Senior living in Portugal – a huge and largely untapped potential
The residential sector for the elderly has enjoyed considerable growth over the past five years.
According to the Senior Living Report by the real estate consultancy Savills, as average life expectancy increases and people live healthier for longer, residential model choices for the senior class needs to reflect these changes with this segment providing an obvious opportunity for property investors.
And since Portugal is a top destination for retirement, second homes and holidays in Europe, particularly for UK, Irish, French, German, Scandinavian and US pensioners, the potential in the country is obvious, and you would think that Portuguese local government would bend over backwards to make the country the Number 1 destination in Europe for elderly residents.
But that is not necessarily happening, according to some speakers at the webinar ‘Senior Living’ organised by Savills in partnership with the Portuguese Resorts Association (Associação Portuguesa de Resorts – APR) and supported by sponsors such as the APPII, Moving to Portugal and ISEG (Lisbon School of Economics and Management).
They highlight a timid banking sector unwilling to lend for senior living projects and bureaucracy at local municipal council levels as two of the factors that have inhibited Portugal from taking advantage of the boom in this residential housing segment elsewhere in Southern Europe.
Attractive for investors
Senior housing and care homes provide greater portfolio diversification, while avoiding the fierce competition for prime price traditional property assets.
The less cyclical nature of this type of property asset is also appealing to investors. In addition to rental income, senior housing also relies on services and catering revenues allowing for a diversified revenue model.
And with Portugal’s safety and tranquility record, good climate, excellent public and private health infrastructures, the Non-Habitual Residence or NHR tax incentives scheme, and an obvious lack of supply to meet a growing demand, you’d think that companies specialising in this area would be queuing up to create projects in Portugal, and some are, but not without problems in terms of this problem of red tape and municipal bureaucracy.
What investors want
Investors in homes for the elderly and assisted living residences are attracted by the prospect of a long-term income stream underpinned by significant demographic changes, including lower fertility rates and longer life expectancy, both causing an increase in the aged population.
At the same time, new living arrangements and higher divorce rates are leading to an increase in demand for housing. The sector also offers competitive returns of between 3.5% and 5% prime yields.
In Portugal, the main trends are that developers of senior homes are targeting international seniors who want to be located close to the coast and golf courses.
The main investors in the Portuguese market tend to be a mix of both International and national ones and aim to develop their companies’ own operations.
Purchases of existing residences will also increase in order to enable the expansion of operators and their capacities, meaning achieving growth without the need to build from scratch.
According to Savills’ Lydia Brissy (Commercial Research), in the coming years the retired will account for 30% of the population (it is 20% now) of which 11% of the population will be +80 years old driving increased demand for residences and according to the EC, the timeline for this shift in the increase in the elderly population will strike Italy, Portugal and Germany first.
The Portuguese reality
In 2019, half of the Portuguese population was aged over 45, while a study in 2018 revealed that by 2028 the weight of the millennials will fall back by 16%, while the weight of the senior population will rise by 26%. By 2031 this number could reach 31%.
Between 2016-18 life expectancy in Portugal from birth is now around 80 years and by 2020 was 82 years old.
Alexandra Gomes of Savills Portugal says the in Portugal the supply of quality senior residential accommodation is still very much an underdeveloped and underexploited concept in the market, as highlighted by Pedro Fontainhas, managing director of the APR, and still only involves a narrow group of investors, but does benefit from strong market fundamentals.
Portugal has an imbalance between supply and demand, and with the elderly living longer and better, there will be many interesting opportunities in the Portuguese market for residential accommodation for the elderly in the market.
In Portugal, most of the current supply is from old peoples homes (Lars idosos) although some are seen with negative connotations. The family or domestic care services have played a central role in caring for senior citizens.
This reality is changing, however, due to several factors such as an increase in single-parent families, migration of the younger population overseas or elsewhere in Portugal. The supply of high-quality and professional services has also grown, breaking down into several categories.
“Senior residential supply still remains dominated by the social economy, namely, local municipal council run institutions, foundations and private social institutions that are highly dependant on state regulations,” says Alexandra Gomes.
Portugal has also seen private operators come in, that typically set up in high density, high purchasing power areas like Lisbon and Porto which have the largest number of residential care homes for the elderly. (24% of total supply/35,000 beds)
Alexandra Gomes points out that private operators account for only 12%, with a focus on resources, quality and professional management. Savills has identified 65 residences nationwide which fit the quality private profile for seniors and which also have medical services provided through agreements with health institutions.
