So, how is Audley thinking about financing?
Our holistic approach is twofold: to reduce the financing requirement, which increases our attractiveness for investment, and to increase the availability and type of financing the sector can access.
Integrated Retirement Communities (IRCs) are relatively new to the UK. And in an emerging sector there is no roadmap. Innovation often means doing something for the first time.
IRCs are multifaceted interconnected businesses, making thinking and planning holistically the key to success. By way of example, Exercise and Care are two traditionally distinct and separate areas of focus. But at Audley, we are launching a more holistic focus on Health and Wellness to intentionally bridge, or blur, the distinction between the two. Keeping active and healthy has a positive bearing on being able to live healthy lives, and therefore on care needs. It should therefore all be seen as a continuum of experiences that also include good nutrition, social interaction and appropriate surroundings. Focusing on the end goal of living better for longer improves the way we think about the parts and the relationship(s) between them.
In the same way, a holistic approach to the way IRCs secure financing is equally necessary if we are to succeed in our goal of increasing the provision of units for the UK’s aging population.
The economic model of an IRC is one requiring considerable investment, especially through its early years. Costs of entry are high and the time to cash maturity is long. Speeding up the process of selling/occupying units works for everyone.
Reducing the requirement
Reducing construction material usage and improving construction efficiencies reduces the cost of construction – especially important at a time of high inflation. Reducing the time to cash maturity by speeding up the process of selling/occupying units is particularly important. For investors, it means receiving capital and returns sooner. For owners, it's more availability and choice. Occupying villages faster brings them to life sooner which also brings benefits for the local community.
By developing in partnership with quality real estate investors such as Octopus/Schroders, BlackRock, and Royal London, Audley can make its own capital go further and accelerate delivery of new IRCs.
Increasing availability
To date, the sector has had little option but to work with existing financial products and to ‘bend’ these where possible. Increased investor knowledge and more empirical data mean we can now change the narrative from what is available to what needs to be available. And what we need is to be able to secure finance over a village’s life, not just its development.
There is an abundance of development and stock financing which is helpful because the relative infancy of the sector, in this country at least, means the demand has to date been for this type of financing. Most IRC companies are small and focused on development.
However, to meet the increasing demand for IRC units, it is essential for investment to exist at all stages of a village’s life. At Audley, we now have nine mature and maturing villages with the development and stock-selling phases increasingly distant memories. Audley Willicombe Park celebrated its 20th anniversary back in 2020.
Our focus, and increasingly that of the sector, is to finance mature and maturing villages (and their secure and upward inflating incomes) to invest into new villages to bring more units to market.
Rather contrarily, financing is readily available for what is arguably the higher risk phases (development and sales) but not for secured incomes with no occupancy risk. The question or concern I hear for income or freehold financing is about refinancing risk. Ask an equivalent investor in the United States, Australia or New Zealand (markets with over 7x the market penetration of the UK) and this isn’t a question. In a market that shows no sign of slowing any time soon, increasing cash - as upward inflating incomes mature - means leverage and risk reduces over time with a corresponding diminishment in refinancing risk. In all likelihood, I would predict the refinancing event to see a re-gear given improved conditions.
Thankfully, we are currently exploring freehold financing with a couple of forward-thinking financial institutions that get it. However, as ever, time is our enemy and what will be commonplace tomorrow is needed today.
To summarise, we know how many units are needed to meet demand. With an ageing population, this demand is only increasing, and the current trajectory is nowhere near steep enough. To create villages which enable more people to live better for longer we must find new and improved financing solutions to enable Audley Group, and the sector generally, to create the villages our increasingly growing older population so desperately need.
