McCarthy & Stone to ramp up BTR to a quarter of new homes

Retirement home developer McCarthy & Stone is not typically associated with electric car clubs, fine dining or health and fitness. But after four decades of building retirement apartments in the suburbs, the FTSE 250 developer is embracing a service model, following a £17m restructure – and that applies to its homes, too. Last year, McCarthy & Stone announced it would seek to develop a £300m rental portfolio within three years, and instructed Rothschild to secure an investment partner. In 2020, chief executive John Tonkiss says he expects build-to-rent to make up a quarter of new homes. Tonkiss said: “This is surpassing our expectations. We are seeing a quarter of our portfolio now we think in that mixed-mode, multi-tenure offering.” McCarthy & Stone is targeting 2,100 units reserved in 2020, with at least 500 of these expected to fall under its range of rental tenures. It follows completions of 2,301 homes in the 14 months to 31 October, up 8% on the previous year. During this period, McCarthy & Stone has clocked 165 multi-tenure transactions, making up 7% of the total homes. “We are approaching 300 multi-tenure homes, having really only started this in earnest a few months ago,” said Tonkiss. Analysts at Jefferies, however, were more critical, highlighting in a note: “Progress in developing the rental product has been robust, providing confidence this will be a strong component of the group’s future strategy. However, with no partner signed for the investment vehicle, this update doesn’t provide quite the progression we hoped for.” Emerging asset class Tonkiss said the group is in commercial negotiations with a number of potential funders, tempted by the expected gross yields of between 6% and 8%. He said: “Investors see this as a new emerging asset class taking shape. Like anything, it is the commercials, the details, the numbers. We are in really detailed conversations with a number of investors to really bring all this together. “These are UK pension funds which are looking for stabilised, long-term income – which is ironic in a sense, because the customers then are retirees who benefit from the income.” McCarthy & Stone has funded the seed portfolio using balance sheet finance, and will retain a 10-20% minority stake in the £300m portfolio. But Tonkiss says the total fundraise target is still to be confirmed. “That is the million dollar question,” he added. Once the fund is established, McCarthy & Stone will transfer tranches of stabilised assets into the vehicle, on a quarterly or half-year basis. McCarthy & Stone reported average reservations of around 12 per week, with its rental offering rolled out via pure rental, shared ownership and rent-to-buy tenures available on all of its sites. “We are agnostic,” said Tonkiss. “A customer comes through the door, they fall in love with the idea of staying in a retirement community with McCarthy & Stone, and then they make a decision on the best form to purchase.” New strategy Prices range from £1,100 for a one-bedroom Retirement Living apartment to £2,600 for a two-bedroom under the Retirement Living Plus model, which offers 24-hour care and support and greater access to facilities, with services on top of this. Tonkiss said the rental drive benefits from his own background in student accommodation, as the chief operating officer at Unite Group. “I see this as following in the footsteps [of student accommodation], with a new asset class in retirement living, not dissimilar to student accommodation 10 to 15 years ago.” The new strategy saw Tonkiss promoted to chief executive in 2018, with McCarthy & Stone appointing Alison Nunez as director of multi-tenure last year. Tonkiss said the restructure involved “pruning the land bank” to remove sites that were not economically viable, as well as streamlining overheads. These costs saw pre-tax profit drop 25% to £43.4m over the 14-month period. Operating margin fell to 9.4% from 10.1%, and the group is targeting a recovery to 15% by 2021. The drop in margin came down to buyer incentives and perks, funded by balance sheet finance, “because of the challenging secondary market”. Amid the continued challenges and any ongoing political or economic turmoil, McCarthy & Stone is protecting itself with this counter cyclical rental drive and focus on service. “We used to be the UK’s leading retirement housebuilder, but we are much more than that,” Tonkiss said. “We are developing a developer-owner-manager mindset and developing new service models.” To send feedback, e-mail emma.rosser@egi.co.uk or tweet @EmmaARosser or @estatesgazette