Essay | Global Vision 2022

An older generation and next generation property sectors

By Andrew Angeli

an-older-generation-hero

The story on ageing is nothing new, though it is often oversimplified. Over the past decade, investors have turned to senior living and care sectors based on the thesis that the greying of the baby boomer generation is creating millions of new customers for specialised residential facilities. These run the gamut from age restricted resort-like communities to assisted living and nursing homes.

A demographic imperative

At a headline level, population projections justify this line of thinking. Over the coming decades, all regions of the world will undergo significant demographic changes due to ageing. Across OECD countries, the number of people aged over 65 years will climb from over 245 million in 2021 to nearly 374 million in 2050.1 The changes are even starker for older cohorts. In Europe, countries such as Germany, Italy, Spain, and Portugal, the proportion of the population aged over 85 is expected to more than double.2 During this same time horizon, the working age population (15-64) is expected to decline, translating to an ever-precarious dependency ratio, further stretching public finances, and raising questions about who will take care of the old.

But ageing shouldn’t be viewed simply as a mathematical phenomenon. After all we are social creatures with basic human needs. According to psychologist, Abraham Maslow, these include shelter, personal safety, friendship, and respect.3 And while these generally stay the same throughout our lives, our expectation of their delivery evolves. So too does our ability to finance satisfying these needs as well as governments’ capacity to provide a subsidy.

In this essay, we will examine the opportunities and challenges that living longer presents to property investors. Not everyone is destined for the same living experience later in life. We’ll learn that this is a highly nuanced operationally intensive space carrying a host of risks as well as opportunities. This suggests that there will be a wide gap in performance prospects when investing into this inescapable megatrend. In conveying the story, we’ll focus on Europe, but because many of the trends are globally applicable, we’ll reflect on the experiences in other regions as well. Also, commentary will oscillate across later living formats and target age groups, before concluding with sub-sector investment recommendations.

More than numbers

An ageing European population is transforming the structure of society, though the speed with which it is occurring may come as a surprise. Older people, defined by the World Health Organization (WHO) as those aged 65 years or more, in the EU-27 will increase significantly, rising from nearly 92 million in 2020 to reach 130 million by 2050. During this period, the number of people above 85 years is projected to more than double.4 The shift in those aged over 85 is particularly stark in a country like Italy (Figure 1). By contrast, the latest projections suggest that in OECD countries there will be 14% fewer working aged people living by the middle of the decade. Current and future population pyramids illustrate just how great this shift will be (Figure 2).

This demographic development, can, in many ways, be considered a success story, as it reflects reductions in child mortality, advances in medical technologies, healthier lifestyles and improved living conditions. But the growing number and share of older people within society poses challenges. As introduced in The Big Squeeze: Global Labor Market Demographics, the old-age dependency ratio — or the number of older people relative to the size of the working-age population — will continue to rise. As this does, there will be a smaller workforce to take care of older generations. This has huge implications as it will increase the burden on government finances, necessitate changes to the statutory retirement age and lower levels of pension provision. As it relates to the topic of this paper, this raises serious questions about financing housing and care later in life and even who will buy the houses that old people need to sell.


Source: OECD.


Source: Eurostat.
 

A fragmented landscape

For those who have previously compared housing markets around Europe, it will come as little surprise that the landscape by tenure for those over 65 is also fragmented (Figure 3). That said, there are some important commonalities. Older people are more likely than younger people to be homeowners. In 2018, some 61% of older people living alone in the EU-27 were homeowners with no outstanding mortgage. By contrast, more than one third of older people rented their homes, split approximately two thirds at market rate and one third living in some form of socially subsidised housing. This backdrop is important as housing wealth will play a key role in financing housing for the old, whether it is in age-restricted active adult communities or later living and extra care. Furthermore, preferred housing tenures before one reaches old age will influence choices later in life. Germany and the UK, the most mature senior housing markets in Europe, provide an interesting juxtaposition. In the case of Germany, a for-rent senior model dominates, which is akin to the US or Japanese experience. In the UK, owner occupation makes up a greater share of senior housing, like in Australia. Suffice to say, housing tenure profiles should be carefully considered when devising a senior living investment strategy.


Source: Eurostat.
Note: figures ranked by owner with no outstanding mortgage or housing loan.

