Growth drivers in the senior living sector: insights from Hoong Wey Woon
How has the market been responding to the economic shifts we’ve all experienced recently?
I would describe 2023 as a tepid year for M&A deals. I think since interest rates have risen, there has been a divergence between buyer and seller expectations, as well as the increase in funding costs, which has basically meant that valuations and transaction levels dropped off dramatically. The good news is that we’ve seen that recover somewhat in the first part of 2024.
However, there’s still a lot of caution about. Anything that gets put in front of a credit or investment committee is needing five out of five green lights to proceed. In a bad market you might need four green lights. In a good market, three green and a couple of amber. But in the market we’ve had, the appetite for risk hasn’t been there.
In terms of debt, debt is available, but the cost of financing has risen sharply. Even low-cost low leverage financing is going to cost you at least 8% now.
That has made it difficult to transact from an M&A and transactional perspective. Looking ahead, though, some of the gap we saw opening between buy and sell-side expectations has started to close now that we seem to have hit peak interest rates. There’s now pretty much a consensus that interest rates will now be on a downward trend, maybe with two or three in the next six to 12 months.
What about the senior living sector specifically?
From both a macro and demographic perspective, the tailwinds are in favour of the sector. Clearly, we’re an ageing population and there will be a need for provision. Of particular interest is going to be, essentially, retirement villages and assisted living on the one hand and elderly care on the other.
I liken the retirement living market now to where build-to-rent (BTR) was 15 or so years ago, with developers building these big blocks of accommodation and then renting them out. The sector took a long time to gain momentum. I’ve spoken to retirement village businesses and the issue for them is having the comparable evidence on transactions, which is the same issue BTR faced. Once we get more evidence, transaction volumes should rise.
What will then be the growth drivers in the senior living sector?
Typically, how you get bigger initially is you get private equity, or family offices, willing to take a high risk, high reward opportunity. But to super-size the sector you need the institutions, like insurers and sovereign wealth funds, who are low risk, very cautious, but able to deploy large amounts of capital, to take on these assets. These organisations need that comparable evidence I mentioned earlier. There’s more evidence coming through in assisted living retirement villages, but it would be growing much more quickly with more evidence.
In care homes, the reality is that much of the existing stock is 20-40 years old and essentially not fit for purpose. Much of it needs to be replaced, before you even get to increasing the available stock. There’s massive demand, and dwindling supply. There’s been some stigma in the sector, on the back of the challenges some operators have had a few years ago, like Four Seasons and Southern Cross. That’s now largely played through and there are good operators out there, but things can always happen to disrupt – look at Clariane restructuring and then exiting the UK.
How do the two main senior living business models differ?
Retirement villages are a relatively new concept in the UK. They’ve been quite a big investment sector in America, New Zealand, Australia and South Africa. The retirement village is a complex where the residents are encouraged to live the fullest life they can. They have amenities like a hairdresser, a swimming pool etc but you might also get an hour of care a week included in the package. The care provider, which is regulated by the CQC, and which looks after the residents is generally outsourced in the UK.
With elderly care the provider is regulated by the CQC, and there are operational risks that come with operating those facilities. People tend to want to avoid going into a care home because, to be frank, the average stay is around 18 months. It really operates as end-of-life provision.
With retirement villages, the residents expect to enjoy themselves for a relatively long period. The issue at the moment, as I’ve said, is that there’s not the comparable evidence for investors. A few platforms have started operating in the UK, but there needs to be much more volume to cope with rising demand.
What are the tenure options in a retirement living village?
There are two primary financial models that retirement living operators have. One is the North American rental model, and one is the deferred management fee model which is more common in Australia and New Zealand. There are question marks there around how far the UK as nation of homeowners is ready to pivot to that rental tenure later in life, while deferred management fees – which is basically an exit fee charged on the sale of the property once it’s permanently vacated – are quite a new concept. Residents will need to understand the range of options and associated fees that they’re looking at.
Where do the investments in this sector tend to come from?
For retirement villages, the primary source of capital at the moment is North American and UK money. Oaktree is invested in the Life Story platform. Goldman Sachs is growing Riverstone. Bridges, Octopus and Axa have UK retirement living investments. There are platforms in private ownership too, like Adlington in the North of England. The care home sector is much larger and more mature, taking in capital from all over the world including the listed REITs and private equity. There’s lots of entrepreneurs and owner-backed businesses which have built up large groups of care home businesses. We’re seeing interest coming from Asia into this sector, including Singaporean groups interested in the yields that elderly care is able to generate – in a normal interest rate market.
Supply in this sector clearly needs to increase. How can that be achieved?
My main issue is around the planning system. In the UK we have a complicated, complex planning system. It takes a long time to get permissions, and that fetters development. That’s applicable across all real estate classes. More clarity and speed is needed and that would really help increase volumes to cope with the ageing population dynamic. We need a longer-term planning policy which gives certainty to developers of senior living facilities, or indeed any development. A suggestion I’ve made before is that the UK shifts to a Singaporean system where you have a 10, 20+ year plan for housing, care, everything. It needs to be cross party politically, and in the interest of delivering the infrastructure the UK needs. In contrast, we’ve had, for example, 16 housing ministers in the last 13 years.
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