Opportunities in Real Estate, Part 1: Senior Housing Sector

“Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.” ~Warren Buffett

There is simply nothing like investing in an illiquid asset. I know, you're probably already at the edge of your seat. But, when it comes to accumulating wealth, the real estate market has created handsome and sustainable returns for investors throughout the past century.

If it ain't broke, don't fix it!

Timeless strategies, or rather philosophies such as value investing, have shown time and time again that considerable results can be attained by investors both small and large. Going against the crowd can seem counter intuitive, but when exciting opportunities arise, they may not be in today's headlines. So, without further adieu, let's look into the areas that others aren't:

Senior Housing

It's not the most sexy image that comes to mind, but often times the greatest investments aren't. With favorable demographic fundamentals and the achievement of higher yields relative to conventional apartments, the senior housing sector is emerging as an increasingly attractive investment opportunity.

Occupancy and operating margins are improving to new highs, along with healthy year-over-year revenue and net operating income (NOI) growth in the industry. This has resulted in the increasing number of acquisitions among institutional investors in the sector, helping to drive cap rates to new lows.

Seniors are defined as any persons age 65 and older and are expected to increase in the U.K. from 15.42 million to 16.46 million by 2020 (Office for National Statistics). The U.K has experienced three baby boom periods over the course of the past century. However, the post-World War II baby boomers (people born between 1946 and 1964) now represent one of the wealthiest, aging demographic waves the U.K. has ever seen.

Not only does senior housing provide an opportunistic investment for the near term, but also attains intrinsic defensive qualities, such as diversification due to low correlation with external economic factors like unemployment. The senior housing sector is expected to transition from a niche market to a specialized market, with long-term outlook looking increasingly positive.

Source: Office for National Statistics

Strategic Options:

Targeted Senior Housing

Active adult communities and senior apartments (for sale and for rent) are typically condos, co-ops or single family homes with minimal or no services offered. These tend to be larger multiunit facilities with a rental payment structure and age requirements of 55-plus. Investment benefits include: continued home ownership, appeal to baby boomers, suitable for 2nd homes, and 100% real estate. Drawbacks include: competition with conventional single-family residential or condo market, as well as more supply in pipeline.

Independent living facilities (ILFs), also known as congregate care facilities, offer a multifamily design to seniors who are less active and may have difficulty with housekeeping. These facilities offer meals, housekeeping, transportation, and organized group activities. Residents of ILFs typically rent at a premium in order to cover costs of additional services provided. Investment benefits include: cost-effectiveness, high demand, preference of seniors, and first mover advantage - waiting for baby boomer wave. Drawbacks include: not peak of population yet, and renting instead of owning.

Both active adult communities/senior apartments and ILFs provide an attractive investment opportunity due to the current supply and demand balance. Expected population growth in the foreseeable future will likely exceed supply growth over the past few years. Additionally, these properties add diversification as they do not closely correlate with conventional multifamily properties. -David J. Lynn, PhD

Assisted living facilities (ALFs) are multifamily properties with personalized support services for seniors. ALFs cater to individuals who need assistance with daily activities, but do not require nursing home care. These facilities usually specialize in the care of residents with Alzheimer's or other forms of dementia. ALFs target the fast-growing 85-plus population and also show increasingly strong potential within the senior housing sector due to several factors, such as: improved margins, 85-plus population growing fast, supply slowing, and room for further improvement in occupancy. Drawbacks include: big wave still a few years away, renting instead of owning, and the inclusion of a large non-real estate component.

Retirement Communities near University Campuses

Already being successfully implemented in California, the unique investment strategy of developing senior residences near renowned university campuses could hold true value in targeting aging university alumni. With a wealth of educational and recreational offerings, universities have clear potential to attract alumni. Since university alumni tend to be affluent and willing to donate, implementing this strategy could reap mutually beneficial rewards for investors as well as the universities.

Additionally, forming strategic alliances with universities could be of great significance to investors as they tend to have credibility, capability, and potential for comparatively lower land costs.

Opportunity to Build Brand Equity

In addition to developing near universities, opportunities exist in consolidating owners and operators in the senior housing industry, as there are currently no single players with dominating market share. Through strategic portfolio and property acquisitions, potential remains to build a national brand.

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Ben Koeppel is a MSc Management Science candidate at the London School of Economics and Political Science. He attained his BA in Economics at the University of Miami (FL). Ben can be reached at (504) 430-6450 or email: [email protected].