a mixed scheme, maybe divided one-third later living, two thirds mixed.” The maths could work well because an intergenerational mix widens the pool of potential tenants. Providing you include some larger apartments (over-50s will not live in shoeboxes), keep extra age-or care-related amenities under control so they don’t add more than, say, 20% to the cost, and chuck out the chintz, all should be well. Shouldn’t it?

Concept failure

That’s not yet clear for three reasons. First, Moorfield’s Ferguson Davie is sceptical about the rental offer. “The logic of BTR is that there are lots of people who need to rent because they can’t own,” he says. “I don’t think resizing or downsizing retirees will be looking to rent, they don’t need to rent, because they can own.” If he’s correct, this creates a headache.

Demand issues

Second problem: does anyone want this product? Proving demand for any new venture is always a nightmare, particularly if your core audience doesn’t think it is your core audience. Funders need to see something solid before they will put up the money. There might have been a great example to point to at Allied London’s St John’s scheme in central Manchester. The residential tower could, thanks to its larger apartments and less youthy appeal, have proved the concept. But it got pulled, to be replaced with offices.

Premium product

Max Broadbent, director within the healthcare team at Colliers, says senior living accounts for about 6% of housing in Australia, New Zealand and the US, and just 1% here, which ought to give investors’ confidence. Broadbent’s colleague and head of operational property markets, Paddy Allen, says a focus on the higher-value end of the market also makes the bet a little safer. “People see profit in the higher price points, exactly as we saw in the early days of PBSA and BTR. Senior living will be all about serving the underserved premium customers,” he says.

Scalable prospects

Third, can you make this scalable? At first, no. It’s going to be a small network of premium-targeted schemes in affluent London and, maybe, a few likely candidates elsewhere. Think Oxford, Bath, Chester. It may also be hard to make it scalable in the more obvious sense that the usual BTR approach, in which 300-ish units makes a nice viable scheme, probably wouldn’t work with senior living for the 55-70s, or the 70s-plus.

No skyscrapers, please

“Everyone talks about scale, as they did for BTR and PBSA, and investors love it, but you wouldn’t do 1,000 units of retirement living in one go, unless it were over 100 acres or something like that. You certainly wouldn’t build towers,” says Allen. “The trouble is this isn’t scalable in each micro-location, though it is over the market as a whole. It’s a more fragmented way to build, because you can’t just do a big block, that wouldn’t work.” Allen adds that both the planning system, and silo-thinking in the capital markets, don’t help either.

Concentrate on your knitting

There are clearly some circles to be squared. Nursing homes, of the kind Moorfield is moving into, will obviously be needed. The existing leasehold-plus-management agreement approach, as famously pioneered by McCarthy & Stone, has its place. But both of these styles cater to residents with a high median age – say 75 to 80-plus. Retirement communities, of the upmarket kind with golf clubs and hair salons, have niche appeal, often with a similar demographic. But the 55-75 age group? There is still work to be done.

Conclusion: one to watch. If an intergenerational BTR plan can be made to work, that could change everything.

DRIVING THE WEEK

Pitalia Real Estate’s debut and £180m other reasons to like it

Last week, the recently formed property fund run by former JLL director David Lathwood acquired the 35,000 sq ft Aeroworks office building at Adair Street in Manchester for £9.3m, a net initial yield of 5.25%. What’s Pitalia’s strategy?

The Aeroworks site is a medium-term bet: this district is on the up, and its office market is going somewhere. FTSE 250 online travel booker On the Beach, the London Stock Exchange-listed company, is the sole occupier on a lease with seven more years to run takes the sting out of waiting. The deal shows how Manchester property guru Lathwood plans to deploy the company’s resources. Watch out for a £150m development play in the BTR sector, and a pipeline of between £180m and £360m of real estate investments over the next 18 months.

Family money

Money finds its way into property in all kinds of ways: the so-called ‘family office’ is becoming one of the most significant. Globally, as much as $6tn is thought to be managed by family offices, 20% of it going into real estate. The fortune of cataract surgery entrepreneur Anil Pitalia is behind newly-formed Pitalia Real Estate, essentially a family office. Its real estate strategy (quickish-turnaround capital growth, not chasing income or yields) is typical of the type in a world where returns on most asset classes are disappointing.

All about the IRR

Pitalia Real Estate is chasing strong internal rates of return, which in this case means opportunities to add value through redevelopment or super-sharp management. This is traditional propco funding territory. What Lathwood does not want is high yields and dry income, deals premised on optimistic assumptions about rents, or projects that depend on timelines of more than three years, because the aim is to recycle equity fairly promptly.

Spread the love

“We’re not frightened of any sector,” says Lathwood. “Retail could offer really good value for repurposing, and the office has been declared dead prematurely, it has a lot to offer.” What he doesn’t want is too-hot-to-handle industrial assets. “I’m not keen on getting into a bidding war with everyone else on industrial assets,” he says. Pitalia can afford to take more risk in the hope of more return.

Planning on success

BTR is also on the list. Watch out for announcements about a subject-to-planning deal that could yield a £150m development. Pitalia is likely to seek a development partner once planning consent is secured, and this could prove a model for the future although an in-house team is envisaged. Recruitment has already begun.

Small can be beautiful

It won’t all be monster deals. Although the current thinking is that the next 18 months will bring 10 deals in the £10m-£20m category, there is no lower limit. A good £3m deal is preferred to a thin £15m deal. Likewise, while Pitalia starts in the North West it will be hunting deals elsewhere. The Midlands and South East are already being tapped for business.

Windows of opportunity

Above all, Pitalia is about grabbing chances when they arise because the North West has never been more competitive. “We will be careful not to have too many balls to juggle,” says Lathwood. “I want to be able to respond to opportunities within 24-48 hours, because I was an agent too not long ago, and I know how much it matters.”

IN CASE YOU MISSED IT…

Heads we win, tails we win

HBD has paid £5.8m for City Court, a 27,000 sq ft urban logistics scheme in Ancoats. The yield is understood to be to 4.1%. Is this too hot to handle?

As Place North West revealed, HBD bought the 1.3-acre City Court Trading Estate from joint owners Urban Splash and Pears Group. The Poland Street scheme has 13 small units, the kind of thing parcel carriers and other urban logistics users love. It is a hot property and means an assured income. There’s also a medium-term development play for HBD. Architect SimpsonHaugh has already worked up plans for townhouses and apartments in a 220,000 sq ft development.

Yield compression

But the deal is raising eyebrows, Subplot has been told. If it is income you’re after, then a yield on the floor at 4.1% suggests there is little scope for rental growth. If, on the other hand, the residential development is the target, a land price of just shy of £4.5m an acre is fairly challenging for Ancoats.

The L-word

HBD clearly sees this as win-win-win. It gets a nice safe source of income, a development prospect, and something to trade should the urge come. All good. But some wonder how much further yields can compress (and prices rise) before central Manchester industrial begins to feel a lot like central London, with all the good (and bad) things that go with it. Whatever view you take, the deal marks a fascinating and high value starting point for the post-lockdown revival.

The Subplot is brought to you in association with Cratus, Bruntwood Works, Savills and Morgan Sindall.