Key players in Portugal include the José de Mello Residências and Montepio Residências (Portuguese), Groupe Aegide (Domitys) and also Orpea Groupe, both of which are French operators.
“Over the past 5 years, senior living has accounted for 2,2% of the total residential investment volume, and while this segment is still a niche in Portugal, there is a long term trend of growing investor interest,” says Alexandra Gomes.
Marcus Roberts (Savills UK) says that unlike the UK model, which is mainly build to sell, on the Iberian peninsular the development model in the sector is very much build to rent. He also says that Portugal is an immature market with clear opportunities for growth in the senior living market.
Senior living, he says, is coming of age, but it is important to distinguish the difference between senior living which is about community, and close care homes, the former being a non-medicalised offer rather than close care offer, but does provide a granular and secure revenue stream for investors because of an average length of stay of five to seven years.
“We have seen a build to sell model evolving in Southern Europe, particularly on the coastline and in the Algarve in Portugal, for example, but we are seeing an increase in the rental model from the more experienced French operators. Portugal is interesting because it has a very strong supply and demand imbalance on the supply side which is lacking, and is why Orpea is being acquisitive in this space,” he says, adding that investors are looking more at senior living rather than close care homes.
Horacio Blum, an associate director at Savills, discussed the possibility of investor diversification and the beginnings of a new core investment area saying that in Portugal, even though there might be a low provision of certain sub-sectors such as independent living, he believes that private and institutional investors are definitely sourcing projects that might fit their investment strategies.
Blum says that operators are looking at both Lisbon, as well as other areas of Portugal, and the demand allows them to think that this is a segment that will become well established in Portugal over the next few years.
Bernard Pinoteau (Groupe Aegide Domitys) believes that the Aegide group which has “hands on experience” in Portugal in areas like the Algarve, more specifically Vilamoura, has potential. “We certainly think Portugal is a good destination and we have two ongoing projects in the country at the moment, the other being in Porto”.
“Our main product is an urban residence rental model (Domitys), aimed at local residents from the city in which they live. Our clients are 75+ and are able to fly. The Group, he says, is a leader in senior serviced residences and began its internationalisation programme in 2014 in Italy, Spain and now Portugal.
The group is also active in Morocco and Mauritius with its ‘Evasion’ model which can be adapted to specific localities since, as he says, a section of the elderly like to spend part of their time overseas for various reasons such as taxation, lifestyle, health and wellness, etc., and Portugal fits this model.
“The children of senior clients are looking for security for their parents, understanding that they have to move because their present home is not adapted to their reduced mobility needs. The elderly are increasingly alone as friends and relatives die, family and children are working or move away, so Domitys provides communities in a supportive environment,” he adds.
A Fragmented sector
Marcus Roberts pointed out that in Southern Europe the senior living segment is very fragmented with assets owned by small families with one care home or a small portfolio with four or five homes.
Many of these owners, he says, who have seen their occupancy challenged over the past 12 months during Covid-19, are asking the question should they sell or upgrade these homes or even partner with private equity which is chasing the sector.
“For Domitys and others in the senior living space, because they are building new, they are able to adapt to Covid and changing regulations and to meet the requirements of local government, but also can adapt to what occupiers expect as well, i.e., feeling safe and secure in a clean and attractive environment.”
Hugo Santos Ferreira, VP of the APPII (Portuguese Association of Real Estate Developers and Investors), said that Portugal has all the fundamentals and dynamics needed to increase these types of residential living models for the retired and elderly.
“We still, in my opinion, don’t have a clear perception of the difference between typical elderly homes and what retired living can be in the future or the potential for these new assisted living residential models. In Portugal we need to see a shift in mindset towards these new models,” he said.
Hugo Santos Ferreira adds that regarding senior living, Portugal is lagging behind the rest of Europe where it is seen as one of the alternative types of assets and is facing problems in terms of bank financing which is one of the main constraints for senior living developments.
“The banks are simply not so open minded in financing these types of senior living assets,” he said.
The other problem that investors face, mainly in the municipalities, are admin constraints and red tape for these new types of models.
“We have been discussing this topic since 2008 and the last financial crisis, and in the last two to three years we have developed a lot and can see in the market a many new projects for senior living,” he said, adding that investors were looking at the Portuguese coast, with little interest in the interior.
The APPII VP adds that the model in Portugal was more connected to the Portuguese resorts from a strategic point of view, while Covid-19 had caused an interest in remote residential models.