Tobias Kotz, Global Head of Client Relations and Capital Funding at Real I.S. AG
High construction and finance costs and declining property prices are a major challenge for the whole of the real estate sector. Banks and other lenders are placing an ever-greater focus on experience and security and are acting cautiously. Because of the changed financing environment, many real estate projects are delayed, or even completely cancelled. The risks for the operators of properties such as residential accommodation for senior citizens are also increasing due to higher energy costs, staff shortages and rising labour costs.
However, even in the current challenging market situation there are opportunities for attractive property investments. There are still low-risk asset classes which are seeing dynamic growth. They include residences for senior citizens.
Supply remains limited whilst demand increases substantially
The great advantage of senior living properties is that they are largely independent of fluctuations in the economy. The demand for residential accommodation suitable for elderly persons is completely separate from the state of the economy, and in an age of demographic change it is no surprise that this demand is constantly growing. In view of the growing number of elderly people in the population, the demand for senior living will increase dynamically over the next few years. According to the German Office of Statistics (Destatis) every fifth person is already older than 66. By the middle of the 2030s, the number of people of pension age will increase by about four million to at least twenty million. Similarly, the number of very old persons, and thus the probable demand for residential care in Germany, will greatly increase from the mid-2030s. According to the results of the nursing care forecast by Destatis, the number of people in need of nursing care in Germany will already reach about 5.6 million by 2035, which is 14 percent more than the number in 2021. By 2055, it is predicted that this figure will increase by 37 percent to 6.8 million.
At the same time, the surplus of demand will increase dramatically because the supply of suitable properties will not be able to keep up with the rising demand. In Germany, there is already a shortfall of 500,000 units for supported living, and experts expect this shortfall to grow to about 560,000 by 2040. An additional factor – which applies to residential buildings in general – is that the new building pipeline continues to shrink as a result of the current difficulties encountered by project developers. On the one hand this exacerbates the supply shortage, but on the other hand this could also have a positive effect on the valuation of existing properties.
Market analysis and active real estate management are more important than ever
Health care properties, especially senior citizen residences, could be a very good supplement in a diverse real estate portfolio. This asset class is proving to be resilient, particularly in the difficult current market conditions. Construction costs for real estate for elderly people are often higher than the costs of other residential properties or office buildings because of the special requirements involved. But this can be compensated by the higher rents and longer-term rental contracts which are generally achievable in senior living properties.
Nevertheless, this vibrant growth segment does not offer an automatic guarantee of success. It requires precise market analysis and active real estate management to identify and realize its potential. This is because the senior living market is highly fragmented and requires an exact knowledge of each specific regional submarket segment. New projects naturally also depend on the experience and implementation capacity of the project developer and on concepts which satisfy the long-term demands of the market. It must be remembered that senior living developments are operator-run properties. This aspect should not be underestimated. The selection of the operating company, which should be experienced and professional, can also be essential for a successful investment in senior living accommodation and for its sustained value. It is the operator which guarantees the quality of the care given to the senior citizens and a high utilization of the space in the premises. The demands which senior citizens of today place on their residential environment, service and leisure facilities are different from previous generations, and they want to be self-determined and active in their lifestyle.
CONCLUSION: Senior living – a market segment with great potential, but also special features
Senior-living properties are certainly not niche products. They have developed into an independent and rapidly growing asset class. Such properties can offer great opportunities and attractive yields for real estate investors, even in the present challenging market situation. The shortage of supply and the continued growing demand for residential forms suitable for elderly people in an increasingly aging population create good long-term prospects and very promising investment options for investors. The falling prices in the current situation could offer interesting opportunities to enter this sector. The prices of such properties are likely to increase due to the high demand and the limited supply. However it is important to know the risks and challenges involved in the development and operation of senior-living properties and to take systematic steps to minimize them. This is because senior living involves special considerations which should be taken into account. This is a special segment which requires experience, forward-looking concepts and professional market participants who know how to operate in this sector.