The UK's rapidly ageing population, on-going housing crisis and increased focus on health and wellbeing is leading to major growth in the senior living sector.
In this latest podcast, our head of senior living, Dominic Morris, is joined by Nick Sanderson, Chief Executive of Audley Group and Chairman of ARCO (the Associated Retirement Community Operators).
We discuss how Audley's retirement villages have responded to the challenges of the pandemic, the advances in technology that are driving the sector forward, why investors should be backing operators in this space, the emergence of private rental models in the sector and the role of Audley's Mayfield brand in its future growth plans.
Dominic Morris: Hello, I am Dominic Morris, head of the Senior Living Team at Gowling WLG. Today is the first of our series of Senior Living podcasts and I am delighted to be joined by Nick Sanderson, Chief Executive of Audley and Chairman of ARCO.
Dominic: On the back of the rapid expansion of the senior living sector in recent years, COVID-19 has shone more than something of a spotlight on how we can best meet the needs of our aging population for specialist housing. So Nick, against that backdrop, I would like to jump straight in if I can and ask you what the experience has been for your residents living in your communities over the past year?
Nick Sanderson: Well thank you Dom, nice to be with you, hello everybody. I would say better than most truthfully in the community. The retirement villages we create have offered us the opportunity to allow people, I think, the best of all worlds. They have been able to isolate within their own homes, within their own environment, with all of their familiar surroundings, with their neighbours and the rest of the community in close proximity, but isolated, with us there to provide them with a whole range of services to keep them independent, to keep them supported, to keep them entertained, but most importantly to keep them safe. We can deliver them care if it is needed, deliver their meals to their front door, to do their shopping, everything that can be done to keep them active and safe. I think it has been a brilliant example of what the model can offer actually.
If you look at our model, there are two alternatives to compare it to. Firstly, staying within the existing community in your large family home, where you will be isolated from your family, not supported by local services, unable to get to the shops - your family home, which is your pride and joy, has suddenly become your prison. Alternatively, having left it too late and ended up in a care home, which I am afraid have had a horrid time over the last year. Our offer of independent living with care and support I think has stood up really well. There has been some fantastic work by my team to support people, to keep them engaged, to use technology to communicate with them and just to make it a good place to live.
Of course, now we are at a place where as of early February 2021 three quarters of our owners and our staff are vaccinated. In a few weeks' time, nearly all of them should be vaccinated and at that point we can open up all of our central facilities, our restaurants, bars, pools and gyms. Truthfully, our owners will have a better life than all the rest of us because they can get back to more normality than we can. It has been very challenging of course, keeping up with ever-changing advice, guidance and legislation, but I think it has been a perfect illustration of the benefits of what it is the sector does.
Dominic: So Nick, what sort of feedback have you been getting from your residents as to their experience of living in these settings, and how it has shaped up against what they thought they were letting themselves in for?
Nick: I think it really has exceeded their expectations and they tell me so too. We had our annual residents survey towards the end of last year, and our rating from our owners has reached record levels - we are up on an approval rating higher than Apple and various other large international concerns because I think we have been able to meet their needs but also create a really fun and stimulating environment. I think, and I hear it on a regular basis, they are very grateful and so are their families. The people who would have been very concerned about elderly relatives maybe living remotely in other parts of the country, the knowledge that they have that those who come to live with us are kept safe and supported means generally everyone has been incredibly approving of what it is that we do. It has been reflected in the current levels of activity as well in terms of new demand for us.
Dominic: That is fantastic and I guess it is a people business, in bricks and mortar, but it is a people business overall. I think you have already mentioned the fantastic work your teams have been doing, but how has the last year really impacted your staff and how have they risen to the challenge?
Nick: Well they have been brilliant. We have 850 staff around the United Kingdom and those include front line care staff who are delivering care to people, not only within their own homes in our villages but also in the communities around, because Audley Care are providers of care outside of our villages in the local community too. Then we have those who have been maintaining the estate, keeping everything looking as good as it could with all the restrictions that we have had, plus our general management team who have just been exceptional in creating new activities and events. They have done amazingly well and it is really hard to appreciate quite how challenging it is when you are going in armed in PPE in to somebody's home, not really knowing what you are going to see - it has been remarkable the way that they have responded and they have done a fantastic job.
