While an increasingly aging society will certainly affect the future of retirement savings and health care in Canada, this growing demographic shift may also offer an opportunity for institutional investors.
“Within a decade or two, the largest single household cohort will be seniors,” says James McKellar, director of the Brookfield Centre in Real Estate and Infrastructure at York University’s Schulich School of Business. “We talk a lot about the challenges of the city today, but we’ve really not addressed the freight train that is coming, which is how are we going to accommodate something like 40 per cent of households that are going to be over 65?”
Between 2009 and 2017, seniors housing units grew at a rate of 6.9 per cent a year, according to the Canada Mortgage and Housing Corp. But figures from Statistics Canada show the senior population grew even faster, at 20 per cent per year over the last decade, and the age group is set to outnumber those under age 14 by 2021.
Taking advantage of this trend, many large Canadian pension plans are investing in housing for seniors. The Ontario Teachers’ Pension Plan, for example, has a subsidiary in its private equity group, BayBridge Seniors Housing Inc., which owns and operates senior living communities across Canada.
It’s the right time to move into the space. Using real estate investment trusts as a proxy, the U.S.-based National Council of Real Estate Fiduciaries found seniors residences led REITs in aggregate with a return of 10 per cent over the past decade.
“If you look at the broad data, seniors housing has actually outperformed the broad real estate market in 10 of the past 12 years,” says Steve Blazejewski, managing director and senior portfolio manager at Prudential Global Investment Management Inc.’s senior housing partners funds. “The only years it didn’t outperform were really the rebound years coming out of the global financial crisis.”
Indeed, it’s considered to be somewhat recession-resistant, thanks partly to the coming demographic wave, he adds. As well, Blazejewski points out the high-income play, noting it’s a very sticky real estate investment.
“Residents move in, they’re typically very happy and they stay for a period of time,” he says. “And we’ve been very successful in the industry in performance. We’ve had positive rate growth even through the depths of the financial crisis and we continue to grow our rates and income through the various cycles.”
Nevertheless, as institutional investors enter the sector, returns are becoming tighter, says Blazejewski. “We continue to see significant investor appetite in the space and we’ve seen cap rates really drop, a lot of compression from 10 per cent or higher in the late 1990s and the 2000s to what is really a five per cent to six per cent range for A-quality assets today.”
Another early joiner in Canada is the Public Sector Pension Investment Board, which bought the publicly traded Retirement Residence REIT in 2006, renaming it Revera Living. From a base of 223 properties, it now operates 500 facilities across Canada, the U.S. and, most recently, Britain. Along the way, it’s also teamed up with Welltower, the biggest U.S. seniors REIT, in a series of joint ventures across Canada and the U.S.
According to the PSP’s annual reports, after jettisoning some businesses, Revera Living has made a major contribution to its real estate group’s bottom line, along with apartments, student housing and mixed-use developments. “These investments produced positive results due to increases in occupancy, repositioning of assets, implementation of value-add strategies and valuation appreciation in alternative asset classes, such as student and senior housing in the U.K.,” the PSP noted recently.
Still, the path followed by large pension plans is often too complex for many smaller plans. Since the PSP’s Revera Living and Ontario Teachers’ BayBridge Seniors Housing are both operating businesses, they include a set of risks quite different from those usually associated with investing. Among these are labour shortages and level of service.
“The problem is that it’s not so much a real estate play as an operating business. That’s the dilemma,” says McKellar. “There’s people that build seniors housing, but the sad part is that the operation of these homes has left a lot to be desired.”
All the same, the industry has changed. Increasingly, retirement communities are incorporating independent living, as well as assisted, memory and nursing care, notes Blazejewski. “If you look back 20 years, you saw a lot of what we would consider to be standalone communities that had only one level of care, only assisted, or only independent living. That has certainly shifted a lot, and now you see the inclusion of multiple levels of care, often independent care, assisted care and memory care in the same community.”
Retirement communities have grown in size as well. Along with adding different levels of care, they’re also a lot larger and, subsequently, have a lot more amenities, says Blazejewski. “Whereas 20 years ago you didn’t have occupational therapy or physical therapy, now that’s almost a have-to-have. You now have multiple dining venues. You have very nice business centres, things like that. The communities have changed, and you’re certainly seeing what I would consider to be a more discerning resident.”
In the end, argues McKellar, the industry — and governments — will have to step up and do more for seniors. The aging demographic presents more than just a housing issue; it’s a social issue.
“The problem we have with cities and with a lot of the Western world — maybe not in Scandinavia — is we’re still single-purpose-minded. So we build a school, we build a daycare centre, we build a library — we build these but we don’t think of using them to address a broader social agenda. It would seem natural to me that elderly people would like to be around young people.”
Institutional investors, suggests McKellar, can be part of the solution. “I just interviewed the heads of major pension funds in Canada. ‘We’re not short of money,’ they tell me. ‘We’re short of good projects to invest in.’”
Scot Blyth is a Toronto-based freelance writer.