Senior Housing Arrives in Spain, and Not a Moment Too Soon

It is the (grand) mother of all demographic real estate trends. By 2030, one in six residents globally will be aged 60 or older, rising from one billion now to 1.4 billion.1 Developed markets are aging at an even faster clip. The 65+ set already makes up almost a third of the population in Japan.2 In the US and the UK, it is pushing close to 20%, and the fastest-growing cohort is people aged 80 and above.3 4 5 For commercial real estate developers and investors, housing the “silver tsunami” looms as one of largest unmet opportunities of the next decades, the direct corollary to last century’s baby boom. In market after market, if you want to identify the hottest segment of the local property scene, just look for the walking tracks and backgammon rooms.

The world’s most mature senior housing market is the US. This $112 billion market (expected to reach $150 billion by 2029—for a CAGR of close to 6%)6 has three distinct sub-segments: independent living communities, offering communal spaces and amenities (but little in the way of on-site medical care); assisted living with more medical services; and nursing homes. Parallel to these, there is a fourth category of CCRC’s (Continuing Care Retirement Communities) that essentially combines all three (it’s as much an insurance product as it is a distinct segment), allowing people to buy into a community and age in place as they require more care, without having to worry about outliving their assets.

In the UK, the senior housing market has been about 20 years slower to develop than in the US and Australia but is gaining momentum as well.7 This is especially the case at the more independent end of the spectrum, where Integrated Retirement Communities (IRCs), akin to the independent living and retirement village arrangements in the US and Down Under, have sprung up to plug the gap not served by traditional, more medicalized care homes.

As it happens, one of the least mature senior housing markets is also among the oldest. Spain is currently aging faster than just about any other country, with its ranks of 65+ expected to nearly double to 36% of the population by 20508 9. Thanks to high-quality accessible public health care, the benefits of the famed Mediterranean diet, and a culture valuing the importance of personal connections, it also has among the highest life expectancies. The average Spaniard today lives to be 83 years old.10 If trends hold, that is projected to increase to 85.6 by 2040, by which point it will be top in the world.11

What Spain doesn’t have yet are many viable housing options for its burgeoning army of healthy, active seniors. Apart from a well-developed nursing home sector (a function of its robust universal health care), and a scarce few communities aimed at the waves of northern Europeans and other expats looking to retire in the relatively affordable sunny clime, the 10 million population who are 65 and older have surprisingly few places to turn. One recent survey counted a total of 10 dedicated independent living communities in the entire country.12

Late last year we wrote about the investment opportunity in Spain’s unpenetrated and undersupplied self-storage market. Real-estate anomalies like these are curious phenomena. Sometimes there is good reason that a certain type of product that has proved wildly successful in other similar parts of the world has failed to translate to a given market. As noted in the self-storage piece, in other instances there is no good reason at all, other than that no one has gotten around to building it yet.

The competition

It was something we heard again and again when researching the Spanish senior housing market: Culturally, it will never work, because Spain is one of those places, like other southern European countries, with a strong tradition of multi-generational living. As Spaniards retire and grow old, it is almost a given that at some point they will move in with one of their children or with extended family. Any developer who might dare to blaze a trail in the Spanish senior housing market understands: your stiffest competition is the mother-in-law suite.

At least that was the conventional wisdom.

Part of being a successful real estate developer and investor involves challenging conventional wisdom, and we had our reasons to be skeptical.

According to a 2019 United Nations report, 20% of people aged 65 and over in Spain live with at least one of their children, about the same percentage as in Greece and Italy, and essentially tying it for the highest in Europe.13

However, just because that has been a common practice doesn’t necessarily mean it is the preference. As explained in our self-storage piece, Spain is overwhelmingly a country of flat dwellers, and over time the size of those flats has been shrinking. Thirty years ago, the classic Madrid flat averaged about 250 square meters; today even in affluent neighborhoods it is typically half that. So, even where multi-generational cohabitation is desired, it is increasingly a tight fit. In fact, anecdotally, what Spanish families often tell us is that the ideal arrangement is to find a suitable place for retirement-aged family members in another unit or building nearby.

Why rentals

In scoping out the Spanish senior housing opportunity, another question that arises is whether to develop such projects as for-sale units or rentals.

