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-termcontracts 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
Tenancy agreements and developer guaranties could mitigate these risks, some experts think. “Developers in Germany are legally obliged to provide a
There are parameters that can help investors find a less risky investment.
|Minimum number of tenants||100|
(it should be possible to increase
the homes capacity and reshape
|Share of single rooms||80 %|
|Minimum floor area of a single
|18 sq m|
|Minimum floor area of a double
|25 sq m|
|Minimum occupancy rate||90 %|
|Age of the property||Under 10 years|
(new or refurbished homes will
keep maintenance costs and
|Minimum tenancy term||20 years|
|Country||Austria, France, Germany, UK,|
|City or town||Any large city or town, |
university city and surrounding
|Population||High rate of pensioners, public|
service workers and business
|Infrastructure||Public services, healthcare,
medical and rehabilitation
institutions, good transport links
|Partner organisations||Hospitals and nursing care|
|EBITDAR (Earnings Before
Income Tax, Depreciation,
Amortization and Rent)
|20% for private operators, if|
interest share in capital is 8%
operators if interest share is 3%
|Diversification of risks||Using several
reliable operators; signing
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-yearcontracts. 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.
- Care homes that provide assistance with meals and household maintenance.
Hospital-typeretirement homes that offer comprehensive medical care.
The USA has a unique set of retirement real estate options:
State-financedretirement homes offering basic assistance. Assisted-livingfacilities offering medical care and meals.
- Boarding houses with
10–15 bedsfor retired lodgers.
- Nursing homes providing accommodation and medical care.
- Adult day care facilities offering
non-residentialservices for the elderly.
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.
(≈11% land value)
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
The gross profit margin before taxes is 30%. For instance, a retirement home in the UK with
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
|Three meals daily||368|
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
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
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
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
Investments in this sector of the German economy are no less attractive. There are special mortgage terms and rates starting at 2% per annum.
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
Yulia Kozhevnikova, Tranio
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