The market for senior living is still in its infancy in the UK. Estimates from Knight Frank have placed the worth of the private UK market at just shy of £40bn, compared to investment manager AEW’s valuation of some $797bn (£650bn) for the senior housing market in the US.
To give another snapshot of how demand in these markets compares, AEW has estimated that 13% of people in the US aged over 80 live in private pay, or independent or assisted living properties, compared with less than 5% in the UK. The findings show the UK would need to build 267,500 units to match the US’s more developed market.
So what can the UK glean from the US and other overseas markets that are often far ahead when it comes to unlocking demand, handling risk and sizing up operators?
At a panel session hosted by AEW at the Hotel Café Royal in Soho, W1, panellists based in the UK, US, Japan and France shared their views on how each of their markets aims to meet future housing needs.
AEW has around $50m of senior living assets under management in the UK; on the other hand, it has $3bn AUM in the US, and $350m in France. AEW’s UK arm made clear its intentions to capture some of the same success that the US has had, having identified opportunities with the rental model in particular.
The care continuum
How senior housing fits into the living cycle varies dramatically between geographies. The US, for a start, is largely a social and care model as opposed to a medical model.
Brian Sunday, US-based director and senior portfolio manager for AEW’s senior housing investor funds, says that in the US the model mainly comprises independent living, assisted living and memory care, most of which can exist under the same roof.
“The good part about that is, residents do want to move into independent living, but they know they’re not going to have to move properties when they do need care – they can just move to a different wing,” says Sunday. He adds that the option is particularly popular for couples, if one spouse needs more care than the other.
In Japan, there is also an opportunity for independent living to mix with care, since the country’s long-term care insurance system can provide for assisted living and high levels of nursing care.
“We’ve seen some developers build this product, and we are looking at it carefully,” says Steven Bass, director and Japan country manager for AEW Asia.
Such approaches differ from the current set-up in the UK. Caryn Donahue, who relocated from Boston last year to lead Cushman & Wakefield’s retirement living service in the UK, says: “In this market, people very much segregate independent living from care homes – there is no spectrum in one community.
“A continuum of care is a huge opportunity that doesn’t really exist here. There are a few people thinking about putting that into the market, but not many are actually doing it.”
Risky business
The panellists agree that strong operators are critical to the success of any senior housing community. But Donahue says that there is some way to go before operators in the UK can catch up with their US counterparts.
“There are not many operators in this space, and not many that have a track record,” she says. “From an investor’s standpoint, they have a hard time putting money behind someone that does not have a track record, something that has not been built or has no pipeline. Many in the UK sit in this seat because unfortunately it is such a nascent market.”
The capitalisation of operators appears to present less of a problem in France. Paris-based Stéphane Sebban, a fund manager and executive director of AEW, says most operators are subsidised by the major developers, such as Bouygues.
“They are sponsored by the developer behind the residence, and part of the margin of development is used to [finance] the operator,” he adds.
Pricing is also a key risk in the UK. Alex Short, AEW UK REIT’s portfolio manager, says: “In the rental market there are precious few comparables, if any. It is very hard to know where pricing should sit. We are having to price off what else could happen to this land or these properties, where we anticipate rental growth.
“Clear visibility over where returns might go is difficult, but seeing how this evolves over time in other jurisdictions will be helpful.”
For Japan, policy is the biggest risk; any changes to the long-term care insurance system, an important pillar of senior housing, could be adverse. That said, Bass believes that the risk is low, pointing out that consumption tax in the country has been upped from 8% to 10%, in part to fund the care insurance system.
Closing the generation gap
Intergenerational living – whereby multifamily and senior housing are combined within the same space – is another concept often pinpointed for its growth potential. This has been ignited by housing trials in recent years from the likes of Homeshare and LinkAge in the UK, which have gained widespread praise. But the idea has yet to take off.
“I really believe it is the future, but I cannot work out how the planning environment in the UK can ever go there,” says Honor Barratt, managing director of London-based retirement living developer Birchgrove. “Their heads explode if you say you want to build something for old people, [let alone for] old and young people.”
Bass says that in Japan, the combination is much more commonplace. “We see a lot of multi-use developments that will include one senior housing component and another component of standard multifamily. We have some cases where one operator also operates a nursery school in the same building.”
The purpose in Japan is twofold – as well as the increased social interaction it brings, it is also driven by the scale of the property in question, in which it is not financially viable for senior housing to account for all of the capacity.
Sebban noted that operators in France are increasingly putting serviced residences on travel booking websites, since it can take two to three years to reach full capacity.
“They are really starting to mix senior residences with tourism,” he says. “It is a way of increasing their income, and it works well.”
Subverting expectations
The unifying theme across many of these markets and approaches is the importance of uprooting stereotypes and cultural barriers associated with senior living to boost penetration rates – something that each market still seems to be grappling with on various levels.
Some developers are experimenting with new designs to ramp up the appeal of senior residences. Barratt says her firm is experimenting with removing corridors to erase the “institutional feeling” of being “one of hundreds” living along one. One Birchgrove development is currently being built with no corridors, but eight lifts.
“It is expensive to build, but there is a tiny communal area – we are trying to get this below 10-15% [of total size], to see whether we can replicate the vibe you can get from living in a standard village,” she adds.
“It’s about knowing the immediate neighbours, and where the post office is. Can this be replicated around a lift shaft, rather than a really long corridor? It will take two years to build – I’ll tell you after that.”
Citing market research, Barratt also suggests that residents in the UK tend to prefer smaller properties with fewer than 30 units.
Still growing up
Demographics in the UK alone should be a compelling case for investment – the number of people aged 85 and over is expected to almost treble over the next 32 years, to 4.4m in 2051. Practically speaking, however, locations and product types remain a puzzle.
Investors who might be used to the more developed models in the US or Europe have traditionally found it tough to identify the best way of accessing the UK’s market, which remains largely split between the for-sale model and the government-funded sector, with rental product slowly growing on the side.
Demand for mid-market product also remains largely overlooked – most private stock has so far stayed on the high-end side.
“There is significant investor appetite here, but it is tricky to narrow in on exactly what it is they want to buy,” says Short. AEW’s UK business previously said in May that it was provisionally targeting an equity raise of around £300m-£500m to build a platform.
“Do they want to invest in the buy-and-sell model that still seems to be prevalent here? Is it the rental model that we can persuade them is the way forward for the future?
“There is still quite a long way to go in the UK, but certainly the demographic returns suggest that investor demand will follow.”
Given the demographics, it seems inevitable that investment in the asset class will get off the ground at some point. But it appears there is plenty to be learned from other international markets first, before coming of age.
To send feedback, e-mail pui-guan.man@egi.co.uk or tweet @PuiGuanM or @estatesgazette
