Valued Insights: Senior Housing

Asia Pacific’s rapidly ageing population and retirees’ growing wealth are driving strong demand for senior housing in several of the region’s developed markets.

19 May 2021

By Tom Edwards & Danny Mohr in collaboration with Dr. Henry Chin

Valued Insights Senior Housing

Ageing populations and retiree wealth drive senior living demand.

Rapidly ageing populations[1] and retirees’ growing wealth are driving strong demand for senior housing in several of Asia Pacific’s developed markets.

This is attracting investors seeking higher yields than those traditionally found within core property sectors, with CBRE’s annual Asia Pacific Investor Intentions Survey consistently tracking strong buyer interest in senior housing.

Senior housing scale, format and development vary widely across the region, with Australia, New Zealand and Japan firmly established as the region’s key markets, and China tagged as a location of interest.

This latest article in CBRE’s Valued Insights series provides an overview of Asia Pacific’s leading senior housing markets and discusses the latest developments and trends through the lens of CBRE’s valuation experts.

Australia: the region’s largest senior housing market

With the proportion of Australia’s population aged 65 years and over increasing from 12.3% in 1999 to 15.9% in 2019, Australians are living longer and healthier lives than ever before.[2]

While health-related issues are often a catalyst, many well-funded retirees are increasingly looking to downsize from large, maintenance-intensive homes to simpler accommodation providing a range of services and amenities.

This has spurred growth in demand for retirement living, which is broadly defined as a structured community for the elderly that provides safe homes, a reduced cost of living and neighbourly companionship.[3]

The retirement living market is highly fractured, with operators ranging from traditional developers with large portfolios such as Stockland and Lendlease and other for-profit owner-operators, as well as smaller not for profits.

Recent years have seen more investors and funds entering the space in search of higher yields, with Brookfield’s AUD 1.3 billion purchase of Aveo Group, Australia largest retirement village operator, in 2019 a transaction of note. Other major deals include Dutch pension fund APG’s acquisition of a percentage of Lendlease’s retirement living business in 2017.

While there are few exceptions such as New Zealand-based Summerset and Ryman Healthcare, which are investing heavily in acquiring new sites, new entrants often struggle to access the market due to a lack of opportunities to acquire assets at scale and the time and upfront capital required to build out facilities.

Payment models are inconsistent and vary according to the operator’s not-for-profit or for-profit status. Not-for-profit operators typically follow a Deferred Management Fee (DMF) model based on entry price. For-profits adopt a DMF calculated on a mix of either entry-based or exit-based pricing, whilst also potentially offering a share of any capital gain over the period the resident resided in the community.

The format of retirement villages differs across Australia’s seaboards, with properties in northern areas such as Queensland focused around water sports and other outdoor activities, and southern states such as Victoria featuring more indoor environments.

Following the onset of the COVID-19 pandemic, many operators were commended for their quick and effective response in locking down villages to ensuring residents’ safety, which has strengthened sentiment towards the sector.

Other key trends at present include growing competition from manufactured housing estates, which involves operators renting sites for relocatable homes to residents.
New Zealand: Rapid growth in number of retirement units

People aged 65 and older comprise around 15% of New Zealand’s population: a figure expected to double over the next 20 years[4] as more of the wealthy baby boomer cohort begin their retirement.

End-user motivation for moving into retirement villages has been driven largely by certainty of living costs, companionship, downsizing, security and transferring obligations for maintenance onto operators.

These factors have been the catalyst for strong growth in the retirement village sector, with the number of retirement units more than doubling from 20,000 in 2008 to around 42,000 as of May 2021, comfortably outstripping growth in the number of care beds over the same period.

In addition to a trailblazing group of private entrepreneurs who established New Zealand’s first retirement villages in the 1980s, market growth has been facilitated by the Retirement Villages Act 2003, which provides for consumer protection legislation and protects the elderly from being taken advantage of financially.

This has created an environment in which operators are committed to providing a secure, comfortable, and well-amenitised experience for the resident and a product that meets the market’s needs as a priority. Happy residents mean profits follow.

As retirement villages require substantial upfront capital, are management intensive businesses and are subject to relatively higher regulatory controls, most investors tend to shy away from the sector, preferring relatively less complex sectors such as industrial.