The preferred later living model: a global perspective

While the focus of this essay is to contextualise investing in real estate supporting those later in life, there is of course another alternative. Incentivising self-reliance and enabling the old to be looked after at home for as long as possible is a viable option. This has been a cornerstone of policy in the Netherlands for more than a decade, which has helped ease public financing pressure. In Australia, “ageing in place” is being championed by the government. And for good reason, it is substantially cheaper5 and there is a body of academic literature supporting the case for people to stay out of institutionalised care.6 These extend beyond the basic role of shelter and consider the importance that neighbourhood and community have in the lives of the elderly. In much of Asia, historically there has been a certain stigma about family’s inability to care for their own elderly, which has resulted in a home care model and constrained growth of an institutionalised senior housing sector. Data from the US illustrates, that despite a growing population, the number of people over 65 living in nursing homes has declined since 1990 (Figure 4). The trend partly reflects a growing preference for alternative settings for later living but also a small share of the population that can afford prolonged care.7 

In the future, living longer at home can be bolstered by innovative medical technology and aided by gig economy-facilitated services. Admittedly, this challenges the investment thesis into the asset-backed care home sector, though it could shift attention to creative proptech solutions which foster autonomy and independence for an older generation. After all, this is what most people ultimately want.


Source: U.S. Census; KFF.org
https://www.census.gov/content/dam/Census/library/publications/2014/demo/p23-212.pdf
 

The pandemic and reputational risk

Across the rich world, nearly half of all deaths from Covid-19 have happened in care and nursing homes, even though less than 1% of the population live in them.8 The problem is not only that the residents’ age makes them particularly vulnerable to the virus, but also that living arrangements can create opportunities for it to spread. We’ll spare the macabre stories that circulated during the first wave of the virus in mid-2020. However, we acknowledge that this is hardly the backdrop that entices a prospective resident or indeed their family to facilities that have been ravaged by the virus — or those that have not.

This of course has had an impact on occupancy levels. In the UK, care home occupancy, which approached 90% pre-pandemic has hovered slightly below 80% since its onset. This has had a direct impact on operator profitability. According to Knight Frank, EBITDARM9 as a percentage of income for UK operators has fallen to 26%, its lowest level since first being tracked in 2008.10 The sector, however, is showing fledgling signs of recovery. Reporting from European listed care home providers during the third quarter of 2021 indicates that a slow, but steady, recovery to more normal occupancy levels is underway.11 12 13 More recent data from the US casts a slightly different shadow. According to the National Investment Center for Senior Housing and Care, optimism regarding a near-term occupancy recovery to pre-pandemic levels is flagging.14 This highlights the sensitivity the sector faces to the evolving public health situation.

The early pandemic experience is a reminder that reputational risk, which becomes proportionally greater as you move up the care spectrum, is an important consideration when investing in housing for the old. The sector effectively takes the form of a hybrid of traditional real estate and a full-service hotel, with the added complexity of healthcare. This represents a layering of operational and custodial risk which isn’t necessarily suitable for all investors.
The age-restricted active living segment is well placed to cater to those in search of community and a lifestyle change after the prolonged lockdown experience. With house prices having continued to rise during the pandemic, some may see this as an attractive trade.
However, for those accepting these sensitivities, there is a real opportunity now to reimagine specialised residential facilities for those later in life. The age-restricted active living segment is well placed to cater to those in search of community and a lifestyle change after the prolonged lockdown experience. With house prices having continued to rise during the pandemic, some may see this as an attractive trade.  Another outcome is creating more-intensive operational facilities that meet evolving occupier preferences and regulatory standards. And this of course presents and interesting investment opportunity. It is conceivable that senior-living facilities could prove that they are best able to handle future viral outbreaks, thus supporting demand and potentially setting standards transferable to other property sectors.

Demographics from another perspective

So far in this essay, we focused on the users of specialised senior living facilities. But there is also a powerful demographic force which challenges the viability of the senior care sector. During the past decade, in three-quarters of OECD countries, growth in the number of long-term care workers has been outpaced by the growth in numbers of elderly people.15 The pandemic has further exacerbated the problem as care workers have left the profession given precarious working conditions and vaccination requirements.

In the US, the number of people employed in nursing and residential care facilities has fallen by 425,000 people, or nearly 13%, since late 2019 (Figure 5). More worryingly when taking a longer-term view, the OECD forecasts that the number of care workers will need to increase by 60% by 2040 just to maintain the present ratio of careers to elderly people.

