In the property sector, there are always niche areas that develop into markets worth billions within just a few years. Do you remember logistics property back in 2011? At the time, it was considered a niche area; today, it is one of the most sought-after asset classes worldwide. That is exactly where we currently stand with the senior living segment. Anyone paying close attention today can fully capitalise on the next wave of structural growth.
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Unlock content Accept the required service and unlock contentDemographic change as a driver
The facts speak for themselves. In the European Union, the proportion of people aged over 65 currently stands at around 21.6 per cent. By 2055, this figure is set to rise to just under 30 per cent. In Germany, the trend is particularly rapid. Here, the proportion of people aged 65 and over will rise from 22 per cent today to around 28 per cent.
Nor will the population shrink; rather, it will rise slightly to 84.6 million people by 2055, driven by immigration. At the same time, life expectancy today stands at 79 years for men and 84 years for women. However, what matters is not just how long we live, but how long we remain healthy. In Germany, the average number of healthy years is estimated at 61. After that, a phase begins in which the need for care arises, which statistically can last up to 22 years.
By 2040 alone, 372,000 new care places will be needed in Germany. In addition, 100,000 existing places will need to be modernised. We are therefore talking about almost half a million places that the market is currently unable to provide.
A fragmented market – huge potential
A common objection is that such a sector has long been controlled by the major players. The reality is quite different. There are around 19,500 senior living facilities in Germany, many of which are municipally owned or run by charitable organisations. The ten largest operators together account for just 14.3 per cent of the market. This means that the market is extremely fragmented, offering investors enormous opportunities.
Strategies for market entry
1. New-build? Only of limited appeal
Given the high construction costs, traditional new-build projects are usually not worthwhile. The price of cement alone has risen by more than 60 per cent since 2021. The exception is property developers who can build at exceptionally low costs. For the majority of investors, however, converting or infill development of existing properties is the better choice.
2. Sale and Lease Back
Sale and lease-back transactions are a particularly attractive option. Care home operators who are also the owners sell their property to investors but remain on site as tenants. This provides the operator with immediate liquidity and gives the investor a property with an experienced, solvent occupier.
3. Propco and Opco models
Another tried-and-tested model is the separation of ownership and operation. As an investor, you acquire the property through a property company (Propco) and let it to an operator, the operating company (Opco). This ensures you receive stable rental income, whilst the operational risk remains with the operator. Ideal for long-term investors such as pension funds or insurance companies.
4. Value-add and change of use
Those seeking higher returns can acquire existing properties that do not fully meet senior living requirements and enhance their value through refurbishment or modernisation. This opens up the possibility of higher margins, but also requires greater management expertise.
Returns and Timing
The prime yield for senior living stood at 5.1 per cent in 2023, but had already fallen to 4.9 per cent by 2024 . This means that the earlier investors enter this market, the more attractive the long-term return prospects are. With the expected growth in demand, competition for suitable properties will increase, which is likely to put further pressure on yields.
Germany in an international comparison
Is it worth focusing exclusively on Germany? The answer is: yes. Germany is not only Europe’s largest market, but also offers a particular degree of security for investors.
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Long-termcare insurance: Unique in Europe with a standardised refinancing system.
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Benefits in kind: Up to €2,299 per month for outpatient care and €2,096 for inpatient care.
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State subsidies: Additional support from pension funds.
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Financial stability: With a Fitch rating of AA and public debt of less than 85 per cent of GDP, Germany ranks among the most reliable debtors worldwide.
Conclusion
Senior living properties are at the start of a trend similar to that seen in the logistics market ten years ago. Demand is guaranteed by demographic change, supply is scarce, the market structure is fragmented and returns are currently still attractive.
For investors, this means that those who act now will not only secure stable cash flows but also the opportunity to get in early on a growing market worth billions.
The motto is: don’t wait, but actively embrace the transformation.
