It is not unusual for European real estate investors and asset managers to look across the Atlantic for inspiration when it comes to emerging real estate sectors. It has long been accepted that the US has managed to evolve, develop and mainstream new property types very effectively.
It will therefore come as no surprise to learn that the focus of this piece, the senior assisted living sector, is highly developed in North America and is already regarded as a core element of many real estate investors' portfolio strategies. The same cannot as yet be said in Europe. This piece is an attempt to look at how this model works in a US context and to draw some brief contrasts that will hopefully illuminate the challenges associated with establishing senior assisted living as a core feature of European investors' strategies.
First, let us define senior living. The reality is that senior living encompasses a wide variety of operating approaches. At its most straightforward it can be gated communities for over 60s; at its most complex it is the care of seriously ill dementia patients. As a result the operating models deployed in the sector vary widely, dependent on the type and nature of the support network required by the senior. There is substantial data available in the US to help us understand how these different models break down.
As we can see in figure 1, generically the models fall into four or five groups depending on the intensity of care required. We can also see clearly that the operators of these facilities are major enterprises, employing thousands of staff across hundred of properties and offering a substantial ‘care menu'. There is also a significant amount of choice for the consumer in terms of style of accommodation and other services, all of which combines to make an attractive ‘lifestyle oriented package'. As a result the scale of this industry in the US is very significant.
The depth and sophistication of this provisioning typifies the comparative advantage that accrues to US companies in developing real estate driven business models. In short, the size and scale of the US in terms of wealth, population, urbanised model of development coupled with consumer sophistication and plentiful census and research data makes it comparatively straightforward for companies to test, develop and roll out large-scale business models, even in small sectors of the economy like real estate.
This speed to mass-market gives US companies tremendous ‘first mover advantage' and profit potential. Although competitors are rapidly attracted by the profits in any given business model, the market is still big enough to sustain genuine competition which ultimately drives up service levels and drives down prices for consumers. In addition sheer size also allows for a degree of specialisation among providers. This means that although a company might occupy a small niche in its market, it is still has enough customers to allow it to become readily scaleable - reducing its cost of financing and allowing it to properly diversify its portfolio of customers, assets and risks.
Although this thesis also underscores the development of an integrated open European economy and single market, the reality is that the real estate markets in Europe are not the ideal test bed for such strategies. First and foremost scale is an issue. Although our populations are of similar size, the US population is far more urbanised and concentrated in large sprawling cities. European urban centres are typically smaller in terms of population and there are fewer of them. In the US there are over 50 metropolitan areas with populations in excess of 1m capturing 55% of the population; in Europe there are less than 25 accounting for 17%. While differences in tax treatment, market conventions and the legal and regulatory frameworks are harmonising in Europe they still represent a significant (indirect) cost to the real estate entrepreneur and make it difficult to achieve critical mass. In addition, in most European countries the state takes a much larger role in the provision of senior care and, even though it might be state-of-the-art private care, as a result senior care still commonly carries a negative connotation of ‘state institutionalisation'. Furthermore, in many countries the state fears private provisioning may break up local monopolies or encourage exploitative behaviour and hence regulates the large scale private sector providers out of the market.
As a result, it becomes challenging for property investors and asset managers to import this business model from North America into Europe. Nonetheless, a number of providers (see figure 2) are forging a path. According to its website, Sunrise Assisted Living, the largest US provider, now has over 2,000 bed spaces in 23 locations in Europe, located in Germany and the UK. There are several similar operators who have achieved some level of critical mass in the UK, most particularly Southern Cross Healthcare (which is owned by private equity group Blackstone and has over 500 facilities). There are also an increasing number of ‘retirement builders'.
Notwithstanding the impediments, the demographics in Europe remain compelling and people will continue to try and break into the sector. Retirement will be a great growth industry as the baby boomers start to leave the workforce over the next 20 years. At the same time populations will be providing for more and more seniors who will live longer and need more care. The operator who breaks down the barriers to access for senior living across Europe and persuades the stakeholders that senior living is a viable alternative to care in the home or by the State will have a profitable and durable business model.