There is an urgent need to attract and retain more long-term care providers to the profession as well as to improve worker productivity. Increased remuneration is an obvious first step, though this presents a challenge for cash-strapped public bodies and private operators who have seen margins eroded. Echoing commentary from The Big Squeeze: Global Labor Market Demographics, a more constructive debate around immigration policy for care workers is also necessary. This is because the majority in the profession, especially in wealthy nations, are foreign-born. Furthermore, countries with very large old populations, such as Japan, Germany, and Italy, have historically had restrictive stances toward immigration. If unaddressed, this will jeopardise the viability of the later living property sector. In the UK, a decline in care worker numbers has been linked to Brexit. A recent report from the Migration Advisory Committee recommends that the government set up a formalised route to allow care workers into the UK.17

And for good reason, Skills for Care, an industry body, reported that there was an average of 112,000 job vacancies in the sector at any given time in 2020.18


Source: Refinitiv, latest = July 2022
 
Innovation of course will also be necessary.  Implementing simple, non-invasive proptech solutions such as smart sensors or GPS monitors at home or in high acuity care facilities is a relatively low-cost option. As a sign of things to come, more complex technological devices – such as companionship robots or self-sufficient smart homes – are making their way into care settings in Japan. There is some evidence that humanoid robots have positive effects in health care for the elderly with respect to mood, loneliness, and social connections with others.

While it may seem farfetched to be cared for by a robot, one could argue that aging digital natives will be more accustomed to non-human interactions. It remains to be seen, however, whether technological advancement can completely replace the attention of a skilled care provider. But given increasing dependency ratios there may be little alternative.  Investors in later living subsectors need to recognise that they are more than landlords. They facilitate the delivery of a critical service, and their success is dependent on the competence of the operator, its staff, and increasingly technological solutions.
As a sign of things to come, more complex technological devices – such as companionship robots or self-sufficient smart homes – are making their way into care settings in Japan. There is some evidence that humanoid robots have positive effects in health care for the elderly with respect to mood, loneliness, and social connections with others.19 

Investor attitudes and activity

Despite the challenges that the senior living sector in its various formats can present, property investors have become increasingly receptive in recent years. According to the 2022 ULI /PwC Emerging Trends Europe Survey, “retirement/assisted living” assets are seen to provide the most compelling investment and development opportunities than they have in the past five years.20 Survey respondents cite undeniable long run demographic trends, but are also influenced by the fact that Covid-19 has slowed construction activity. This means that the supply and demand imbalance that has been evident in many countries will further exacerbate over the near term. In the listed real estate space, senior living and care companies are regarded for their defensive characteristics. During the sharp market sell off at the onset of the pandemic, European healthcare REITs proved comparatively more resilient than other listed real estate companies and subsequently saw lower volatility through 2021 (Figure 6). Performance has been mixed in 2022. This is partially due to allegations of malfeasance at a French healthcare operator and fears of contagion to European REITs. Such fears have begun to subside, and as at mid-August 2022 the sector trades at a premium to underlying NAV.  This is contrasted by the North American experience, where senior and healthcare focussed REITs saw a sharper immediate sell off, but eventually posted a stronger bounce back. The sector has underperformed the broader REIT market since early Q4 2021 as inflationary concerns have mounted, staff shortages have become acute and virus variants foster further uncertainty (Figure 7). The U.S. sector currently trades at a modest premium to NAV.


Source: Refinitiv, latest = August 11, 2022
Selected healthcare REITs include: Primary Health Properties, Assura, Target Healthcare, Impact Healthcare, Aedifica,
Cofinimmo, Care Property Invest


Source: Refinitiv, latest = August 11, 2022
Selected healthcare REITs include Well Health Technologies, Healthpeak Properties, Ventas, Caretrust REIT, And
Diversified Healthcare
In terms of transactional activity, volumes have held up well during the pandemic, underscoring the perceived defensive nature of the sector. According to Real Capital Analytics (RCA), investment in the European “senior housing and care” space remained above €8bn on a rolling annual basis through Q2 2022 (Figure 8). And while its share of total investment activity remains small, it has grown in recent years, mirroring the trends in the much larger private rented residential sector (Figure 9). Investment growth has been constrained by the limited supply of operational assets. As a result, an increasing number of deals are forward funding or development, which of course caters to a specific risk/return tolerance. 
Survey respondents cite undeniable long-run demographic trends, but are also influenced by the fact that Covid-19 has slowed construction activity. This means that the supply and demand imbalance that has been evident in many countries will further exacerbate over the near term. 

Source: Real Capital Analytics (latest = Q2 2022), Eurostat


Source: Real Capital Analytics, data through Q2 2022

Compared to other property types, senior housing has historically attracted a limited amount of foreign capital. According to RCA, over the past five years, cross border investment accounted for 30% of the total volume on average, compared to 40% for multifamily and 62% for student housing. The sector requires solid knowledge of a changing regulatory environment as well as an understanding of anchored habits from the elderly population, both of which vary from one country to another. Furthermore, as the sector is still in its infancy, the market remains opaque, often resulting in protracted transaction processes which can be a deterrent for some investors.

