People are living longer. The number of people aged 75 and over in the EU is expected to almost double by 2050, and the demand for care and housing for them will rise accordingly.
This is one of the main takeaways from ING’s recent report, Elderly care and housing demand in the EU, which highlights the tailwinds that are creating market opportunities for real estate investors and lenders. These tailwinds also include the expected increase in incomes for elderly EU households and changing attitudes among Europe’s elderly populations towards senior housing options.
According to Savills, investment in senior living in the UK – arguably the country with Europe’s most established market for the sector – increased by 3.6 percent last year to £1.2 billion (€1.4 billion), its highest ever level. Investor demand for senior housing in the UK far exceeds supply. This has resulted in steady yield compression over the past six years, with prime yields for care homes hardening by 225bps over that period.
This surge in investor interest is not only supported by demographics, but by rental growth. Although many care home rents in the UK are linked to the Retail Prices Index, Savills estimates that like-for-like rents on standing investments are 7.6 percent higher in real terms than they were in 2014.
The lack of debt liquidity in this space means higher margins for lenders that are keen to back senior living assets. A source tells us that developments in the UK with a loan-to-cost ratio of around 60 percent can secure loan pricing of more than 400bps, while those with an LTC of 75 percent are typically priced in the 650-750bps range. This compares with development loan margins of around 350bps for UK office schemes with LTCs of 60 percent or less, according to data from CBRE.
And yet, despite these tailwinds, many lenders still view senior living with caution. Some have told Real Estate Capital that they fear the reputational risk of being associated with the failure of a care home provider. Others stress the need to be sure of a care home operator’s expertise and track record in such a socially important sector. Certain lenders point out that many care homes across Europe are dependent on local authorities paying patients’ fees, rather than on private patients paying for themselves, and that this makes them vulnerable to changes in public spending.
However, the market opportunity for senior living is likely to spread across Europe, as happened with the student accommodation sector – in which the UK has led the way with purpose-built products, with the Spanish, French and Irish markets following suit. The ING report, which analyses 11 EU countries, notes that the potential demand for senior housing is highest in the Netherlands and Spain: the Dutch market ranks first in terms of elderly people’s wealth, while Spain’s elderly population is projected to continue growing by more than the EU average until 2050.
Given the need to house Europe’s growing elderly population, the care home sector is a compelling opportunity for real estate investors and lenders. However, as with other growth sectors in real estate, such as build-to-rent residential and co-working, the success of an investment ultimately comes down to the strength of the operating business. This is especially true of the elderly care sector. Although the sector is loved by few lenders, it still presents a growth opportunity for those prepared to gain a thorough understanding of their operators’ businesses.
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