Global property consultancy Knight Frank has launched its annual Seniors Housing Annual Review, a market-leading report revealing the performance of the Seniors Housing Residential sector. The report includes insights from leading operators, highlighting challenges and opportunities in 2023.
In this year’s report, Knight Frank surveyed operators who have £4 billion of assets collectively within the retirement housing market. The survey underlines the pivot that investors are taking towards long-term inflation hedged cashflows, with more operators offering reduced annual charges in return for higher Deferred Management Fees (DMF) or charges, mixed tenure options and BTR.
The findings from the survey revealed that 68% of the operators surveyed are now offering two or more DMF options, a significant increase compared with 38% who offered the same last year.
In response to the changing needs of seniors and a commitment to providing flexibility and choice, operators are expanding their offerings. 78% of private operators surveyed offer rental as a tenure option, either as standalone build to rent schemes, or pepper-potted within for-sale schemes – up from 68% in 2022.
Notably, 45% of the operators surveyed envision new IRC schemes featuring a mix of private sale and private rental tenures, indicating a substantial shift that is expected to nearly double the number of seniors private rental units within the next five years.
The report by Knight Frank also highlights the increasing importance of Environmental, Social, and Governance (ESG) considerations in the senior housing sector. A remarkable 94% of operators surveyed said ESG will be important for their business strategy over the next five years. Certifications such as BREEAM have become a main point of focus, with 91% of operators targeting them to showcase sustainability and wellbeing credentials in their developments.
Tom Scaife, Head of Seniors Housing at Knight Frank, said: “Overall, this year’s survey results serve as a positive indicator of the sector’s position following the pandemic and, more recently, the economic headwinds. Larger DMFs and flexible payment options allow more cost risk to be shared between the tenant and investor, creating long-term alignment. It allows income sensitive tenants to fund their senior living purchase and allows operators to provide high quality amenities with higher staffing levels and high-quality services. The rental tenure allows increased flexibility and choice to tenants whilst widening the addressable market.”
The past year has not been without its challenges. Inflationary pressures have put a burden on construction and operating costs, while debt remains a challenge for leveraged investors. Over half of the respondents to this year’s survey flagged the performance of the wider housing market as a concern, and 76% said that they had had difficulties recruiting staff in the past year.
Yet, there is appetite in debt markets from a growing range of lenders to fund seniors housing schemes. Prime yields sit outside of the rest of the other living sectors asset classes (PBSA and BTR) making leverage more accretive. Value also looks attractive; high inflation over the last two years means real values remain down.
Tom Scaife, Head of Seniors Housing at Knight Frank said: “Looking forward to next year, inflation will remain sticky, which will continue to support rental growth. If the current Older People’s Housing Taskforce delivers in 2024 on their brief of providing policy change to increase supply then the sector will have a tailwind through 2024 and beyond, which will accelerate investment. We have reached peak rates by all accounts and rates will decrease at some point. All of this combined provides a pretty exciting mix for the sector.”
Scaife added: “We are living in a country with an aging population, where more people are living longer and the over 60’s demographic is getting bigger. There is large headroom in terms of tenant demand for seniors housing and the inflation tracked nature of the income provides a strong investment option.”
Data from the 2021 Census shows that more than eight million over-65s already live in urban areas, up from seven million in 2011. In the next 20 years, the over-65 population is forecast to increase by around a third, meaning seniors will make up an even bigger part of our urban communities.
Anna Ward, Associate in the Research team at Knight Frank concluded:“The UK seniors housing sector continues to evolve to provide more flexibility and choice to seniors. With an increase in accessibility, we will also see more private investment into the sector, which serves an important role in overall housing delivery, whilst also helping to reduce the burden on the social care sector and the NHS. A rise in proposed mixed tenure and community-led schemes in urban locations will attract a broader market, help to accelerate absorption rates and act as an important catalyst to further investment.”