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The golden goose

Scott McCulloch is editor of Families In Business

UK demographics predict a sharp and rapid rise in the retired population by 2020. So sheltered housing for older people is big business. Churchill Retirement Living is a multi-million pound company and growing. Scott McCulloch inspects the foundations

As a young boy pondering his future in the family business, Spencer McCarthy never had a eureka moment where he declared a burning desire to work in the retirement homes sector. But like it or not, the retirement business is in his blood. Spencer's father, John McCarthy, is a pioneer of sheltered housing in Britain. In 1963 he set up the leading retirement company McCarthy and Stone when most private builders wouldn't entertain the idea of providing homes for old people.

Times, of course, have changed. By 2020, it is estimated that more than 12 million (19.3%) of the UK population will be aged over 65. This is a 28.4% increase on the current 9.4 million of that age. On average there are about 3,000 private sheltered homes built each year, but with the projected growth in the elderly population, demand for this type of housing is expected to increase to by a minimum of 350,000 homes in 15 years. It's big business and one reason why his company, Churchill Retirement Living, made a profit of £5.6 million on turnover of £26 million in 2004.
McCarthy and Stone control 65% of the retirement home market, says Churchill chairman Spencer. "There are really very few players. We're the only ones coming into that market." Spencer, who started working for his father at 14 as the tea boy, recalls his initiation on development sites as something of a natural progression on his career path. "At weekends John would go to various building sites and I would come along and take a look around." At 16 he left Priestland School in Lymington, Hampshire. "Academically, I wasn't the sharpest tool in the box," he concedes. So his father, at the behest of Spencer's headmaster, sent him off to be a carpenter, a useful trade he learned at Southampton Technical College. "I think from an early stage I knew right where I was going to go, what my trade was going to be."

After 12 years working his way through McCarthy and Stone as a carpenter, surveyor (he trained as a surveyor while working), site manager and in sales and marketing, he left the company after a rift between him and the then CEO. It was a shrewd move. Churchill Retirement Living, which Spencer runs with his elder brother Clinton, was set up in 1994. "I went to [my father] and told him that I was leaving and that I had this project. He said: 'Well, you'll never get finance.' It was a small house and we needed to raise £80,000. I said: 'Well, I've got it. I've gone to the bank, seen them already, and they've offered us the money.'"

The rest, as they say, is history. Spencer and Clinton offered their father a role as chairman. He declined, opting instead for a job as a non-executive director. "I passed on my experiences as well as some financial muscle to enable them to meet their plans," explains patriarch John. Having grown my own company for 45 years and seen all the pitfalls and problems that go with it I feel that I can offer a lot of good advice."

Not only has Spencer followed in his father's footsteps by running his own housing empire but, ironically, he even found himself in competition with his high-powered dad. In 2003, John McCarthy resigned as chairman of the retirement home company he co-founded, less than a month after he failed in an attempt to take the company back into the McCarthy Family. At the time he was the largest shareholder at McCarthy and Stone, now the UK's biggest retirement home provider, after founding it in 1963 with Bill Stone. The pair then floated the company in 1982 and the families kept a 17% stake. "We went public to enable us to secure a market I identified as very large – totally untapped – and to try to grab hold of the national market as quickly as we could be before anybody else did," he recalls. "The idea was to go public, invest and get kudos of out being a plc, which our residents would feel more secure and confident [about]," says McCarthy. Five years after floating, McCarthy and Stone was still in expansion mode, boasting regional offices throughout England and armed with surplus cash. But, as John grimly recalls, "We were being dictated to by the City about what we should and shouldn't do. Short-term profit is the name of the game-along with their excessive fees, of course." Letting the family business go public, he came to realise, had its price. "I've found that after a few years the City starts to grab hold of what you've made a company into and tries to run it for you. If you've made a loss, you're likely to get kicked out," he complains. "We made a loss, but I managed to turn the business around from a ­£60 million loss over three years to a £140 million profit in one year. I believe the City treats CEOs like some of these football coaches that are sacked just because they haven't done well at the beginning of the season."

By June 2003, John and the McCarthy Family Trust, acting in concert with his two sons – who were running rival Churchill – made a proposal to buy back their business with the intention of handing over control to his heirs. They failed. "The bid was too expensive," recalls John. "We thought we could best invest our money in the boys' company. Churchill already had a five-year plan and, other than being in debt for God knows what and owing significant fees to the City, we had made it a rule right from day one that the family wanted 100% of the equity. But the banks were trying to muscle in and get 20%. No way was I prepared to do that."

The McCarthy family were believed to be offering between 500 and 525 pence per share, while analysts were urging investors not to sell for less than 700p. At the time, Spencer, John's eldest son, described a price above 600p as "optimistic". John denounced such a high valuation when the bid failed. In the end, John went on to sell off most of his remaining 17% stake in the company.
Meanwhile, Churchill went from strength to strength. In 1994 Elmor Homes (as Churchill Retirement Living was then known) was building standard thatched cottages in Wiltshire, the gateway to England's West Country. Today the company claims to be the UK's fastest growing privately-owned retirement home builder, specialising in the development of purpose-built retirement  developments.
Despite the scope for growth in the retirement homes market, trading conditions in the UK's flagging property sector are difficult. Yet Churchill has its market cornered. While upper-scale companies such as Beechcroft and Pegasus are more likely to be affected by falling prices, Churchill offers affordable one- and two-bedroom flats – the average price is £190,000 – to the lower end of the market.
Churchill's real reason for success arguably boils down to its strong emphasis on property location for its mainly over-60s clientele. A key strategy is to have retirement homes no more than half a mile from a town centre and on a level walk to a bus or train route. The site area needs to be 0.4-1.5 acres, with potential for three storeys. It's a sound strategy. According to research conducted by McCarthy and Stone, four in ten people have difficulty finding suitable accommodation "close to home": a problem that is likely to worsen as the population ages.
Taking into account the soon-to-be-felt demographic shift, Churchill's tack is not selling just to pensioners but also to their children. A study undertaken by the company shows that since moving into a retirement home, 58% of all residents became less dependent on their offspring. Like most highly industrialised countries, the UK's population will soon comprise a disproportionate amount of elderly people. There will be a shortage of good, affordable retirement homes, an alarming aspect of the market that Churchill is working hard to rectify.

As private house builders outside the retirement sector might try to move into the sector, there are many barriers to over come to grab a slice of the retirement home pie, Churchill is confident it will hold its own in its well-guarded corner of the market. The company works on a five-year cycle: it allocates one year to source a site in a high profile location; one year for planning; one year to build and two years to sell. That ties up a lot cash before a return is seen.

Although there are no immediate plans to finance future ambitions through private equity or an IPO, the McCarthys are philosophical. "Never say never," says Spencer. "But at this point in time we have no intentions looking at that."
So what of the next generation in the family business? Spencer says he has high hopes for his six-year old tyke. "I would like him to come into the business like I went through the business with my father. He adds with a laugh: "He wants to become a cement mixer." This time round, however, things will be different for the next generation of McCarthys.
"I'd like him to get some experience outside and then perhaps come in. That's the mistake that I made coming straight in from school."

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