America’s population is ageing. Improvements in medicine, nutrition and lifestyle mean that people are living longer than ever before. Governments might regard this as a problem, but many investors are realising the opportunity.
Our real estate ethos is to focus on operational real estate – investments which are asset-backed and underpinned by operating businesses which can drive earnings growth and deliver essential services to customers.
We’ve discussed this before in relation to student accommodation, but another area with significant investment potential is senior housing.
Changing demographics: Opportunities for growth
There are a number of reasons why the ‘silver economy’ might represent a strong investment. The first is demographics, which influence supply and demand. America’s ageing population is set to result in a spike in demand for the diverse categories of senior living. What’s more, over the past decade, construction of new supply has not maintained pace, while the majority of existing senior housing stock is out-of-date or requires capital works. Interestingly, this sector has also proven to be resilient during periods of recession.
America’s ageing population
- By 2035, there will be 80 million Americans over the age of 65;
- There will be more than 10 million Americans older than 83 by 2025;
- The non-profit National Investment Center values the senior property market between $250 billion and $270 billion;
- This amounts to approximately 22,000 properties with just under three million beds.
A large, diverse group with divergent needs
Accommodation for seniors has undergone a revolution in recent years. There are now several categories of senior living, reflecting the diverse needs of America’s baby boomers. The three main options are: independent living, assisted living and skilled nursing.
Categories of senior living
- Independent living facilities are for seniors who want the convenience of senior living, but who do not need constant assistance. These facilities generally include recreational activities and fine dining options.
- Assisted living facilities combine the independence of the above category with personal support assistance and healthcare services.
- Skilled nursing services provide 24-hour care for short or long-term conditions. These facilities are for people with a variety of conditions and allow for a far more intimate and attentive form of care. opportunities
Understand the sector, understand the risks
While the silver economy might be the source of numerous investment prospects, investors should always be aware of the potential risks, and how to manage them.
- Choose your investment targets carefully: Underperforming operators are starting to display signs of distress in several areas of the US, due to over-investment and a lack of understanding of industry dynamics.
- Location is everything: While the senior living sector has significant upside potential, it has become increasingly popular among investors. As such, some regions in the USA are over-leveraged due to over-supply and over-capitalization.
- Generational sentiments can change: Just because a sector of society currently exhibits certain attitudes, it does not mean that will always be the case. Broad attitudinal trends can change. For instance, in recent years, some senior living operators have reported that potential customers are living at home for longer periods or moving to college towns in order to be closer to their families or to support children attending university.
- Keep an eye on residential housing: A strong residential housing market is generally a tailwind for the senior living category, because people often sell their family home to fund their retirement plans. Multi-family homes have seen almost a decade of uninterrupted growth, but it is unlikely continuous growth can be maintained indefinitely.
- Beware of an over-leveraged market: While we’re not seeing the high levels of leverage and other risk factors observed ahead of the 2008 crisis, if the multi-family housing sector experiences a period of slower growth, this may have flow on implications for the senior housing category.
While the sector has experienced significant growth over the last five years, operators have had mixed success in this space. Below is a snapshot of some of the more prominent listed groups to watch:
- Brookdale Senior Living (NYSE:BKD) is America’s largest senior living community operator, with 851 assisted living communities, 129 independent living communities and 75 skilled nursing retirement centres.
- The Ensign Group (NASDAQ:ENSG) boasts consistent profitability, which is underpinned by its independent and assisted living facilities at 61 locations across the US and 170 skilled nursing facilities.
- Welltower (NYSE:WELL) is a real estate investment trust (REIT) specialising in senior living facilities, which invests in real estate and leases the properties out to other companies.
Source: Bloomberg Markets as at 11/23/2019
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