The last couple of weeks have been a particularly exciting time for our retirement team.
We have announced our joint venture, alongside Schroders Real Estate, with Elysian Residences, which will create a series of luxury retirement communities. We’ve also just published our new report on the retirement sector, Unlocking the retirement opportunity in a post-pandemic world, which draws on a survey of over 2,000 people aged 55 and above.
This comes at a time of great growth potential for retirement real estate. The last year has seen a period of increased allocations to the alternatives real estate sector. More than $144 billion of private capital was raised globally for real estate fund investments in 2020, and we expect this trend to continue as the sector goes from strength to strength.
As specialist real estate investors, we know just how important retirement communities are to our society as one part of the housing puzzle, with the UK adapting to an aging demographic. We’re equally aware that they represent a fantastic long-term opportunity for institutional investors – especially for those increasingly focused on Environmental, Social and Corporate Governance (ESG) investments.
The UK’s population is ageing rapidly. By 2069, it’s estimated that there will be a further 7.5 million UK residents aged 65 and over. As our society ages, demand for retirement communities is set to grow.
At present, less than 1% of UK retirees live in retirement communities. This compares with around 6% in both the US and Australasia. But our survey strongly suggests that this gap will close. More than a quarter (27.3%) of the over-65s that we spoke to said that they would consider moving into a retirement community. Extrapolated to the population at large, this figure suggests that homes for up to 2.5 million people could be needed to meet demand1. For such a sizeable building programme, substantial investment will be required.
The Covid context
As our report points out, the Covid-19 pandemic has prompted retirees to re-evaluate their living arrangements and highlighted the benefits that retirement communities offer. We are also seeing accelerated society-wide trends that make traditional real estate assets – such as those linked to retail or leisure – less attractive.
Even before the pandemic, online shopping, self-rental holiday platforms and flexible working were undermining the investment case for real estate sectors that had traditionally attracted institutional investment. With Covid-19 closing offices, hotels and shopping centres, these trends have only accelerated.
As a result, and with interest rates and bond yields so low, institutional investors are increasingly abandoning those areas in favour of others that offer more stable and predictable returns. With powerful demographic trends behind them, retirement homes offer exactly that.
The ESG opportunity
Stable returns are not all that retirement communities offer. They also allow institutional investors to satisfy ‘social’ ESG credentials in a way that traditional real estate investments don’t. By helping to expand the UK’s network of retirement homes, investors are addressing a pressing need and delivering real social benefits.
These social benefits are substantial. Retirement homes are the best way to cater to the changing requirements of our ageing population. Baby boomers, who will make up the bulk of retirees in the decades ahead, are much more likely to pursue active and social lifestyles than their parents. And well-designed retirement facilities are ideally placed to cater to this.
There are striking health benefits too. Residents of retirement facilities typically experience better health than members of the wider retired population. This reduces dependence on the NHS, with a 38% reduction per patient in healthcare costs. And, by rehousing senior citizens in accommodation designed for their needs, retirement homes also free up the stock of family housing for the next generation.
Unlocking potential together
Given the power of the demographic trends behind them, retirement communities have the potential to offer some of the strongest fundamentals of any alternative asset class. Considering the speed at which institutions have become comfortable with other alternative real estate assets, we expect much the same for the retirement sector.
Recently, large financial institutions have been looking to capitalise on this opportunity. Several have announced ambitious plans to invest billions in developing new retirement communities. By working alongside operators and developers, investors can start to unlock the considerable potential of this sector.
Our latest joint-venture announcement with Elysian exemplifies this sort of cooperation. At Octopus Real Estate, we’re committed to working with current and future partners to identify opportunities that will provide our investors with the returns and diversification they need – along with striking benefits to society at large. We believe these partnerships to be vital in unblocking the investment needed to meet the demand identified in our research and help to transform UK housing to the requirements of an older, active society.
According to the Office for National Statistics (ONS) 9.2 million over 65s own homes. Based on our research, we found that 27.3% of 65+-year-olds would definitely or maybe be more likely to move to a retirement community after seeing more information on them, resulting in an estimated total of just over 2.5 million people potentially requiring a home in a retirement community.
Personal opinions may change and should not be seen as advice or a recommendation. We do not offer investment or tax advice. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. Issued: March 2021