Different markets have approached the question differently. In the UK, IRCs have largely evolved along the ownership model, albeit one with its own market-specific distinctions, with most typically structured as long-term ground-lease agreements. The US market is big enough to accommodate a mix of owned and rental options.

From the outside looking in, it might appear that Spain would follow the ownership route. In addition to its high rate of apartment living, the country boasts a comparatively high (76%) rate of home ownership.14

For several reasons, however, we think rentals are by far the more sensible approach. A common concern among senior housing residents the world over is the risk of becoming a forced seller in a down market. Whether it’s seniors having to sell the family home to buy into a community, or seniors or their heirs having to resell the unit later to facilitate a move into a nursing home or the disposition of the estate, there is no guarantee that home prices will cooperate with a family’s timeline. The swoon in home prices sparked by the sharp rise in interest rates over the past few years has only underscored the risk.

Renting bypasses such worries. While most residents will still need or want to sell their existing home to free up capital to fund long-term rental payments, renting may give them the option of carrying the property until prices are more supportive. Renting also allows them to try out community living without having to make a major financial commitment. In conjunction with a sale of their primary home, it can free up family wealth, either to distribute to heirs or improve the senior’s own quality of life.

Renting can also make for a more attractive proposition for investors. Purpose-built rental residential is a rapidly growing and highly institutional asset class in the US and Europe. Institutional investors increasingly want greater exposure to long-term inflation-adjusted residential income. With an average tenancy of around seven years,15 the cash flow for senior housing is among the longest-dated and most durable of the residential rental sub-sectors that have seen increasing institutional interest in recent years, including student housing and build-to-rent (BTR) single-family. As the sector in markets like Spain matures and consolidates, and the yield differential with traditional BTR compresses, we see strong potential upside.

The beta casa

La Moraleja is the most affluent neighborhood in all of Spain.16 Located on the northern edge of Madrid, a 10-minute drive from the central business district, it is an area of lush parks, exclusive private schools, luxury golf clubs, and one of the country’s most respected hospitals. As of last year, it is also home to a new generation of Spanish senior housing.

The development has been built atop 3.4-acres on the border of La Moraleja and Encinar de los Reyes, another vibrant enclave with a slightly younger demographic of upper-middle-class families. While the immediate target market is residents already living in one of the two communities, Madrid’s lack of supply and excellent transportation infrastructure means the true market is really all higher-income 75+ residents in Madrid and further afield. Indeed, the project has attracted interest and residents from across Spain, Europe, the USA, and Latin America.

The project itself has been designed to effectively lay to waste comparisons with mother-in-law suites in all but the most opulent family compounds. The 154 one- and two-bedroom apartments have been outfitted with ample space and high-end finishings. A ground floor communal area features both an indoor and outdoor pool, gym, game rooms, numerous large sitting rooms for entertaining guests and family members, and terraces overlooking the manicured gardens. The restaurant has been designed so that the entire community can partake of the traditional Spanish midday meal simultaneously, with pricing for an elegant three-course meal at a fraction of the cost of dining in an external restaurant.

The La Moraleja scheme is the first of four similar projects PineBridge Benson Elliot and our development partner have planned across Spain, with the other projects in various stages of progress. One of the early learnings from the project has been how deliberative this market is. Even with the stakes reduced by a fully cancellable lease, moving to a senior community is a major decision for a demographic that makes few decisions quickly. That children often have a say adds to the complexity of the marketing funnel. In a more developed market like the US, prospective tenants at least have had the luxury of weighing their options for years before an eventual move. In Spain, everything—the intra-family consultations, anxieties, and consideration of tradeoffs and potential joys associated with the move, along with first-hand familiarity with the product through site visits—is from a standing start.

Only time will tell how fast senior housing takes off in Spain. In the meantime, however, a wholesale restructuring of Spanish society is hardly required for early-mover investors to realize a competitive return. Even if a large majority of Spaniards continue to choose bunking down with their children or living on their own nearby over wining, dining, and swimming in the company of their peers in an environment that supports their age-specific needs, that still leaves a very sizeable addressable market. For comparison, the vigorous independent living market in the US has been built atop just 6.5% of all US seniors choosing to live in such a community. The percentage in the UK is even lower—1%.17

Assuming similar or even lower levels of penetration in Spain, we expect there soon will be many more senior housing renters than there are senior housing rental units available in the limited number of projects seeking to birth the market and capitalize on it today.