I think as well, I am pleased to say, that at last they have seen the appreciation of a community and society that now recognises what work goes in, both in the residential care sector and also in the housing with care space. I feel that that they feel their status has been elevated, and quite right too.
The good news is they have also managed to keep themselves pretty safe, and we have a track and trace system that is significantly more effective than the government's so we are able to monitor any potential risk amongst our staff and any signs of infection or indeed a positive case, we have been able to isolate and track them. We have been able to keep them safe as much as we have our owners. In fact, within our own community of clients and club members, some 2,500 people, we have seen numbers of positive cases in single digits because we have been able to keep people safe in their own homes.
Dominic: So far, far better statistics than in the general population?
Nick: Much better than the general population and I have to say significantly better than within the care home sector. Of course, within an institutional setting where there is a much more shared use of facilities and staff, and where staff are shared between different locations, it is almost impossible to contain or to keep out the virus. I think they are suffering badly.
Dominic: And do you think coming out of this there are any permanent changes in the way you are operating your communities? You touched on technology for one.
Nick: Yes, I think that is the big one actually and I put it in the general topic of communication. We have gotten much better at communicating with all of our owners. You have to respect that in a community of let us say 160 – 170 units, which is probably 250 people, it is quite easy to get lost and some people choose to get lost. Not everybody wants to be the first one in the restaurant at lunchtime or swimming in the pool or joining a class. We have had to get very good because of the desire to monitor everybody on an individual basis.
We have had to get better at reaching the far extremities of the village, making sure we are in touch with everybody and the best way of doing that has been using a technology platform. We had apps in development, but it was remarkable - in a space of two weeks I think we completed the work for the app, which might well have ordinarily taken a year, and delivered that to each village and on which that was a great platform.
We then took our owners who communicated with us through those platforms from less than 50% to over 85%, and then it went up to over 90% and now our people communicate with us through a smart phone or a tablet. This gives us direct contact into their homes and the ability to communicate with them and for them to communicate with us, whether it is ordering a meal or joining a virtual drinks party, or doing an exercise class online, whatever it is we have had this great two-way communication. That will never go back to what it was before. Our ability to use those platforms to better monitor their health and wellbeing going forward is essential, It will help all of the discussion post-COVID, which will be about prevention rather than cure. It is a bit of a health and social care cliché, which is let us work really hard to keep people independent for as long as possible, and so much of that is achievable using those technology platforms to monitor their health and wellbeing at quite a technical level. I think that is the big change that we will see going forward. The core principles are the same: good housing, great lifestyle, care if you need it but with advances in the way that we deliver service.
Dominic: It is great that after what has been obviously a very challenging year for everyone and continues to be, that there are some positives coming out of it. I guess it has also directly impacted your approach to sales and marketing in particular, as you cannot get people on sites to look at the marvellous product you have got. How have you gone about tackling that?
Nick: The same way actually. We went into the pandemic very positive actually - I think we had our forecasts done in December 2019 following the election results, which if you remember back that far saw the prospect of Brexit being resolved, which has taken a bit longer and maybe still has not been resolved actually. We were very optimistic at that stage. We had some very high quality villages coming and stock being delivered to the market. We then went into a really difficult period with lockdown, but we had 17,000 people on our database.
What we had to do was keep communicating with them. The vast majority of our new prospects had contacted us originally through an iPhone or a tablet, so we had their email address and so we kept communicating with them all the way through lockdown so that when we could open our sales offices, they came back in and they came back in in a rush. We were able to share with them, through those communication channels, what life they were missing by not being in our villages, so they saw the virtual drinks parties that had been going on. That was a really positive thing that we were able to do.
