Demographic trends and resilience to economic ills are making senior housing an -increasingly compelling investment opportunity and even where very traditional attitudes exist regarding care of the elderly within the family, cultural barriers are now breaking down. But it is not all good news, as Lynn Strongin Dodds reports
Although an ageing population across the US, UK, continental Europe and Asia is focusing governments' collective minds on senior housing, solutions differ depending on culture and regulations. This presents varying investment opportunities but the most important elements for institutions is to have a firm grasp on the finer details of the structures, operators and potential pitfalls in each locale.
As Daniel Bowden, fund manager of AXA Real Estate's Alternative Property Income Venture (APIV) fund, put it: "The cultural differences, regulations and structures cannot be underestimated."
Terminology also varies. There might be reams of marketing material on the subject but senior housing (sometimes referred to as ‘senior living') covers a range of properties. For example, in the US, independent living consists of apartment buildings with services such as cleaning, a communal dining area, transportation, laundry and social activities but no real medical care onsite. The next stage is assisted living homes for people who need more help with personal daily living.
At the other end of the spectrum are nursing homes as well as specialised nursing facilities that are temporary facilities people enter after an operation or illness. There are also continuous care retirement communities (CCRC) which are campus-like structures that house all types of accommodation under one roof. Residents typically pay up front and will move from one facility to another on a needs must basis.
"Each has its own set of opportunities and will attract different types of investors," says Anthony Oldfield, senior associate at property consultants King Sturge. "For example, private equity and property developers will prefer retirement villages that have an owner-based model whereas institutional investors will look at care homes because of the steady rental streams."
The US is the best-established market while in Europe the UK and Germany are at the forefront, while in Asia it is at a much earlier stage of development. Lee Menifee, director of global strategy at CBRE Investors, says: "Senior living is an accepted non-mainstream asset class in the US institutional market. This is not the case in most of Europe as well as Asia. However, things are beginning to change in China. This is because the cultural beliefs of taking care of elderly parents in the home as well as the wealth barriers are breaking down. Also the one-child policy is pushing people to look at senior housing and applying the US model, but it is still very early days."
Although it is likely that China will develop its own variation of the senior housing model, the country is facing the same demographic timebomb as the US and Europe. Some 31% of the Chinese population will be over 60 by 2050, according to the China Aging Development Foundation. In the UK, the over-65 age group is expected to jump by 23% by 2034, according to the Office of National Statistics. The ONS estimates that the fastest-growing segment of the UK population will be the age group 85 and over and that by 2024 this group will be 2.5 times larger than in 2009, reaching 3.5m and accounting for 5% of the total population.
In the US, the 65-plus age group is expected to more than double by 2050, rising from today's 39m to 89m, according to US Census Bureau projections. The important factor here is that this growth does not include the baby boomers, the oldest of which won't reach age 75 until 2021.
"Demographics is definitely a main driver in the senior living market," according to Bowden. "The other is that the sector is not reliant on consumer spending. It is based much more on need, which makes it more resilient and defensive than other parts of the commercial real estate market. Parts of the sector are less correlated with other sectors of real estate such as office or retail."
Overall, industry statistics in the US show that the senior housing returns dropped by around 15% to 20% in the wake of the stock market crash compared with the overall drop in commercial real estate of 30% to 50%. The latest statistics from the Investment Property Databank (IPD) Annual Healthcare Index also revealed that the overall healthcare property index, which includes 571 healthcare properties worth £1.8bn (€2bn), outperformed the broader UK commercial market for the third consecutive year, at 5.4 % in 2009. The strongest performance was delivered by the primary sector - comprising doctors' surgeries, dentists and polyclinics - at 8.8 %, while the secondary sector, which consists of hospitals, long-term care facilities, nursing homes and specialist treatment centres, returned 2.2 %. The key contributors to the IPD UK Annual Healthcare Index were MedicX Fund, Primary Health Properties, Assura Group, Ashley House, and Aviva Quercus.
As well as delivering better than average returns, senior housing offers long-dated income streams and a good increase in operating income on a regular basis because there is a general shortage of product across the spectrum. Regulations can also work in its favour, depending on the country. In the UK, for example, Neil Gardiner, fund manager for the Quercus Fund, a healthcare fund managed by Aviva Investors in conjunction with Quintain, notes, "Inflation-linked rents and 35-year leases and yields in excess of 7.5% make senior care facilities attractive. It can act as an inflation hedge and provide a steady stream of income. In addition, the income is underwritten partly or wholly by the state at times when the resident cannot pay."
