Investors’ outlook for senior housing is largely positive as market fundamentals and demographic trends look to drive future M&A activity, according to Salus Valuation Group’s Fall 2013 Senior Housing Investor Survey.
An increasing number of investors view senior housing as a preferred asset class and investment strategy, due to the sector’s low volatility and higher risk-adjusted returns compared to other real estate classes such as retail and industrial.
The senior investment market has also become compelling to many when combining improving market fundamentals and demographics, according to the 307 total surveyed respondents that include U.S. and foreign investors, operators, appraisers, lenders, underwriters, credit officers, acquisition staff for real estate investment trusts (REITs) and private equity funds.
Compared to Salus’ 2012 survey, investors continued to witness capitalization rate compression for all types of senior housing and care properties, particularly when comparing independent living and assisted living from prior surveys.
Since 2011 the spread between independent and assisted living has narrowed from 70 basis points to 40 basis points in 2012, to only 16 basis points in 2013, which Salus suggests highlights investors’ preference for facilities licensed to provide need-based services.
As for investment activity, public and private REITs continue to lead the way, however, there have been many new domestic and international investors that have also joined the space, such as private equity funds, insurance companies and pension funds, among others.
“Notwithstanding, there remains a premium for accretive growth and achieving increased scale, so we would not be surprised by accelerated transaction activity, investor consolidation and increased M&A activity over the coming year,” writes Salus in the survey.
While much of the investment capital in the senior housing market continues to favor well-positioned and well-located Class-A properties, aggressive pricing and reduced yields have led some investors to chase Class-B assets that require significant renovation or repositioning from outside preferred market locations.
These “B” space investors are highly selective, Salus notes, because many assets do not have the necessary property, location and risk metrics that work for a wide body of alternate investors.
When it comes to the issue of cap rates and the direction they are headed, investors were split in their predictions, however, a slight majority indicated cap rates were likely to increase.
“For the time being, we believe that cap rates have effectively stabilized and will generally remain at their existing levels, unless materially prompted to do so otherwise,” writes Salus. “It is, and it will likely remain, a highly competitive landscape and it is effective demand that is driving the bus on pricing and cap rates.”
Investors strongly believe that assisted, independent and memory care will remain the assets of choice, however, cost of capital and access to capital will remain key.
An improving national economy and housing market will also look to drive senior housing growth in the coming year, as well as the “march of demographics and the need for appropriate, market-based housing alternatives for an aging population.”
“Despite the challenges, the agents for growth and investment are abundant,” writes Salus. “For those prepared and ready for the ride, it should be a great and rewarding adventure. As for us, we can think of nowhere else we would rather be.”
Written by Jason Oliva