A continental perspective on later living

Given the trend towards an ageing population across Europe and beyond, later living is one of the hottest sectors for real estate investors, with many taking an increasingly global outlook. Selecting three markets, what are the key “need to knows” for real estate investors navigating the later living sector in the UK, France and Spain? The UK The over-65s are by some margin the fastest-growing demographic across Western Europe, so the later living sector continues to be a hotspot. Unlike, say, purpose-built student accommodation, the later living sector is incredibly diverse, ranging from independent living and assisted living through to highly specialist care-related facilities. With senior living increasingly being considered as part of mixed-use offerings, the sector is no longer the preserve of the specialists. Like any other real estate sector, securing an attractive return on that investment is important. This can be achieved by different tenure and payment structures, depending on the later living product in question. In the UK, for care homes we often see a 25 to 30-year lease to an operator that runs the home and provides the care to residents, with index-linked rent reviews to achieve a steady (but affordable) income stream. In integrated retirement schemes, the houses or flats are typically bought (or rented) directly by the resident, who also pays a monthly service or management fee at an appropriate level for a retiree’s outgoings, with a deferred management fee payable when the individual permanently leaves a retirement village and the house or flat is sold. From a planning point of view, the key consideration is making sure the consent is right. There are various things you need to consider. So if applying for planning permission, how do you frame your application? How much flexibility do you want or need? What are the knock-on implications of one approach rather than another? If you are investing in or building out an existing permission, what can you really do? We are seeing a significant trend in introducing later living into schemes that already have consents, as a way of diversifying the residential offer. This can work very well, but it is not at all unusual for changes to the consent to be required in order to facilitate this. It isn’t always clear which use class a particular proposition falls into where care is provided – it will depend on the extent. It is possible to get around this by having a specific planning permission for the use proposed, with reference to use classes. However, the flip side of this, from the investor point of view, is that it results in less flexibility, which can have an impact on value. Notwithstanding this, there is an increased recognition of the importance of later living – the National Planning Policy Framework now specifically recognises the importance, and requires local planning authorities to consider the need for housing for older people. We are certainly seeing a real push for the planning regime in England to more fully embrace the later living sector, and to be more uniform in how it does so. When choosing an operator, it is important that an investor selects one that it is confident can and will provide the safe and dignified care that residents and their families expect, and that the regulator – the Care Quality Commission – requires. This is most important at a human level, but ultimately, where that standard of care is not achieved, an investor’s association with that operator or home can be severely detrimental reputationally. Similarly, it is important to select an operator that has an achievable business model/plan for its home or platform. Visibility and transparency of costs and budgets is of fundamental importance to ensure that an operator’s business model is viable, so that you have the confidence that it will be able to provide continuity of care and meet its rental obligations. Spain Some 30% of the Spanish population will soon be over 65 years old. This demographic shift creates a strong and growing demand for high-quality, specialised housing solutions designed for seniors that cater to both independent living and more assisted formats. Investors want to create communities that offer services and amenities focused on wellbeing, social interaction and healthcare. They are increasingly drawn to the sector owing to its long-term stability, as senior housing tends to have lower vacancy rates and longer rental periods compared with other asset classes. The public sector in Spain has historically been involved in providing care and housing solutions for senior people through social services and affordable housing. However, public resources have become increasingly strained and there are administrative constraints. Private investments, on the other hand, are usually more flexible and market-driven. The private sector has recognised the potential for high returns in this sector, particularly by catering to retirees looking for a higher standard of living and specialised services. The public sector in Spain is not competitive in this regard. Private developers often focus on more premium offerings, such as independent living communities, assisted living and luxury senior housing. These investments are typically quicker to develop due to there being fewer regulatory constraints compared with public projects. However, private investors must still navigate complex land use laws, obtain the necessary permits and comply with health and safety regulations if healthcare services are included. There is also a growing interest in public-private partnerships in the later living sector in Spain. While public investments are more focused on affordable care and access, and private investments tend to emphasise premium services and faster market adaptation, public-private partnerships offer a hybrid model that combines the strengths of both approaches. In terms of land use and zoning, generally, senior living developments are subject to the same basic zoning and land use regulations as other residential projects. However, depending on the type of facility and services provided in the complex, certain additional requirements may apply. For example, assisted living or nursing facilities may need to be zoned in areas qualified for healthcare-related services, as these projects often combine residential and healthcare. As the sector grows, it is likely that more specific planning regulations tailored to senior housing will emerge across Spain. France In France, too, we are seeing a trend of people living longer, which has led to a growing demand for adapted care facilities for dependent elderly people but also for a reinvention of the later living sector. In France there can also be an issue with isolation of the elderly. This is all the more marked in rural areas, where seniors often have limited access to services and shops, especially if they don’t have a car. This is why co-living offers are also increasing in number and popularity and showing new perspectives to senior residents. As such, the later living sector presents great opportunities in a promising market, supported by real, sustainable needs. The later living sector in France was traditionally funded by public entities and non-profit-making entities. The idea was that it was the French government’s role to take care of its ageing population and to offer solutions that would work for dependent people. Since the 1970s, however, we have slowly seen the emergence of private investments, and we are now at a stage where it can be expected that the private later living sector will become more mature. Private investors and operators tend to be more interested in serviced residences for seniors and co-living residences. These assets are less highly regulated and offer more flexibility. The serviced residences for seniors market is still essentially based on forward sales and is therefore highly dependent on new developments. However, the current rise in land prices in France, coupled with increasing construction costs, is putting a strain on developers’ initiatives. This is quite a new sector in France and it is not highly regulated, which creates more freedom for operators in the private sector. These types of investment can be very attractive as investors benefit from a fully delegated management model. Clearly, it is important to select an operator that is recognised for the quality of its management and its financial strength. An in-depth analysis of its results and ability to maintain a high occupancy rate is essential. The reputation of the operator is especially important in France, and we are therefore increasingly seeing provisions in sales agreement whereby investors may withdraw from the investment in the event of scandal. We are also seeing attempts to include such provisions in leases. In practice, however, it should be noted that it is very complicated to terminate commercial leases concluded with later living operators in France as they are protected by law. Where now? It is clear that across the UK and Europe there is a societal and demographic need for investment in the later living sector. While each jurisdiction has a slightly different approach in terms of governmental involvement and planning requirements, the appeal of investment in the sector shows little sign of abating. Hannah Quarterman is head of planning in the UK, Paul Tonkin is a partner in the UK, Siân Howes is a senior associate in the UK, Emilio Gomez is a partner in Spain, and Margot Derumaux and Alice Houdart are senior associates in France, all at Hogan Lovells International LLP Image © Skynesher/iStock