Brief overview of the real estate market of Senior Housing in Spain and perspectives post coronavirus.

The World Health Organization (WHO) recommends providing assisted living residences for every 5 people in 100 over the age of 64. In Spain, at the end of 2018, there were almost 9,100,000 people over the age of 64 and an offer of just over 380,000 places. This means a ratio of 4.2 and so there are 107,000 places short. The coronavirus has tragically reduced this figure with the death of about 25,000 residents of residences.

Taking into account the increase in the life expectancy of the population, that demand will continue to rise and an additional 18,000 places per year should be provided in Spain.

Of course, those forecasts should be slightly nuanced because other factors can influence those figures in one direction or the other. Initiatives of cohousing, care and kangaroo living, home care and improvement of the health level of older people are just a few examples that could cause a drop in forecasts and let us hope that no new epidemic or other disasters would occur.

Other factors such as the disappearance of large families, the work of husband and wife and other altered family patterns reduce the possibilities for taking care of parents and this can in turn increase the forecasts.

In her study Paribas points to the consequences of longer life expectancies and the new lifestyle compared to the previous century.

We go to school a little longer, then have a transition period of formation and organization of family and housing, a longer working period, a period of retirement pension that starts from 70 years and that can go up to 100 years of which, however, only 10 in full health and from the year 82 a period of poor health, chronic diseases, Alzheimer’s etc …

In 2019, there were approximately 5,500 residences to accommodate those 380,000 elders, 3,844 (71%) are privately owned and 1,573 are public institutions. The vast majority of private residences are in the hands of small family businesses that are both owner and operator.

In the last ten years, larger companies have been taking over residences or building new ones. Currently there are 7 that operate more than 40 residences, the largest, Domus VI, has more than 135. In addition, there are another 11 that operate between 10 and 22 centers.

They currently represent less than a fifth of the whole, but their share is constantly increasing because this improves rationality and operating costs that many smaller companies can no longer guarantee the services because of the stricter requirements and higher operating costs. Even among the large companies, there are mergers and acquisitions, such as the Colisée group, which acquired Armonea in 2019. Armonea was the largest Belgian company in this sector and operated in Spain under the name La Saleta, which is now in 8th place in the ranking.

The care sector is profitable in many countries of Europe because there is a Social Security system that in many cases supports part of the operating costs of a private residence.
Last year’s turnover in Spain amounted to EUR 4,850 million. The large corporations make a gross profit of 20% on their billing, making it easy for them to find funds in the capital market …

While the family businesses are usually both the owner of the building and the operator, the situation is different for the large operators. They prefer to focus on the management and have the assets bought by investors with whom they conclude a long-term lease with the commitment of a fixed net return. (OpCc and PropCo / Lease back)

Purchase of Health Care Assets Is a safe solution and slightly more profitable in Spain than in the rest of Europe.

1) because of the high yield 5% to 5.75% (end of 2019), which is more than other sectors 2) the long-term leases that are concluded with professional operators 3) the solvency and guarantees provided by the operators 4) the better stability against economic cycles than other real estate sectors because it is based on necessities and is financed in large part by solidarity and other income or guarantees (social security, pensions, private insurance organizations personal wealth etc …)

The investors have of course also found that niche and a large national and international groups have focused on this market share.

What will happen in the post coronavirus era?

The corona virus and the many problems that the residences have endured due to lack of sanitary facilities, not only in the residences but also outside on the one hand, and the new obligations of adjustments to installations and working methods will of course have an impact on the future of the operational sector on the other hand.

In the first instance, we have to wait and see what will happen with the many complaints from families of the deceased against the owners, but in addition, the new regulations, the inspections/ control and the stricter contract conditions with insurance companies will increase operating costs.

In any case, it is clear that the demand for new residences will continue to increase and that there is no money available for the government to take on this task as it has to work first on improving sanitary facilities.

It is foreseeable that the expansion and emergence of large companies will continue and more and more smaller companies will offer their residency to those large groups because they themselves can no longer or do not want to bear the additional burdens and responsibilities and cannot compete with the competence of the large ones that are more profitable because of their more efficient management and access to financial markets.

As a result, many assets will come onto the market either through the owners or through the operators.

Because of the attractive nature of the investment, there will of course be many national and international interests.

The only disadvantage is that too great concentration of the operating companies can entail is a pressure on the yield, as is the case today with Prime Location with Prime tenants, in other sectors of the real estate

Quintessence, as a real estate consultant, offers to guide investors in the search for assets, existing or new projects, and also companies who can operate the residences.

Rik De Ridder co-founder Quintessence International Real estate.
August 17, 2020