The future of investments in nursing homes: opportunities and risks

Among elderly people, there is a significant proportion who do not have close relatives capable of taking care of them. As a result, many senior citizens choose to live in specialized facilities that provide the necessary medical support. In Germany, according to the latest forecasts, by 2020 there will be a need for tens of thousands of new places for elderly people in nursing homes. Research conducted by HPS Research shows that from 2007 to 2020, the demand for such services will increase by 50%, and from 2020 to 2050, a growth of as much as 100% is expected. These factors are attracting investors to the field of services for the elderly, which, in turn, is generating growing interest in this type of project.

The process of investing

The investment mechanism in this sector works as follows: a potential investor purchases a senior living facility, which is then handed over to a specialized operator for management. This operator is responsible for organizing services for the elderly, collecting rental income, and distributing the profits from the rentals.The advantages of such investmentsinclude a constant demand from tenants, as well as long-term lease agreements that provide stable income.

Types of homes for the elderly in Europe

In the European market, three main types of homes for the elderly can be identified:

• Licensed sector:To design and manage such institutions, a special permit from government authorities is required. This approach is typical for countries like Belgium, Italy, and France.
• Unregulated market:Here, companies have the opportunity to create and manage institutions without the need for permits. Examples include countries like the United Kingdom, Germany, and Spain.
• Outsourcing sector:This sector includes scenarios where local authorities transfer management to private firms through contracts, typically ranging from 3 to 10 years. This model is common in Norway, Finland, and Sweden.

Types of housing for elderly people

In addition, there are three types of real estate for seniors in Europe:

• Regular apartments or houses adapted for the comfortable living of elderly tenants (for example, without thresholds and with wide doorways for wheelchair users).
• Specialized comprehensive institutions that provide care services and meal organization.
• Nursing homes that offer a full range of medical services.

Types of facilities for the elderly in the United States

In the United States, several types of facilities for elderly people are distinguished:

• Homes for retirees where the government provides subsidies for living in apartment buildings with minimal amenities.
• Assisted living:It's something between a home and a medical facility that combines nutrition and medical care.
• A boarding house is a small guesthouse designed for 10-15 residents.
• Nursing home:establishments that focus on providing medical services.
• Adult daycare facility — centers for daytime care for the elderly.

Advantages of investing in nursing homes

When discussing the advantages and disadvantages of investing in nursing homes, it is important to note that such investments have several benefits:

• High occupancy rate:reaching around 90%. In some countries, such as France, this figure can reach 98%.
• Constant interest from tenants:This is due to the trend of an aging population, especially in Europe, as well as the increase in average life expectancy. According to UN forecasts, by 2050, the number of people over 60 years old on the planet will rise to two billion.

Thus, investments in this sector represent a promising direction with a high degree of stability and the potential for generating long-term and favorable returns for investors.

Demographic changes in Europe

By 2040, it is expected that in countries like Germany, France, and Switzerland, people over 65 will make up more than 40% of the total population. On average across Europe, the share of citizens in this age group will reach about 30%, with over 11% of them being over 80 years old.

A particularly high level of elderly people over 80 years old has been recorded in Japan, Italy, Sweden, Germany, France, and Norway. Additionally, by 2020, a significant increase in the number of elderly people is projected in South Korea, Switzerland, Austria, and the Netherlands.

Investments in facilities for the elderly

Speaking about investments in senior care facilities, it should be noted that such investments are often made for long terms, which ensures stable income. Georgy Kachmazov, the manager of the company "Tranio," emphasizes that these properties are usually leased under long-term contracts, which can last five years or more.

The key point is that the tenant does not have the right to terminate the lease and evade payments for the entire duration of the contract.

Investment risks

However, investing in nursing homes comes with certain risks. "There are assumptions that in 15-20 years, significant repairs or renovations will be needed for housing for the elderly, which will negatively impact income. Additionally, we cannot rule out the possibility of rapid technological advancements, which may lead to modern facilities for the elderly being significantly different in quality, in turn affecting the profitability of existing properties," says Georgy Kachmazov.

Risk minimization strategies

Some experts believe that using mechanisms such as leasing and guarantees from developers can reduce investment risks. Mark Siegel, a leading specialist in the investment real estate department at Allgemeine Immobilien-Börse, notes:

• Building engineering systemsThey really do become outdated over time.
• If the lease agreement is drawn up for20 years...and the service life of engineering systems is25-30 years oldThis creates some reserve.
• In Germany, it is provided forfive-year warrantyfrom the developer for a fully completed property.
• After this period, a re-inspection of the building's condition is carried out, and if any deficiencies are found, the developer must rectify them at their own expense.

Conclusion

Thus, despite the potential risks that may arise in the future, a well-drafted lease agreement and support from the developer can significantly mitigate negative consequences and ensure a stable income from investment projects in facilities for the elderly.

This creates opportunities for the sustainable development of the elderly care sector and improves the quality of life for this category of citizens. Given the growing demographic trends, such investments represent not only a financial benefit but also have significant social importance.

Key aspects of investing in senior care facilities

To minimize investment risks in facilities for the elderly, certain aspects of the properties should be considered. A key criterion is the number of places in the facility, which should be at least 100, as this allows for the possibility of expanding services and significantly eases changes in layout.

It is considered optimal if about 80% of all rooms are single occupancy, which creates comfortable living conditions for guests. At the same time, the minimum area for single rooms should be at least 18 square meters, and for double rooms – no less than 25 square meters. It is also important that the occupancy rate of the facilities remains at or above 90%.