Geographically, investment activity has broadly followed the wider investible universe, with the U.K., Germany and France being the three largest markets in Europe (Figure 10). This is largely a function of domestic pension funds and public REITs being pioneers in these markets. Based on the scale of demographic change, state of housing markets, private wealth of the elderly and level of pension funding, Germany, France, the U.K., Italy, and potentially Poland should offer the greatest investment opportunity set over the medium term.


Source: Real Capital Analytics, data through Q2 2022

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The growing need for affordable senior housing

Earlier in this essay, we alluded to worsening dependency ratios across Europe. Coupled with healthcare price inflation and the high level of indebtedness facing certain governments, this suggests less revenue to fund state pensions and subsidise long term care. This may require pushing back retirement ages, which along with amending immigration policy, is a highly sensitive political issue. Regardless of the official statutory age to receive government benefits, for many, working longer will be inevitable. Japan may serve as a model, where those in their 70s have remained successfully in the labour force, despite an official retirement age of 63 for men and 61 for women. In the UK, long-term forecasts from the Office for Budget Responsibility indicate that the share of those working aged 60+ is expected to shift in a pronounced fashion. By 2067, nearly three quarters of those aged 60-64 will still be employed, not too dissimilar than the levels expected for younger cohorts. For those between 65-69, the share of people expected to still be in the workforce will more than double compared to today’s levels. (Figure 11). A shifting multi-generational workforce of this magnitude has myriad implications and is another demographic megatrend worth exploring separately.
 
Regardless of the official statutory age to receive government benefits, for many, working longer will be inevitable. Japan may serve as a model, where those in their 70s have remained successfully in the labour force, despite an official retirement age of 63 for men and 61 for women.

Source: UK Office for National Statistics for historic data to 2020, Office for Budget Responsibility for forecasts to 2067

Along with working later in life, older people will increasingly have to rely on personal savings to fund housing and care. We see this as a particular concern because in many European countries those over 65 years are already more overburdened21 than the total population from a housing cost perspective (Figure 12). It is concerningly high in countries like Greece, Denmark, Germany, and Switzerland. Added to this, many of the current buildings used for senior housing and care are insufficiently flexible to meet today’s, let alone tomorrow’s, standards. This will pose huge challenges to policymakers and speaks to a growing need for affordable senior housing.

But this also creates an attractive investment opportunity. As we have seen in the non-age-restricted European affordable housing space, there is an important role for private capital to play. Future proofing existing senior housing assets and increasing capacity requires collaboration between local authorities, healthcare institutions and investors. This can free up capital for cash-strapped public entities and allow health service providers to do what they do best: taking care of people. And investors receive stable returns while delivering a positive social impact.


Source: Eurostat
The housing cost overburden rate is defined as the share of people living in households where total housing costs represent more than 40 % of disposable income.

A senior living investment strategy: our model portfolio

CBRE Investment Management’s taxonomy of real estate categorises senior living and care/nursing as Next Generation property sectors. This is because, whilst they currently make up a small share of total investment activity, we anticipate both playing a greater role in institutional portfolios. The same is also true for medical offices, life sciences and student accommodation, which all share some overlapping supply/demand dynamics. For Next Generation sectors, in general, and senior living and care/nursing, specifically, we recommend using the full suite of strategies (listed/unlisted; credit/equity; infrastructure/real estate) to execute in markets where the size and liquidity of the opportunity set remains limited, but demand is high.

According to our H2 2021 Global House View for private equity real estate, we have divergent views for the senior living and care/nursing segments (Figure 13). For senior housing, we recommend a strong overweight position relative to the estimated market cap. This is because of the favourable demographic forces discussed in this essay but also the expectation that this segment is set to institutionalise and make up a greater share of the investible universe. This recommendation is tilted to established markets like the US, UK, and Australia, though we see scope for early mover advantage in certain European countries. 

By contrast, we recommend a strong underweight for long-term and acute care/nursing. Whilst the demographic shift of those aged over 85 is undeniable, we have concerns about reputational risk post-pandemic, labour sensitivity as well as affordability. However, we acknowledge the attraction of long term-leases, often to government-backed entities, which can provide secure recurrent income.


Source: CBRE Investment Management . H1 2022 Global House View
*Care/Nursing comprises of all sub-sectors in the healthcare classification from MSCI.
 