Senior housing is also relatively less volatile during downturns. Ray Lewis, president of Chicago-based Ventas, a healthcare REIT, notes: "One of the silver linings of the last few years is that the financial crisis has given the sector a lab where it could test the long-held theory that it was recession resistant. What we found was that the cash flows held up very well and the underlying fundamentals were less correlated to other real estate, although some were more than others. For example, the care end of the market was more resilient and less correlated because it is driven by need and not economic conditions. This was not as much the case with the independent end which is less need driven and correlates more with the housing market because people tend to sell their homes in order to buy an apartment."
There is also a demand/supply imbalance. Noah Levy, managing director of US-based Prudential Real Estate Investors, notes: "The most attractive investment opportunities are in independent living and assisted living, which includes dementia care. This is because investors may not appreciate the risk/reward of being in a highly regulated business that might be heavily exposed to government reimbursement risk like you have in the nursing home sector. It is also an attractive segment because of the prevailing demand/supply dynamics."
While the growth rate of the 75+ age group will continue to increase over the next decade or so, supply growth has been constrained. After a mini boom in the assisted living sector in the late 1990s, construction starts of new senior housing - independent living, CCRC and assisted living - dropped significantly to a level of about 30,000 units a year from 2000 to 2007. Since then, that number has been cut by more than half to about 12,500 units or less a year with limited industry capacity to gear back up significantly in the near term."
In terms of potential investments, US investors have the most choice. Lewis says: "As a general rule there has been much more private capital invested in healthcare because of the way the health system in this country has developed. As a result, it has given real estate investors a much wider array of investment opportunities in healthcare properties. Most institutional investors get their exposure to the sector through investments in REITs or private equity funds. However, recently, REITs like ourselves have been extremely active because of our low cost of capital and liquidity. Private equity firms in contrast have not had the access to debt finance and have not been able to buy stabilised cash-flowing properties because of their relatively high cost of capital."
In fact, the US has seen considerable investment activity by REITs, with nearly $27bn being invested in senior housing. Ventas is leading the charge with its recent $7.4bn (€5bn) purchase of Nationwide Health Properties and $3.1bn acquisition of the real estate assets of Atria Senior Living Group. The company used a partnership structure under the REIT Investment and Diversification and Empowerment Act (RIDEA) of 2007 which allows it to keep a share of the building's operating income and not just the lease payments. Other REITs such as Healthcare REIT are following in its footsteps.
In the UK, the care home property investment market has been rocked by problems at the beleaguered Southern Cross, the largest operator in the UK and a major tenant in the sector. The company, which owns the Southern Cross Healthcare and Ashbourne Senior Living brands, recently announced it had appointed advisers at KPMG to help it negotiate with landlords and lenders as it tries to stave off "an impending banking covenant breach".
Southern Cross does not own the freehold to the vast majority of its 750 care homes. Around 250 are owned by City bond holders - including the Qatari Investment Authority (QIA), which bought them from a private-equity company five years ago. Since then, the amount Southern Cross has had to pay in rent has risen by nearly 20% to £248m a year despite a falling rental market. If the firm were to go bankrupt, the owners of its care homes could repossess them - potentially forcing the mass rehousing of residents.
According to Oldfield, "one of the key drivers for any investor in the registered care home sector is security of income and this is now being seriously questioned in the minds of many analysts. This has led to a two-tier investment market split between strong demand for good-quality highly specified modern ‘future proofed' homes and minimal interest in homes with a poor track record and limited property fundamentals. This could result in a large disparity between yields being applied even if the two properties have the same tenant company."
Gillian Bowman, a fund manager at Aegon Asset Management, which has the Aegon Target Healthcare Property Unit Trust, which invests in care homes, says: "Southern Cross appears to have lost connection with the management on the ground. We believe the quality of the operator is crucial. There are still a large number of small operators in the UK and you need to go to the local level to understand how each operator works. It is important to look at the quality of the buildings, their rankings and the quality of care being provided."
Emma Glynn, senior associate at King Sturge, notes that outside of the UK Germany is the most advanced because of the regulatory framework. "Unlike other countries, such as France, where the sector is highly controlled, the German government has allowed for the development of new nursing homes and for large operators to grow, although they still only account for 3% of the market. As in the UK, the government will pay a portion of the residents' care. By contrast in Mediterranean countries families tend to care for their parents in their home while in the Nordic countries there is strong support for the elderly living in their own homes and the provision of home care services."