As of 2021 there are six listed retirement living operators in New Zealand along with a few large unlisted players, each of which have substantial portfolios. These portfolios have unique characteristics in terms of their geographical location, scale, product mix and offering.

Other seasoned operators include high net worth entrepreneurs who have sizable portfolios of intergenerational assets that have been passed through their families over the years, and smaller owner-operators with one or two villages.

One of the larger transactions to occur recently included Asia Pacific Village Group Limited, an entity owned by Sweden’s EQT Infrastructure IV fund who acquired all Metlifecare shares for NZD 6.00 per share in late 2020 in what was a NZD 1.3 billion transaction. The takeover offer was approved at a shareholder vote held on 2nd of October 2020, resulting in Metlifecare being removed from the NZX on 3 November 2020. The Metlifecare portfolio was first established in 1986 and was publicly listed in 1994 trading as Metropolitan Lifecare Group Limited until a name change in 1998.

Recent years have seen a flight to the regions as city-based retirees capitalise on rising residential prices by selling their homes and purchasing units in regional retirement villages. While an average house in central Auckland can fetch around NZD 1.5 million, units in a regional retirement village, say Tauranga are available for just NZD 800,000.

Village clustering, whereby a high concentration of retirement villages is developed within a micro catchment, is another key theme. This approach ensures villages complement each other in terms of size, product offering and price point, and attract residents from outside the immediate catchment.
Japan: A broad range of facility and service types for seniors

Government data show that more than a quarter of Japan’s total residents of 126 million are seniors aged 65 and over, making it the world’s oldest population. [5]

This situation has prompted authorities to prioritise the development of healthcare facilities, which includes senior housing, to meet the needs of the country’s rapidly expanding elderly population.

Senior housing in Japan covers a range of facility and service types. The narrowest definition of senior housing encompasses three types: paid nursing homes; senior housing with care services; dementia group homes.

The broader categorisation includes a further three care insurance-covered facilities: medical facilities with care and treatment; healthcare facilities for the elderly; and special nursing facilities for the elderly.

Growth has been relatively slow in care insurance-covered facilities, primarily due to low government spending. This has led to the rapid expansion of the private-sector senior housing with care services segment, the number of which has grown to around 260,000 as of the end of last year.

The investment market for senior housing remains limited, with the market dominated by Japan’s three healthcare J-REITs. In recent years, these groups have made significant investments in the three aforementioned private sector facilities, leading to rapid cap rate compression.

Population ageing is expected to accelerate in the coming years, with the Cabinet Office of Japan estimating that by 2065, one in every 2.6 persons will be 65 years old and above and one in every 3.9 persons will be 75 years old and above.

Japan’s urgent need for senior housing will create further opportunities for investors to partner with operators. With most senior housing operators in Japan mid- to small scale companies, experienced, listed operators are most sought after by investors as they can play a significant role in boosting facility performance, returns and value.

Major challenges include Japan’s acute labour shortage, with the healthcare sector no exception. This trend is already spurring the development and adoption of new technologies such as robots capable of lifting and transporting residents.

In addition to Australia, New Zealand and Japan, there are other markets in which senior housing is emerging as a viable asset class.

Owing to its rapid urbanisation, large number of elderly and one-child policy legacy, China was identified some time ago as a market with great potential. Recent years have seen major Chinese developers and conglomerates, including a number of insurance companies, launch senior housing projects. Selected foreign developers have also entered the sector.

However, a lack of trained staff, shortage of operators and difficulties in instituting a viable profit model mean growth has not been as swift as had been expected.

Singapore and Hong Kong – both of which have ageing populations and a large and growing number of wealthy retirees – also offer opportunities as their existing operators and market size lag behind those in Australia and New Zealand. 

Ageing populations and a heightened appetite to invest in alternative sectors and operating assets will continue to provide opportunities for investors in Asia Pacific to partner with experienced operators to enter or expand into this growing and undersupplied sector.

This article highlights just a few of the vagaries within operating and management structures, governmental regulations and strategies, and senior housing formats in some of Asia Pacific’s developed markets.

Considering the complexity of these elements, investors contemplating adding to their exposure to this sector require substantial support and the highest level of skill, expertise and understanding from valuation professionals, such as those at CBRE.

[2] Australian Demographic Statistics, Australian Bureau of Statistics, June 2019
[5] Ageing Society 2020 Report, Cabinet Office of Japan, 2020.

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