While still in demand among property investors, the senior living sector is facing operational challenges and a growing responsibility to protect its residents.
Often accounting for a large portion of Covid-19-related deaths, care homes have been in the eye of the coronavirus storm which has engulfed Europe. Like hospitals, they have been overwhelmed by an extraordinary pandemic - with some managing better than others.
Notwithstanding protocols already in place, a number of care home facilities suffered from a lack of staff and equipment, and the extra time needed to source this resulted in a sharp rise in excess deaths. On the other hand, care homes which were quick to take measures from the outset were left nearly unscathed, says Erwin Drenth, director of healthcare investment at Dutch real estate investment manager Bouwinvest.
‘This is an important lesson to be learned from the crisis,’ notes Drenth, who oversees a €300 mln care home portfolio in the Netherlands.
‘Those facilities which at the very first signs of infection took unpopular measures by shutting down for visitors and applying infection-control procedures such as disinfection and personal protective equipment, reported very few cases.’
On average, the pandemic has left operators with a slight drop in occupancy estimated at between 3% to 7%. It has also resulted in higher operational costs, with operators incurring more expenses for personnel, equipment, disinfection and medical supplies, Drenth adds. ‘Of course margins are more compressed and the financial situation is worse than before. But operators are also receiving more government funding.’
UK vacancy rate
Andrew Cowley, managing partner at Impact Healthcare REIT, says the number of occupied beds in the company’s 94 UK healthcare properties has gone down by around 5% following the outbreak. Given the fear of infection, he warns that many vacant beds across the UK won’t be so easily refilled. ‘People are scared,’ he admits, ‘We are looking into what we can do to help rebuild families’ confidence in care homes. Of course operators need to be on top of infection control. Testing is key and our tenants are working hard on this.’
Privately funded facilities will have a tougher time than UK government-funded homes, with families more reluctant to move their loved ones, he adds. ‘The top end of the private pay market faces difficult times ahead. Underlying demand will still be there but families will likely put these types of decisions on hold until they feel safe again and can go around searching for the right senior home.’
At the same time, government-funded facilities are being pressured to halt new admissions until they are confident they are Covid-free. This is after a big push by the UK government in April to empty hospital beds by moving patients to senior homes, resulting in a wave of new cases in the sector. ‘We now know that admitting people from hospitals without testing is one of the quickest ways to spread the virus and this is one more lesson to be learned from the crisis,’ Cowley says.
With revenues shrinking, most operators are looking to postpone new investments, yet it is clear many of them will have to redesign interior space to maximise infection control. They may also lose beds if they have to close shared rooms or create segregated wards. ‘We are already thinking about what we need to do in order to make it possible for a building to have different units, that can be isolated completely from the rest in case of infection,’ comments Stefaan Gielens, CEO of care home developer-investor Aedifica, one of Europe’s biggest sector specialists. ‘This will be a challenge to organize particularly in existing buildings,’ he admits.
More consolidation expected
Although the operational side is facing challenges, experts agree that care homes as a niche property investment is so far showing more resilience than many other property segments.
Impact Healthcare’s Cowley says rents for the second quarter have been paid in full and on time. ‘We have not been asked to vary any of our leases and we are not seeing any impact so far on investment volumes either,’ he notes. ‘Transactions which were advanced in March are still happening. However, we have decided to pause new acquisitions until the level of uncertainty has reduced and there is not much new product coming to market. Liquidity in the short term has dried up, so if you are a landlord, you would not launch an asset for sale unless you are in distress.’
Aedifica, a Belgian REIT with a €3.5 bn portfolio spread across 455 assets in the Benelux, Germany, UK and the Nordics, also reported stable rents over the past quarter and said it is analysing a number of new investment opportunities. According to Gielens, transaction activity remains strong, driven by sound fundamentals and relatively high yields of between 4-6% (depending on the European country).
Nonetheless, he reckons that investors who are new to the sector might be scared off for the time being. ‘What might happen is that new investors with little understanding of the market will stay away for some time. Thanks to its high returns, this sector used to attract rent-driven buyers looking for cash-cow assets, but the new situation might put them off. Nevertheless, we believe that the sector will prove its resilience and will remain a very attractive asset class.’
Senior living real estate generally offers returns of around 5% with long-term triple-net leases averaging 15-20 years. It represents a compelling investment opportunity and this is unlikely to change in the future, due to growth in the ageing population across Europe, Gielens adds. ‘In the medium term, the crisis may even result in more opportunities for the sector,’ he says.
‘It may lead to a flight to quality as investors seek defensive healthcare assets. It may also result in growing aggregation in the industry as major operators have digested this crisis better than smaller ones.’
He continues: ‘I believe the private sector will lead the consolidation movement. Most countries coming out of lockdown need to support the economy and their public deficit has grown tremendously, so I believe public operators might decide to sell properties through sale-and-leasebacks instead of keeping them on their balance sheets.’
'UK bed crisis’
Britain could lose almost a third of its care home beds in the next five years with 6,500 properties at risk of closing without new investment, according to new research by Knight Frank.
The country faces a ‘national bed crisis’ without a £15 bn upgrade, despite an ageing population that indicates that demand will continue to peak over the next 30 years, the broker said.
‘At present, there is not enough care bed capacity and there is a structural under-provision of beds in the social care sector. The pandemic has accelerated trends to scrutinise those buildings that are not fit for purpose whilst emphasising the insufficient funding available for reinvestment into existing care homes, which has therefore expedited the number of potential care home closures,’ says Julian Evans, head of healthcare at Knight Frank.
The Covid-19 pandemic has placed additional pressures on the care home market which had already seen closures due to a range of factors including the continued impact of the National Living Wage affecting an already constrained labour market and ongoing staffing challenges, with an acute shortage of qualified nurses, combined with restrained care home development owing to building material inflation costs.
‘This will result in a national bed crisis unless significant inward investment in the UK care home sector is taken,’ adds Evans. ‘Our research shows that 6,500 care homes are at risk of closure currently, which is before we take into account that the peak of demand will continue to 2050 as our population continues to age.’
The UK trails other advanced European economies in terms of bed provision, lagging behind Belgium, the Netherlands, France and Germany, with only 13,000 elderly care beds per 100,000 people over 80.