Plus, of course, it is so much easier now with virtual tours. We have had buyers who have bought very quickly without ever visiting the village. The speed of sale is half what it was a year before because people want to get into the village quickly, and a lot of that can be done virtually. But even though we have gone back into that with lockdown again, it has been a great year. The second half of the year was as busy as we could have expected.
Dominic: That is great news. With Brexit having occurred and the stamp duty reliefs likely to expire imminently, what is your view of the sales market for the year ahead?
Nick: I mean we cannot hide from the fact that we are related to the macro housing market. The housing market needs to be liquid for our customers to be able to sell their larger homes to downsize to us. Last year was a bit of a counter-cyclical I would suggest, in times of great economic risk and vast amounts of public sector borrowing. You would not have expected the housing market to be as strong as it was but it was. That helped us have a very successful year, which carried on into the beginning of this year, but you are right, there are obviously head winds ahead but there were last year too, so it is hard to tell.
The absolute truth Dom is of course there are structural shortages within the housing market within the United Kingdom, which will always drive the supply and demand balance towards a good market. It does not take much to be a signal to sell and stamp duty did definitely help to give that signal to say it is okay. I think when unemployment kicks in and when furlough falls away, I am not convinced it will have that big an effect because I actually think the economic recovery when it comes will be pretty sharp. I think that will be enough to sustain the housing market at maybe not the breakneck pace of the end of last year, but at a stable level and if that is good then I think our sector will do particularly well because of the increased awareness of the benefits.
Dominic: You have been focussing on widening your customer base and you set up the Mayfield brand relatively recently, with a focus on the mid-market opportunity. Would you be able to tell us a bit more about how that is going?
Nick: Yes it's good. Of those who know us, Audley always been a relatively premium brand if you look at the locations we are in - we are in high value residential areas all around the United Kingdom and there are people are selling a high value home, downsizing and releasing equity to access our villages. We have felt for a very long time that there is a much bigger market out there amongst the 75% of over 65 homeowners who are much closer to the average house price in different areas, and that was a market we felt we were missing.
We have the advantage of taking a premium product to a mid-market audience, which is much easier than the other way around - going from a medium product, some had problems trying to create a premium product. So we were very comfortable we could do that so we went and launched Mayfield and yes, it is all about delivering exactly what we do, good housing, great lifestyle and care when you need it, but at a more affordable price. So from Audley at 150 units to Mayfield at 250 units a village, these are in more dense urban locations where there is a deeper pot of population, but lots of owned housing of around average house price. The villages have slightly smaller apartments and therefore we can keep our management and operating charges down, but the same facilities and we think it is going to be great and it has started well. We are in Watford now and we have two projects that we are about to announce, and all indications are we were right, there is a huge market for this.
Dominic: Fantastic. I guess as part of that offer, the traditional Audley model has been a for-sale long lease model, but as part of that offer rentals presumably are coming in to play?
Nick: Yes, and I wish I had a pound for every time an investor says you really should rent these units because of the yield, the yield is fantastic. We managed to resist getting seduced by that. We were much more conscious of wanting it to be responding to the market, the market should dictate what is built, not what investors say. We have never had huge pressure from people saying I really want to rent, I do not want to buy, because the British are, as we know, uniquely wedded to housing and it has done very well for them. Those people I mentioned who might have bought their council house in the 1980s are sitting on a capital asset.
So it has not traditionally been of great demand, but we do feel that because the residential care sector is going to need a lot of change we should be focusing on the higher dependency complex need of end of life area. That residential care sector, low level social care within care homes is not what people want truthfully - they give up their independence far too early. We feel that offering, particularly in the Mayfield villages, the ability to rent plus providing residents with, if needed, high levels of care from our own care service within their own apartments, we can replace that as an alternative and offer people independence. As that means it is likely to be for a shorter stay and the transaction costs would apply, it doesn't really make sense to buy.
We think the rental offer combined with a high service level is a really interesting place for us to be, and we will be offering it probably from the end of 2021 on a regular basis. What I would prefer to do is to give an individual choice, so Mrs Smith comes into our sales office, wants to live in our village and then there is a conversation about what tenure suits her, what price point suits her and if it is sale or rental, that is for her to choose. I think we can achieve that.
