The US teachers’ pension fund building thousands of retirement homes – for Brits

“We are not investing in existing stock, we are bringing new stock to the sector,” says Findlay McAlpine, chief executive of Preferred Homes. “We saw an opportunity to meet demand in the later living space. And to be candid with you, when we started, we thought, ‘Well, is it at the private sector end… the McCarthy Stone, Churchill retirement villages and the rest?”

After examining the private later living market, he concluded there was “no real need” for a new entrant. Where he did see an opportunity was in social and affordable housing, where the system was “creaking badly”.

Councils were “misallocating people into the wrong kind of housing situations”, he says. Some tenants were “left in the community whose needs were not being properly met” through domiciliary care, while others were put directly into nursing homes, when “they didn’t actually need that either”. There was demand for something in between: purpose-built independent living for older people that frees up general needs social housing and takes pressure off the social care system.

Mr MacAlpine’s investors also liked the idea of a “100% rental model”, which leaves the landlord in control and creates a “stable rental income stream” – unlike traditional private retirement housing, where flats are sold to occupiers, creating “pepper-potted investments”.

“So if, in 10 years’ time, that asset is not quite meeting the needs of its residents, as owner, you can actually step in and reinvest”, he says.

Preferred Homes now has two projects up and running in Leeds and Telford, comprising 135 flats in total. It has another nine developments, or 660 flats, in the pipeline: two are under construction (in Shrewsbury and Hucknall, Nottingham) while others (such as Camborne in Cornwall and Broadstairs in Kent) are at varying stages of planning and legals. Another “four or five” sites are at the early ‘heads of terms’ agreement stage.

But it is already thinking further ahead. “We’re looking at another 11 schemes to bring us up to 22, which will be just under 1,600 apartments, and our ambition with our partners has always been to grow that over the next two or three years, to move that 22 to 50, and by then we’ll have 3,600 apartments, and we’ll have invested about £1bn in the sector.”

Currently Preferred Homes is joint-owned by Mr MacAlpine and a number of directors on one side, and TIAA and Nuveen, an asset manager that is itself wholly owned by TIAA, on the other. Over the next year or two, the intention is that the registered provider will move into the full ownership of TIAA, the parent company. That structure will be open to other capital: local authority pension funds might be keen to get in on the action in due course, Mr MacAlpine suggests.

Preferred Homes fully owns its developments, but it offers local authorities 25-year nomination agreements for tenants. (After 25 years, as long as the scheme is active and meeting qualifying residents’ needs, the nominations agreement would be renewed for another 25 years.) At Preferred Homes’ scheme in Leeds, the city council requested an initial nominations period of 60 years, which Preferred Homes agreed to.

“It’s a right for that local authority to identify residents within its community, on its housing lists, on with-care-needs lists, and identify them as suitable residents, and therefore nominate them to come to our building,” Mr MacAlpine explains. Preferred Homes then enters a direct assured shorthold tenancy lease with that resident.

If a council fails to nominate a tenant, either “because of inefficiencies or there aren’t sufficient residents to fill them”, Preferred Homes can serve notice to take the flat back and find residents itself. However, the homes must stay at affordable rent.

Have they had to do this yet? “Yes, we’ve had an active role,” he says. “In fairness to the local authorities, it’s probably been more a product of them being a little bit overwhelmed by the workload.” An older resident’s needs might change over the two-year construction process for a scheme, he adds.

All Preferred Homes are affordable rent, ie 60-80% of market rent. “We just can’t afford to build and operate at social rent [which is typically much lower],” says Mr MacAlpine, explaining that his buildings contain lots of spaces that cannot be ‘rentalised’, such as lounge areas and staffrooms for care workers. Grant rates from Homes England would have to be double what they are today for the schemes to stack up at social rent, he adds. 

The landlord mainly buys its land from councils, which means stiff competition from other buyers because “every local authority in the land is seriously strapped for cash”.

Recently, it lost out on a site Birmingham City Council was selling. “It looks like they’re going under offer to one of those supermarket operators because they are prepared to pay that little bit more money,” Mr MacAlpine says. “That’s a frustrating and challenging thing for us.” 

In Exeter, however, he has had more luck: it is currently under offer on a council-owned site. “We weren’t the top bid, we were second-top,” he says. “They wanted to sell at the lesser price to us” because, among other reasons, he claims that Preferred Homes schemes will save £1m from the public purse a year in reduced doctor and hospital interventions.