ARCO rejects ground rents: Baroness Greengross, with Dr Brian Beach (left), Phil Bayliss, of Legal & General (right), and Michael Voges (far right) ARCO chief executive

The trade body the Association of Retirement Community Operators announced yesterday that ground rents are “not essential” in retirement housing and it backs the government in ending them.

The announcement directly contradicts McCarthy and Stone and Churchill. Both have argued that they need ground rents for the viability of retirement housing projects and without them supply will diminish. Neither is a member of ARCO.

Response to media commentary on ground rents

21 Dec 2017 McCarthy & Stone (the Group) notes the media commentary this morning regarding the proposal by the Department for Communities and Local Government (DCLG) to reduce ground rents on new long leases to zero.

ARCO’s announcement was made yesterday at the House of Lords where the trade body launched a report to encourage an expanded housing-with-care market.

ARCO’s stand on ground rents was echoed by Legal and General, the insurance giant that bought Inspired Villages (£40 million) and Renaissance Villages (£51 million) last year. It is an ARCO member

Phil Bayliss, L&G’s head of later living, said: “We are removing ground rents and looking at other forms of tenure: 125-year lease purchases by those in their late seventies are an absurd form of tenure.”

Ground rents are very high in the retirement market: £450 – £550 a year on properties sold new for £250,000 – £350,000 are not untypical.

As such, they would fail to qualify for mortgages from most lenders. As purchasers are cash-rich down-sizers, mortgages are not a feature of the retirement market.

Ground rents are very much less important for the ARCO membership, who combine retirement housing with care provision. The freeholds to the sites are not sold on to ground rent speculators, but are managed by the operators themselves.

In short, the business model is the provision and management of complex facilities for the long term.

This is very different to the traditional leasehold housebuilding model that is now concerning the government: build; load the leases with income streams for the freeholder and sell the freehold to ground rent speculators, who are often based offshore.

Both McCarthy and Stone and Churchill, which is owned by the McCarthy family, are lobbying hard for the retirement sector to be exempt from the government’s ground rent ban.

McCarthy & Stone puts plan in place to offset impact of crackdown on ground rents

Retirement housebuilder McCarthy & Stone PLC ( LON:MCS) on Wednesday warned on the uncertainty surrounding the government’s plans to scrap controversial ground rents but left its full year outlook unchanged. The government announced in December it will force developers to cut controversial ground rents to zero for new homes.

Although only four per cent of McCarthy and Stone’s revenues come from ground rents, they account for a considerably higher proportion of the profits.

Retirement housing insiders estimate that perhaps as much as one-third of Churchills’ profits come from ground rents.

Here is why ground rents are so important to retirement housebuilders:

Pensioners hammered with 88% rise in ground rents – Better Retirement Housing

Often in sites with dismal resale values Thousands of pensioners living in older retirement properties are facing a massive hike in ground rents: 88 per cent is not unusual. The older leases of mass retirement housing builder McCarthy and Stone are kicking in with huge hikes in ground rents.

BetterRetirementHousing.com is not aware that Churchill has sold on its freeholds, which it manages through its company Millstream. It also deals with resales through its own estate agency.

McCarthy and Stone is a controversial presence in the retirement housing sector, although it has made significant reforms under its current management.

It was a pioneering enthusiast of relatively short leases (99 and 125 years); high ground rents; exit fees on sale (which the company abandoned in 2008); and flogging off the freeholds to the highest bidders.

High service charges have been a complaint at various points in the company’s history.

The bulk of its historic freeholds are owned to the Tchenguiz Family Trust based in the British Virgin Islands.

There have been two Office of Fair trading investigations into the retirement housing sector. One involved exit fees, which are for no designated service. A second involved a ruling against a bogus tendering racket organised by Peverel / FirstPort’s subsidiary Cirrus.

Peverel / FirstPort is the largest block manager in the country with 160,000 flats under management.

It belonged to McCarthy and Stone until it was sold in the 1990s after a disastrous £1 million libel action against the Daily Telegraph over claims of excessive service charges.

McCarthy and Stone and a media firestorm in 1991 – Carlex

The Dispatches programme on Monday night is not the first time McCarthy and Stone has been in the eye of a storm. In 1991 in launched a disastrous High Court action against the Daily Telegraph claiming £800,000 damages over articles about service charge fiddles.

Peverel / FirstPort still manages the bulk of the historic McCarthy and Stone freeholds on behalf of the Tchenguiz interests.

Recent reforms under CEO Clive Fenton have involved: 999-year leases; moderation of sublet charges; and in-house management by McCarthy and Stone Management Services.

The latter is engaged through a head lease structure, which McCarthy and Stone retains, although the freeholds are sold off to ground rent investors.

Related posts:

Churchill Retirement donates £150,000 to Conservatives. To retain ground rents, by any chance? APPG July 11: The case for ground rents from McCarthy and Stone 4% of McCarthy and Stone earnings come from ground rents McCarthy and Stone and Churchill: are you blackmailing government over the ground rent ban and is your business model broken? Asks BBC R4 MoneyBox