Dominic: Great. It is interesting to hear about this investor sentiment I guess around rental. I think Audley has done a number of innovative schemes and JVs and partnerships over the last few years, somewhat leading the way in terms of demonstrating to the institutional market the ways in which they can engage and participate in housing of care schemes. Do you want to talk a little bit about that?
Nick: Yes. It has been a challenge for the sector and now I think that it is gradually converting to the opportunity, which is we have two very distinct disciplines within our business. We have two very distinct value drivers: there is the development piece house building, which is you buy land, you build something and you sell traditionally 150 apartments and recover your costs.
You are then left with a long-term operating business generating very stable lease payment related income, highly protected therefore in terms of its credit worthiness. All of our charges are linked to inflation and that has a very different attraction to investors. So, you have got the relatively high risk private equity type development partnership arrangements, but then you have got the very long and stable income source, and we see ultimately that the investment piece, the long-term management with these assets, will not sit within the private equity owned structures that have existed so far because the sector is being considered high risk. The more maturity there is, the more growth there is, the bigger portfolio sizes there are that can eventually be taken to the investment market and then it will light up the potential of what is a fantastic income source.
We already have a partnership with Royal London on one village, where we have been able to rentalise effectively our operating income and offer the largest mutual in the country 250 years of inflation linked income, with our underlying leases giving securities of that income. That is unheard of in a world where there is no yield or foreign investment income of that nature. So we think that will see that investment cycle begin to come around our way, and partly driven by the fact that if you are a life UM with a real estate allocation, where on earth else are you going to put it? You either put it into retail or offices or hospitality or probably the care sector, so they are all looking for income, hence the demand for rental. But actually I do not think they fully realise yet the quality of our long-term income and I think once that lights up, as it has in New Zealand and Australia, you will see a huge growth. I think we, as you rightly say, have development partnerships with Schroders and Octopus and with others soon to be announced, but I think ultimately the question to be answered is who is going to own those long-term income floats.
Dominic: Great, that is really interesting. One of the wider questions that I have wrestled with is for the wider sector to achieve growth, how is it going to do that when there are not actually that many Audley's around, there are not that many established operating platforms for people to put their money in? We hear people talk about this as being a tipping point where everyone is beginning to recognise the various benefits of housing with care and the value it could have to institutional investors, but how in particular do you think the sector as a whole can address that particular conundrum? Is it supporting existing operators and scaling them up as quickly as possible?
Nick: Yes I think so. We are very aware that our biggest, or certainly one of our biggest strengths, is our management team and our processes and procedures, along with our history and the development of our operating model. This puts us in an almost unique position in terms of the ability for us to scale up and grow. That is what investors want to see of course, and most big investors want to deploy large amounts of capital when they have spotted a market they want to grow.
There are not many management teams or platforms out there that they can easily back, but that has always been the case and it was the same with student housing and build to rent.
I think there is a bit of a myth that the operations get leverage in our business or the intensity is greater than that. It is not in truth. Most of the functions that are in our management or our communities are familiar to those who work in the hospitality sector, asset management, food and beverage, running spas et cetera. The only bit that is unusual is the delivery of home care. It is a regulated service, CQC Regulator for all of our Audley care operations and I think people are concerned about that. I personally think it is an absolute integral part of what we do and it has to be done and done properly, hence ARCO and its involvement of making sure standards are maintained. Apart from that, it can be done and I think people are going to be at a premium and we are very aware of that with our people. But most of the skills you can bring in, otherwise you will just have to back Audley.
Dominic: On that note, shall we wrap up?
Nick: Absolutely.
Dominic: Thank you very much Nick, that was really insightful, really interesting to hear about what Audley are up to and how they are faring and I think the future looks bright for Audley and the wider sector, so thank you.
Nick: Not at all, I completely agree Dom thank you for having me.
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