Conclusion

Throughout this essay we’ve reiterated that the senior living and care segments of the property market are highly nuanced and operationally intensive. This is because they are closely linked to fulfilling fundamental human needs often at sensitive times in peoples’ lives. Not everyone is destined for the same experience because of abilities to finance housing later in life and indeed personal choice. But the implication of ageing on demand for real assets is an inescapable megatrend that should not be overlooked.

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Footnotes

1 OECD.Stat (2021), Population projections. Available at https://stats.oecd.org/Index.aspx?DataSetCode=POPPROJ
2 Ibid.
3 Maslow's Hierarchy of Needs (2020), Simply Psychology. Available at https://www.simplypsychology.org/maslow.html
4 Eurostat, online data codes: demo_pjangroup and proj_19np
5 Bridge, C., Phibbs, P., Kendig, H., Mathews, M., and Cooper, B. (2008), The costs and benefits of using private housing as the 'home base' for care for older people: secondary data analysis, AHURI Final Report No. 115, Australian Housing and Urban Research Institute Limited, Melbourne. Available at https://www.ahuri.edu.au/research/final-reports/115.
6 James, A., Rowley, S., Stone, W., Parkinson, S. Spinney, A. and Reynolds, M. (2019) Older Australians and the housing aspirations gap, AHURI Final Report 317, Australian Housing and Urban Research Institute Limited, Melbourne. Available at http://www.ahuri.edu.au/research/finalreports/317, doi: 10.18408/ahuri-8117301.
7 West, L., Cole, S., Goodkind, D., and He, W., (2014) 65+ in the United States: 2010, United States Census Bureau. Available at https://www.census.gov/content/dam/Census/library/publications/2014/demo/p23-212.pdf
8 Comas-Herrera, A., Zalakaín, J., Lemmon, E., Henderson, D., Litwin, C., Hsu A., Schmidt, A., Arling, G., Kruse, F., and Fernández, J-L., (2021) Mortality associated with COVID-19 in care homes: international evidence. Available at https://ltccovid.org/wp-content/uploads/2021/02/LTC_COVID_19_international_report_January-1-February-1-1.pdf
9 EBITDARM: Earnings Before Interest Tax Depreciation Amortization Rent and Management fees
10 Knight Frank (2020), 2020 UK Care Homes Trading Performance Review. Available at https://content.knightfrank.com/research/548/documents/en/care-homes-trading-performance-review-2020-7621.pdf
11 Impact Healthcare REIT (2021), Interim report 2021. Available at https://www.impactreit.uk/wp-content/uploads/2021/09/IHR-IR21-web-1.pdf
12 Target healthcare REIT (2021) Quarterly Investors Report – November 2021. Available at https://www.targethealthcarereit.co.uk/investors/literature/financial-reporting/?year=2021
13 Cofinimmo (2021), Quarterly information (27 October). Available at https://www.cofinimmo.com/media/5227/r%C3%A9sultats-3t2021_en_final.pdf
14 Peck, L., Executive Survey Insights Wave 35: November 8 ¬– December 5, 2021, NIC (16 December 2021). Available at https://blog.nic.org/executive-survey-insightswave-35-november-8-december-5-2021
15 OECD (2020), Who Cares? Attracting and Retaining Care Workers for the Elderly (22 June 2020). Available at https://www.oecd-ilibrary.org/social-issues-migration-health/who-cares-attracting-and-retaining-elderly-care-workers_92c0ef68-en
16 Ibid.
17 UK Government (2021) Migration Advisory Committee (MAC) annual report, 2021. Available at https://www.gov.uk/government/publications/migration-advisory-committee-annual-report-2021/migration-advisory-committee-mac-annual-report-2021-accessible-version
18 Skills for Care (2020) The state of the adult social care sector and workforce 2020. Available at https://www.skillsforcare.org.uk/adult-social-care-workforce-data/Workforce-intelligence/documents/State-of-the-adult-social-care-sector/The-state-of-the-adult-social-care-sector-and-workforce-2020.pdf
19 Broekens J., Heerink M., Assistive social robots in elderly care: a review (2009). Available at https://www.researchgate.net/publication/229058790_Assistive_social_robots_in_elderly_care_A_review
20 ULI/PwC (2021), Emerging Trends in Real Estate Europe 2022. Available at https://www.pwc.com/gx/en/asset-management/emerging-trends-real-estate/assets/emerging-trends-in-real-estate-europe-2022.pdf
21 The housing cost overburden rate is defined as the share of people living in households where total housing costs represent more than 40 % of disposable income.