Ageing is expected to become a key factor in social transformation globally in the next decades as the elderly population is growing faster than other age groups. One in six people (16%) in the world will be over age 65 by 2050, up from one in eleven (9%) in 2019, while the number of people aged 80 or over is projected to triple to 426 million in the same period, according to the UN.

Demographic changes will increasingly drive customer demand and investor interest in the fast-expanding senior living industry. Already a robust market worth over $400 billion in the US, senior housing attracted $1.5 billion in average from private equity funds and other investors each quarter since 2016  as returns consistently outperformed other types of real estate in the past decade.  

Senior living is expected to remain a hot market: among the respondents of a recent survey of 225 US industry professionals whose companies have plans to buy, sell or hold senior housing assets this year, 51% said their firms are seeking to acquire new senior housing properties in 2020. But in terms of general investment strategy, 33% of the 330 US experts polled in total said new construction will be the top growth direction for their companies in 2020, followed by acquisitions (23%) and renovating or repositioning existing senior housing assets (22%).    

Investor appetite is foreseen to grow for opportunities in Japan, the world’s oldest nation with 35 million people aged over 65, where foreign investors are already making a foray in senior housing. In Europe, which attracted a record senior housing investment of over €700 million in January-August 2019 due to large deals in the UK, future hot spots with growth potential are expected to include Germany, France, UK, Italy and Poland, based on their demographic change potential, the maturity of housing markets, private wealth of the elderly population and government old-age pension levels.     

Opportunities

Investors can target various senior living subsegments, which are categorized based on the extent of health care services and other amenities provided, beyond the real estate component. Active adult rental for younger seniors (health care services are not included and other services are often outsourced) has been the most attractive asset for investors, although independent living (with services and amenities like transport, laundry, meals included, but health care excluded) is expected to take over this top spot through 2020.

Investors and operators can differentiate their properties by targeting the active lifestyle interests of Baby Boomers (born between 1946 and 1964). Community, wellness and recreational activities can improve customer experience and ultimately boost occupancy. Sustainability and eco-friendly environment with the opportunity for cultivating the gardens at countryside retirement communities may emerge as unique selling points. Similarly, strengthening the sense of community by expanding social links across generations may also bring benefits. Some developers, for example, integrate senior living units with mixed-age neighbourhoods or even university campuses.

In an innovative concept, Zurich-based co-retirement and co-living startup The Embassies of Good Living plans to create a network of mixed-use properties in big cities offering permanent residencies and short-stay units to mixed-age tenants, with potential offerings such as restaurants and bars, yoga studios, lounges, sports facilities, co-working spaces and art installations. The first property is scheduled to open in Zurich in 2021, to be followed by other locations in Europe, North America and Asia. 

Each Embassy property would include about 50 living units reserved for older adults, who would be offered access to on-demand assistance, mobility and health services. Partnering with local providers or hospitals, the network would also provide regular check-ups, monitoring and 24/7 in-house care depending on the individual medical needs of its members.  

Teaming up with third-party providers may prove to be the ideal solution for senior living investors that shy away from directly venturing into health care services due to licensing restrictions or possible risks related to payments in government-funded medical and health schemes.     

Under a recent agreement, Ohio-based investment trust Welltower would create a joint venture with  Philadelphia-based Thomas Jefferson University and would acquire a stake in certain real estate assets of Jefferson Health network’s real estate assets, while the university’s clinicians would provide care at Welltower’s existing senior housing, assisted living and memory care communities as well as at future assets the two parties could develop together. 

Brand crossovers are generally getting more and more popular in hospitality, senior living could become an attractive area for well-known hotel chains in the future. Hotel operators can leverage the power of their brands, as Baby Boomers tend to have strong loyalty for their favourite brands and could favour housing in that offers quality associated with respected hotel brands.

In a recent example, Marriott’s St. Regis brand has started offering age-restricted luxury residences in a new 92-home community in Rye, New York, where one resident per unit must be over 55 and no resident can be younger than 18 as per local zoning regulations.

Risks

Risks that need careful consideration when making investments in senior living include affordability, which is seen to become a key issue as the number of middle-income seniors in the US is set to rise with the ageing of Baby Boomers.

Researchers have found that 54% of US mid-income seniors won't be able to afford senior housing in 2029, even if they sell their homes and use all of their annual financial resources. Baby Boomers may already find it difficult to sell their homes to move to senior housing as many of their properties are in places where younger generations don't want to live. In combination with these trends, a possible economic downturn or a recession can hit unprepared investors and operators hard.    

The most popular strategy to address the 'mid-market challenge' is expected to be the repositioning of existing market-rate communities to serve the middle-market, according to 40% of 330 senior housing industry professionals polled in the recent survey mentioned earlier. Developing new middle-market units (20%) and redeploying capital into existing middle-market assets (18%) are seen other options to tackle this risk, albeit to a much lesser extent.    

Another aspect to watch for investors and developers is development cost, which is expected to increase modestly in 2020 with labour, land and construction material expenses picking up. The overall cost for a senior housing project already rose by 6.4% in 2019 to an average of $317 per square foot. But average returns, defined as stabilized net operating income as a percentage of overall development costs, also increased, to 9.5%, up by 60 basis points in 2019.

Future changes in average occupancy may also pose risks for investors. Senior housing occupancy edged up in late 2019 from historic lows in 2018, when new supply generally increased faster than demand. Market players are generally optimistic about occupancy rates in 2020, especially for active adult rentals and independent living units. Some 62% of those US professionals polled recently expect occupancy growth in these two sectors, while 61% and 59% said occupancy will stagnate or fall in continuing care retirement communities and the skilled nursing care sector, respectively.   

Technology innovations could generate both opportunities and challenges to senior living investors. Tech solutions, like app-based grocery delivery or wearable monitors, may increase the ability of older adults to remain independent and out of senior housing communities until later in life. On the other hand, digital services such as food delivery can help senior living operators improve profit margins by cutting back on the costs of in-house dining through new partnerships similar to existing tie-ups with car services to transport residents.    

 

 About the author:  Roger  A. Allen, RLA Group CEO  

Roger is the founder of Resources for Leisure Assets (RLA) and brings a no-nonsense approach to the leisure industry, that is based on a proven track record of representing owners and operators best interests. Roger has worked with many of the leading hotel operating brands and most influential hotel owners and real estate developers around the world.  Furthermore, successful ongoing engagements with government entities and high net worth individuals keep him fully engaged with the day to day project development responsibilities.

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