The equity release market has undergone difficult times over the past two years. Despite a concerted campaign from industry body SHIP to raise awareness of this sector total advances have fallen from £303.3 million in Q3 2008 to £213.4 million in Q1 2010. The reasons for such a drop in business are numerous. House price volatility has made many consumers delay their decision to take out an equity release product. Several key providers have also pulled out of the market over the last year. It was a move first started by Prudential who announced they were exiting the market in November 2009. The trickle has since turned into a steady stream with the most recent casualties being Stonehaven who suspended lending in March 2010 and Hodge Lifetime who stepped back from the market in June. As a result SHIP’s active membership has dropped from around 22 firms to just a handful.
However, despite these difficulties SHIP director-general Andrea Rozario remains confident the market can come through these trying times: “It’s fair to say the industry has undergone a challenging two years with providers pulling out of the market which has in turn had an impact on consumer confidence,” she says. “However, if you look at the key drivers for using equity release – they have never been stronger.
“We have increasing longevity as well as rising wealth due to exponential growth within the housing market. People expect a certain standard of living during their retirement and equity release can help them to get that. We also have the issue of younger people trying to get on the housing ladder with the average age for first purchase now being 37. Baby boomers know they need to look after themselves during retirement as well as helping their children and we are seeing an increase in the use of equity release to gift money to younger generations.”
Funding issues
So while the drivers towards equity release remain strong it is an industry many providers are finding difficult to operate in. This is mainly due to the fact that many providers active within the equity release market were reliant on funding from building societies and other City institutions that suffered severe lending restrictions after the demise of Lehman Brothers. As a result, many of them chose to pull their funding from the equity release market. According to Retirement Plus chief executive Duncan Young this has not only had a huge effect on the number of providers available, but also on the amount of new products being developed.
“As the number of providers dwindled a lot of tension went out of the market,” he says. “Up until this point there had been a real emphasis on new product development and innovation but there is not so much room for this at the moment and so we are seeing a pretty vanilla marketplace.”
The wide scale pull out of providers have left only three companies actively working within the market – Aviva, LV= and Just Retirement. Rather than relying on funding from outside sources these companies use their annuity books to fund their equity release business.
According to Aviva’s head of at-retirement propositions Darren Dicks, the market remains robust with Q1 2010 figures 15% up on the same point last year.
“Funding has undoubtedly proved to be a big issue for providers in this space,” he says. “We use equity release as an asset vehicle for our annuity book as we feel the longevity risk balances out. With equity release the interest accumulates until the person dies, whereas with an annuity someone effectively hands over their pension pot and we agree to pay them a certain amount every year. If you look at the customer profiles for equity release and annuities they are very similar. The average age of people taking an annuity with us is 62 while for equity release it is 67. Equity release as a business takes up a lot of capital upfront and an annuity business makes for a good match.”
Product choice
Dicks also believes that despite the retraction in number of providers, current propositions in the market continue to offer variety to consumers.
“While I think we will see innovation in the future, current propositions still offer plenty of choice,” he says.
He is joined by adviser firm Sixty Plus managing director David Wright who believes there is still plenty of product choice available when it comes to advising clients but that the real challenge for the industry is in raising consumer confidence in the sector.
“Providers may have left the market but we still have a reasonable range of choice available,” he says. “The main issue we have is that maximum loan to value on many of these products has dropped off slightly and this can put people off. House price volatility has also had an effect on people. However, the vast majority take so little equity out of their homes as an overall percentage that it shouldn’t really have an impact. I think another issue is many people take out equity release to boost their lifestyle – in these current economic difficulties people are less likely to make those kinds of decisions.”
Positive signs
While equity release is experiencing difficulties there are some positive signs ahead according to Rozario who says these times will enable the market to evolve and grow stronger.
“I think the industry needed to evolve and this time is helping us to do that and the changes will be beneficial,” she says.
One way the industry is looking to do this is through the increased use of technology to streamline processes and increase efficiency. Technology provider Assureweb’s commercial director, Ian Teague confirms they are continuing to work with several equity release providers going forward.
“We are certainly seeing more providers looking to put processes into place and we are seeing the use of pre-population of data and increased integration with back office systems,” he says. “As a result, more systems can now generate real time equity release quotes. This obviously helps advisers in their research. We are currently dealing with eight equity release providers – while this is down from the 16 or 17 we dealt with say eighteen months ago, it is good to be dealing with providers who are actively looking to enter the market.”
Retirement Plus’s Young agrees that the market is starting to move forward with providers looking to re-enter the market as the funding situation starts to loosen up.
“At the moment though the biggest challenge faced by providers is raising cash,” he says. “If we can do that then I believe everything else will fall into place. I do believe that while things are still tough – they are getting easier. Going forward I see the equity release market making gentle positive progress rather than striding ahead. However, there are positive signs that people are coming back into the market and I think we have reached the bottom.”
However, if the market is to move forward with any real conviction more work will need to be done to ensure both advisers and their clients are fully aware of how equity release works.
“The ongoing issue we all face surrounds the reputation of equity release,” says Sixty Plus’s Wright. “When speaking to potential clients it is still the case that there is misinformation out there – this makes things very difficult. For years we have been told about this pent up demand for equity release and how it will move into the mainstream but we are yet to see this happen. We need to develop a greater degree of understanding, not just from the general public but also from advisers and solicitors.”
Dicks agrees, saying more focus should be placed on adviser education going forward.
“When we talk to consumers the reputation of equity release is not a big issue – it’s the advisers that tend to have the long memories,” he says. “We actually record high degrees of customer satisfaction with our equity release products.”
The equity release market undoubtedly stands at a crossroads and the coming eighteen months will be crucial in determining its future course. While the drivers towards equity release, such as increasing longevity are undoubtedly there, the market still has a difficult time ahead in addressing its funding and reputational issues. However, Dicks believes the market will recover in time.
“We will continue to see issues like house price volatility affect the market for a while and it will take some time for providers to come back into the market,” he says. “We would welcome more providers within the market as I think it would build consumer confidence but I do think we will see improvements in the next 18 months to two years.”
