Niche sector gains ground as core investments lose their appeal, reports Nicol Dynes.
The pandemic has renewed investors’ interest in senior housing, which remains a relatively small sector where even a slight shift in allocations from big investors can have a huge impact.
“There was momentum behind the sector even before the crisis, but it was seen as niche and less accessible to investors,” says Frédéric Dib, president of French operator Mozaic Asset Management. “Now investors have doubts over retail and offices and need to find alternatives, so we are seeing a lot of interest in senior housing from Europe but also from the Middle East.”
More on senior living & healthcare
- Ron van Bloois: ‘Real estate needs to unite on healthcare’
- German demographics drive senior living opportunities
- ‘Consolidation ahead for healthcare sector’
“For the last 25 years we had only seen specialised competitors in the sector,” agrees Philip De Monie, investment manager, Belgium and Spain, at Belgium-based investment manager Care Property Invest. “Now we see different types of competitors like insurance companies, pension funds and family offices, all looking for long-term stable cash flows and good returns for their investors.”
Situations vary in Europe, so the strategy must fit the market. Even neighbouring countries can be very different, for example the Netherlands does not have enough senior housing, while in Belgium there is an oversupply of senior living infrastructure that has led to high vacancy rates.
‘The nursing home with 150-200 beds is no longer viable, the pandemic has accelerated the shift to smaller units.’
Frederick Dib, Mozaic
“In the Netherlands there is huge demand and not enough supply, the waiting lists are long and more building is needed,” says Evelien van Veen, director of Van Veen Architecten. “We’ve seen big growth in investor demand because it’s a very stable investment: the young move on, but the elderly tend to stay in the apartments for a very long time.”
In Benelux consolidation has already happened, while a country like Spain still has many family businesses. But the health crisis is leading to change in the sector, says De Monie: “We’re seeing consolidation in the Spanish market, which is being accelerated by the pandemic and by regulation. This will boost professionalism and quality of service in the industry.”
Across Europe, capital is attracted to the sector by the need to diversify and the prospect of stable returns and also by the positive social impact of the investment.
“Purpose-driven investments are in demand and senior housing & healthcare fit the bill,” says Ron van Bloois, chair of the Senior Housing & Healthcare Association. “Pension funds are increasingly aware of their contribution to society, but investors in general also like asset classes that are not correlated to economic cycles.”
Senior housing is evolving and becoming more flexible and customer-centric. “The trend is to make senior housing more homely and with less of an institutional feel,” says van Veen. “There’s a new generation of elderly people
who want to belong to a community and don’t want to live in a soulless, institutionalised environment.”
It is a positive trend that should be encouraged, she adds: “I’m designing the developments with the future residents, who are active and want working spaces and shared kitchens as well as leisure and entertainment areas.”
‘In the Netherlands we’ve seen big growth in investor demand because it’s a very stable investment: the young move on, but the elderly tend to stay in the apartments for a very long time.’
Evelien Van Veen, Van Veen Architecten
The demand for variety and flexibility is increasing, as residents want spaces that improve their wellbeing, including gardens and outside spaces. The pandemic has accelerated these trends.
“There can be no one-scheme-fits-all like before – variety is key now,” says Anja Dirks, architect and owner of Studio ID+. “Real estate is not just bricks and mortar. Senior housing must be user-centric and designed from the inside out. Research-driven design and thoughtful layouts can make a big difference to people’s lives.”
In urban settings senior housing residents want to feel part of the community and mix with other generations. “Healthcare is very varied now,” says van Bloois. “In cities senior living is being mixed with primary care facilities, creating inclusive neighbourhoods and mixing old and young.”
Change of scale
The demand for a more homely feel and personalised services also means a change of scale, as large institutional homes are seen as relics. “The nursing home with 150-200 beds is no longer viable, the pandemic has accelerated the shift to smaller units,” says Mozaic’s Dib.
Investors, who are increasingly interested in the senior living and healthcare sectors, are coming on board too. “Investors used to be uninterested in smaller assets, but the health emergency has changed that and they are more open-minded now,” adds Dib.
The trend towards smaller sizes is better for the end user, but it must be balanced with the need for critical mass. “The customer-focused trend is positive, but a balance must be found with profitability, otherwise operators won’t be willing to enter the market,” says De Monie.
Solutions can be found, says Dib: “The idea is to keep personalised service and the cocooning aspect, but pool management and facilities in the buildings, thereby lowering marginal costs.”
Healthcare volumes defy the crisis
Healthcare has been the standout sector that has outperformed in a year of crisis.
“In a challenging year healthcare volumes have continued to grow as institutional grade stock comes to the market,” says Stephen Miles, executive director, head of operational real estate, Continental Europe, at CBRE.
Such growing interest from institutional investors, along with the growing supply/demand imbalance, has led to pressure on prime yields, which have compressed from 6.9% in 2013 to 4.5% now, although they are still at a premium to prime offices.
“We’ve seen an expansion of the investor universe as the attractiveness of the sector is recognised,” says Miles. “But institutional investors require institutional quality assets and trusted operators and have strict selection criteria.”
They prefer recently developed, purpose-built accommodation that is compliant with environmental standards, with good quality communal areas. They also opt for resilient locations, with a focus on urban locations with good transport links.
As far as leases are concerned, investors generally prefer triple-net leases, where all property taxes, maintenance, insurance and capex are borne by the lessee; agreements with a duration of at least 12 years; and index-linked rents.
“There is a perception of investment risk in this sector, so the operator’s track record is the most important criterion,” says Miles. “Operator excellence is key.”
CBRE recently conducted a healthcare market sentiment survey, asking investors, developers, operators and lenders active in the sector about the impact of Covid-19 on their business and their expectations going forward. The results are clear: 92% of investors said they will maintain or increase their allocation to the sector and 88% agreed that demand will continue to rise and will lead to stable or higher prices.
The developers’ survey revealed that 60% had not changed their strategy because of the pandemic, while nearly half (48%) expect to work on more projects in 2021.
“We’re seeing increased activity by specialist developers, as operators focus on existing assets,” says Miles. “Most operators have seen at least a 5% fall in occupancy rates, but they believe that confidence will return and that it will take less than two years to return to pre-coronavirus occupancy levels.”
Lenders are also showing confidence, with 72% saying they are interested in increasing their level of exposure to the healthcare sector, 93% willing to lend to retirement living and 100% willing to lend to elderly care.