Staff experience and rental duration

A team with experienced personnelAt least ten years is a critically important aspect, as preference is given either to new buildings or to fully renovated ones, in order to avoid future capital repair costs. Lease agreements should have a minimum term of at least 20 years.

Optimal regions for the location of facilities

As for the geographical location of the objects, the best options include countries such as:

• Austria
• United Kingdom
• Germany
• U.S.
• France

It is recommended to choose large urban centers and medium-sized university towns, as well as their surroundings. Institutions should be located in regions with a high percentage of elderly population and a significant share of public sector and business employees.

Infrastructure development

A well-developed infrastructure is needed, which includes:

• service institutions
• medical institutions
• rehabilitation centers
• a reliable transportation network

Collaboration with reputable medical institutions and specialized nursing homes is an important aspect of successful operations.

Financial indicators

Financial indicators also play a significant role. Earnings before interest, taxes, depreciation, and rent (EBITDAR) should be:

• 20% for private operators (provided that the investment share is 8%)
• 15-17% for non-profit organizations (with investments at 3%)

Risk distribution is achieved by working with several reliable operators and entering into portfolio deals.

Cost structure

The costs for acquiring and maintaining facilities for the elderly account for about 50% of all investment funds. The remaining funds are allocated to:

• project work
• the purchase of a land plot
• associated costs
• unexpected expenses

For more detailed planning and architectural supervision, 3.5% is allocated, for the land plot – 3.7%, for additional expenses when purchasing – 0.4%, for construction – 10.3%, and for unforeseen expenses – 0.3%. In total, the overall costs amount to about 18.2%.

Personnel expenses and profit

According to research, half of the income generated by retirement homes is used to pay staff salaries.

The economy of nursing homes in the UK

In the United Kingdom, care facilities for the elderly with a capacity of 60 to 80 places can generate an annual income of approximately £650,000. This means that the income per place would be around £9,000.

When it comes to private nursing homes, the average cost of living is £27,872 per year, which is equivalent to £536 per week. For facilities with medical care, this amount is significantly higher, reaching £38,376 per year, or £738 per week.

Comparison of expenses in Europe

In comparison to Germany and Austria, where the average costs of living in nursing homes without medical services range from 36,000 to 40,000 euros per year, this translates to about 3,000 to 3,500 euros per month. These expenses typically include:

• Cleaning services once a week
• Complete nutrition
• Utility payments

Speaking about Europe as a whole, it can be noted that the cost of living in nursing homes ranges from 3,000 to 4,500 euros per month. When creating an adequate budget, the following main expense categories can be highlighted:

• For accommodation:1,800 euros
• Three meals a day:368 euros
• Utilities:192 euros
• Phone:15 euros
• Internet:8 euros
• Cleaning:265 euros

The total amount will be 2,648 euros.

Construction and profitability in Europe

When it comes to building new homes, there are strict regulations in place in European Union countries regarding the conversion of regular buildings into nursing homes. Therefore, it is generally easier to construct new complexes. However, it is important to emphasize that the design and construction of such specialized facilities costs about one and a half times more than usual.

In the UK, the yield on such projects ranges from 5 to 7.5%. Germany shows similar figures, where renting facilities for the elderly brings in about 7% per year.

For example, the company "Tranio" is currently selling a nursing home in Brandenburg, located just 20-30 kilometers from Berlin. The complex, built in 2015, is priced at 10.3 million euros and generates an annual rental income of 690,185 euros, which corresponds to a 6.7% yield. If a loan is used for its acquisition (at an interest rate below 2% with 70% LTV for 10 years), taking into account all expenses, one can achieve around 12% annual net profit on capital (IRR). The lease term is 20 years, and management requires 2% of rental income.

Prospects for nursing homes in the USA

In the United States, there is also a significant growth in the segment of facilities for the elderly. As noted by Vadim Cherdak, managing partner of Business Services International, the returns from such homes in the U.S. can range from 5 to 15% per year.

If an investor simply hands over their properties to a management company, the income may even be higher if the investor actively participates in organizing services and covering operational costs. For example, in the economically saturated state of New Jersey, creating a nursing home with day care services will require between 2 to 4 million dollars.

At the same time, a management company that is successfully operating in the market can generate income in the range of 1.5 to 2 million dollars. The cost of acquiring a business in this field ranges from 5 to 8 million dollars.

Conclusion

In conclusion to the article about the nursing home market and investment opportunities in this field, I want to emphasize the importance of this issue in the context of global population aging. As I mentioned, the number of elderly people who need specialized care will rapidly increase. This process requires attention from both the government and the private sector, which is capable of providing the necessary solutions.

Investment opportunities

Investing in nursing homes has its pros and cons. On one hand, we observehigh demandSuch assets create opportunities for stable income. On the other hand, it is necessary to consider the risks associated with potential changes in technology and infrastructure requirements. However, a proper investment approach, adherence to long-term contracts, and guarantees from developers can significantly minimize these risks.

Social responsibility

Against this backdrop, it is important not to forget aboutsocial responsibilityInvesting in homes for seniors is not just a commercial benefit, but also an opportunity to help those in need.Comfort,careandmedical supportPriority should be given to elderly citizens, and a business built on these principles can not only be profitable but also socially significant.

Call to action

Thus, I urge investors and entrepreneurs to pay attention to the nursing home market as a promising area for investment. We all know thatwell-being of the older generation— this reflects the level of civilization of society as a whole. Ultimately, the success of such initiatives will depend on our ability to care for the most vulnerable segments of the population and to create conditions that allow them to feel comfortable and safe.