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Ageing population makes for good investments

Growing numbers of senior citizens are moving into retirement homes as families lack the time or space to look after them. By 2020, it’s estimated that Germany will require tens of thousands more beds in these specialised care facilities to manage its ageing population. According to HPS Research, this sector of the German economy will have grown 50% between 2007 and 2020 and even double between 2020 and 2050. Ageing population is a hot topic in Europe and with many countries facing this unresolved challenge, retirement homes are quickly becoming an attractive market. Certain factors contribute to the low risk aspect of this investment segment:

  • High occupancy rates averaging 90%, even 98% in some countries like France.
  • Strong demand from tenants. The world’s population is ageing and life expectancy is increasing. By 2050 there will be two billion people over 60 according to the UN. Forecasts suggest four out of ten people in Germany, France and Switzerland will be in that age category by then. 30% of Europeans will be over 65 and more than 11% will be aged 80 or over. This problem affects developed countries around the world from Japan and South Korea to the EU.
  • Long-term contracts guarantee steady revenue. Spaces in retirement homes are leased with strict long-term (5+ years) agreements. A tenant can’t move out without paying 100% of the outstanding rental fee.

Investments of this kind, however, bear some risks. “It is quite possible that after 15–20 years it’ll be necessary to modernise and renovate the retirement home which will reduce its profit margins. Furthermore, it’s possible that in fifteen years time, new technology will create a new set of quality standards that are much higher those we have today. This also will make existing retirement homes less profitable. Reconverting a retirement home, meanwhile, is practically impossible,” says George Kachmazov, managing partner of Tranio.

Tenancy agreements and developer guaranties could mitigate these risks, some experts think. “Developers in Germany are legally obliged to provide a five-year guarantee on the entire construction. Another inspection is carried out after that term and if any faults are detected, the developer corrects them at their own expense. Excluding the usual wear-and-tear on the mechanical, electrical, and plumbing systems of the building, they usually last 25–30 years while tenancy agreements only last 20 years,” says Mark Sigal, head of property investments at Allgemeine Immobilien-Börse.

There are parameters that can help investors find a less risky investment.

Minimum number of tenants 100
(it should be possible to increase
the home’s capacity and reshape
the floorplan)
Share of single rooms 80 %
Minimum floor area of a single
room
18 sq m
Minimum floor area of a double
room
25 sq m
Minimum occupancy rate 90 %
Age of the property Under 10 years
(new or refurbished homes will
keep maintenance costs and
repairs low)
Minimum tenancy term 20 years
Country Austria, France, Germany, UK,
USA
City or town Any large city or town, mid-size
university city and surrounding
area
Population High rate of pensioners, public
service workers and business
owners
Infrastructure Public services, healthcare,
medical and rehabilitation
institutions, good transport links
Partner organisations Hospitals and nursing care
institutions
EBITDAR (Earnings Before
Income Tax, Depreciation,
Amortization and Rent)
20% for private operators, if
interest share in capital is 8%
OR
15––17% for non-commercial
operators if interest share is 3%
Diversification of risks Using several well-known and
reliable operators; signing
portfolio deals

Market types

There are three types of retirement homes in Europe:

  • Licensed. Companies have to obtain special permission from the authorities in order to build and manage retirement homes. This market is typical of Belgium, Italy, and France.
  • Unlicensed. Companies build retirement homes and manage them without special permission. This market is typical of the UK, Germany, and Spain.
  • Outsourced. Authorities transfer retirement home management duties to private companies for three to ten-year contracts. This is common in Norway, Finland, and Sweden.

Pensioners usually choose from three types of accommodation:

  • Conventional dwellings adapted to meet the needs of the elderly (e.g. wheelchair-access).
  • Care homes that provide assistance with meals and household maintenance.
  • Hospital-type retirement homes that offer comprehensive medical care.

The USA has a unique set of retirement real estate options:

  • State-financed retirement homes offering basic assistance.
  • Assisted-living facilities offering medical care and meals.
  • Boarding houses with 10–15 beds for retired lodgers.
  • Nursing homes providing accommodation and medical care.
  • Adult day care facilities offering non-residential services for the elderly.

