In the senior housing sector, independent living remains one of the most attractive asset classes for long-term investors. This is a robust growth market: crisis-proof and independent from general economic trends. Above all, the market is dominated by a chronic undersupply of product and lower absolute investment volume than in the care segment. At the same time, there has been a sharp rise in demand for modern, more personalised senior living concepts, causing the already enormous supply gap in Germany to grow ever larger. Our research reveals that 94% of German municipalities do not have a sufficient supply of independent living facilities for seniors. In 76% of communities, this shortage is severe.
Investment potential of EUR 64 to 100 billion in the independent living sector
According to our analysis, Germany has a supply of around 300,000 apartments in the independent living sector, of which 30,000 apartments are in the premium segment. However, in order to satisfy current requirements, we calculate demand for 550,000 apartments, including 90,000 in the premium segment. Of these apartments, 350,000 should be affordable to senior households based on their current incomes and a further 200,000 would depend on senior citizens converting other assets. This corresponds to an investment potential of around EUR 64 billion in terms of affordability from income, or almost EUR 100 billion in total. And these figures will continue to rise in the future: By 2035, an additional 200,000 independent living apartments, including 33,000 in the premium segment, will likely be required. As the market leader in the development of independent living facilities in the senior housing sector, we have outlined these findings for the very first time in a new white paper.
Healthcare real estate demonstrates its resilience
Healthcare real estate remains a robust growth market, even and especially during the coronavirus crisis. This now firmly established asset class is subject to growing investor interest, as confirmed by the latest market figures from CBRE. In 2020, the transaction volume totalled almost EUR 3.4 billion and represented a year-on-year increase of around 61%. In addition, the first quarter of 2021 was the strongest opening quarter since records began, with a transaction volume of EUR 790 million. Furthermore, according to CBRE, healthcare properties were the only asset class on Germany’s real estate investment market to grow their transaction volume compared with the previous year’s first quarter.
Once again, traditional care home properties dominated the investment market for healthcare properties, accounting for 57% of the investment volume, followed by a significant increase in the market share of assisted living that accounted for 32% of the market, up from the first quarter of 2021, the market value was already at 32 percent, an increase of 22 percentage points compared with the first three months of 2020. One of the greatest challenges faced by the healthcare real estate market is the low level of new build activity. Demand is growing and meeting it is more a question of supply than anything else.
Demographic developments drive demand for age-appropriate housing solutions
Demographic developments and the retirement of Germany’s post-war baby boomer generation are the two key factors that are driving demand for age-appropriate real estate. By 2030, the number of people in Germany over the age of 65 is expected to increase by 28% to 21.8 million and the number of people over the age of 80 is set to rise by as much as 38% to 6.2 million. As a result of the general aging of German society and the expansion of the definition of care under the latest Long Term Care Strengthening Act, the number of people in need of care reached around 3.4 million in 2017, thereby crossing a threshold that had originally been forecast for 2030. By 2019, the figure had climbed to 4.1 million, and further increases in the number of people in need of care are expected.
Surge in demand for independent living
Independent living in particular offers significant potential for investors. Compared with care home properties, the independent living sector is not regulated by the state and offers higher potential yields and less dependence on operators. In addition, the care home sector faces the threat of a bottleneck in the market for nursing staff, which represents a not inconsiderable risk to the ongoing operation of facilities and to the growth of the segment. At the same time, the independent living segment has virtually non-existent rental default, especially as rental income does not depend on residents’ employment situations. This means that rental default risks are significantly lower than is the case for ‘normal’ housing. Last but not least, interest in independent living is growing as a result of the political principle of ‘outpatient before inpatient’.
One important aspect in the development of the market is the dynamic growth in demand for age-appropriate housing supplemented by a range of basic and optional services. Demand for senior housing concepts that enable older adults to live independently well into retirement is steadily increasing. However, there is currently a distinct lack of appropriate product to meet this demand, especially in the premium segment. This is largely because independent living concepts can be better implemented in the premium segment, allowing a higher quality of tailored, resident-centric services that benefit from the more flexible deployment of personnel. Another challenge that does not have such an impact on the premium segment is that of steadily rising land acquisition and construction costs, which can be more easily compensated for with premium offers. At present, the premium segment accounts for around 10% of total supply, although the trend is clearly upward.
Overall, the independent living segment promises robust growth and is widely regarded as a highly attractive investment product, especially for investors looking to diversify their portfolios, benefiting from an attractive risk-return profile in a real estate sector that is becoming increasingly relevant to society. And with both demand and the supply gap growing, there is certainly great catch-up potential.
Note: The TERRAGON white paper “Investieren in Service-Wohnen für Senioren: Eine Markteinführung” (“Investing in the independent living sector: An introduction to the market”) with detailed location and purchasing price analyses is published by Vincentz-Verlag and is available (in German) here.