Purchase costs

About half the total investment budget is allocated to the construction of the retirement home. The rest is spent on planning, acquiring land and additional expenses as well as unforeseen costs.

Detailed planning,
compliance monitoring
03.5
Land acquisition 03.7
Expenses accompanying
land acquisition
00.4
(≈11% land value)
Construction 10.3
Unforeseen costs 00.3
Total 18.2

Maintenance costs

According to Knight Frank, 50% of revenue generated by the retirement home is spent on staffing. In London, these costs incurred per resident amount to £20,600 per year. Maintenance such as utilities, taxes and minor repairs takes 5–6% of the income. In Britain, this is about £1,650 per bed annually.

The gross profit margin before taxes is 30%. For instance, a retirement home in the UK with 60-80 beds yields £650,000 per annum, or £9,000 per bed.

A resident of a private retirement home in the UK will pay an average annual fee of £27,872 (£536 per week), while a nursing home with medical care costs as much as £38,376 (£738 per week).

In Germany and Austria, accommodation in a retirement home (no medical care) costs €36,000–40,000 per annum or €3,000–3,500 per month. This includes weekly cleaning, meals, and utilities. The average monthly rate for retirement home living in Europe is €3,000–4,500 per month.

Accommodation 1,800
Three meals daily 368
Utilities 192
Telephone 15
Internet 8
Cleaning 265
Total 2,648

Profit margins

In the European Union, transforming a building into a retirement home requires strict compliance with standards so it’s often easier to build a new one. However, the construction of a retirement home is 50% more expensive per square metre.

Retirement homes in the UK offer an average yield of 5.0–7.5%, and about 7.0% annual returns in Germany. For instance, Tranio has a nursing home in Brandenburg, only 20-30 km away from Berlin. Built in 2015, it costs €10.3M and has annual lease returns of €690,185 (6.7%). If purchased on a mortgage at an annual rate below 2%, 70% loan-to-value ratio for a 10-year period, it will deliver about 12% per annum before taxes. The lease agreement is for 20 years, and the management company charges 2% on lease payments.

Retirement homes in America have high returns too. “If an investor in the US does nothing but lease the property to a company that actually runs the retirement home and provides services, they’ll get 5–15% returns per year. However, they can earn significantly more if they invest in management services and operating expenses too,” says Vadim Cherdak, managing partner at Business Services International. For instance, the construction of an adult day care facility in the expensive state of New Jersey will set you back $2M to $4M. A profitable management company can earn the owner $1.5M to $2M per year, and can be bought for $5M to $8M.

Financial incentives

According to Mr Cherdak, investing in a management company can help obtain a permanent American visa or green card. Additionally, those investing into this type of real estate benefit from depreciation allowance.

Buying a retirement home in France can also be profitable. According to certain regulations, residents of France and its Overseas Departments and Territories are entitled either to VAT reimbursement (LMNP Classique) or a tax rebate equal to 11% of the investment (LMNP Censi-Bouvard). In order to benefit from these preferential rates, the owner must have a lease agreement for at least nine years with the management company operating there.

UK regulations offer similar terms. After an investor has purchased apartments in a retirement home and leased them out via a management company, they receive guarantees of rental income for a ten-year period. The investor is exempted from VAT (20%), and if the developer buys back the real estate within three to ten years, the resale income amounts at around 10%.

Investments in this sector of the German economy are no less attractive. There are special mortgage terms and rates starting at 2% per annum.

Conclusion

Diversified portfolios mitigate investment risks. Investing in retirement homes or individual apartments within these structures provides secure revenue streams, particularly if they are located in key regions designed for middle-class pensioners and strong state social structures. Market research conducted by Knight Frank in the UK concluded that retirement homes with 60-79 beds were the most profitable. One final piece of advice for prospective investors: “Due diligence is crucial when dealing with retirement homes or any other real estate asset. It is always safer to deal with property covered by strict lease agreements and controlled by recognised intermediaries and experienced operators. Location and context are paramount, so for a good investment, study the demography, social environment, infrastructure, transport access, licensing and laws,” advises Anna Kurianovich, investment expert at Tranio.

Yulia Kozhevnikova, Tranio

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    Tranio’s managers offer advice on buying real estate overseas
    Anna Boyarchukova
    Anna Boyarchukova
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