Brexit Bonus

Senior Housing Investment

By Cutright Elizabeth on Jul 8, 2016 in News

While international markets reel in the aftermath of the Brexit vote, U.S. REITs and senior housing providers are well poised to not only survive, but thrive.

It will be months before the international markets begin to feel the effects of the Brexit vote, and probably years before any real assessments can be made on the economic and political impacts of Britain’s decision to exit the European Union. With uncertainty and fear looming, Senior Housing News (SHN) presents a mostly reassuring profile explaining how the U.S. senior housing market can weather the storm. The bottom line: U.S. senior living providers will not only survive, but perhaps even thrive thanks to a mix of strong portfolios, stable property values, and domestic insularity.

Evolving Circumstances

There’s plenty to worry about in terms of Britain’s separation from the E.U. Many predicted complete economic Armageddon and while the U.S. stock market did experience a round of sell-offs and tanking stock values, overall international markets seem to be holding steady. Additionally, some REITS with senior housing in their portfolio actually performed quite well, with both Ventas and HCP ending the day on an upswing.

Although a weakened British pound may introduce another layer of caution, slower expansion does not necessarily translate to catastrophe. In fact, many U.S. REITS may capitalize on the opportunity presented by a more favorable exchange rate by increasing property acquisitions in the U.K.

“[Brexit] will give them more of the field to themselves because the levered investors are going to find debt financing somewhat difficult in the next couple of quarters,”  Keith Harris, London-based executive director for specialist markets at CBRE Limited, tells SHN.

“…I think the international investor who can take a long view on currency hedging is going to be fine. If anything, the devalued pound against dollar and Euro is going to present [them with] opportunities.”

Ebbs and Flows

In the short term, British investors may find themselves paying more for less, thanks to a devalued pound and increased demand for more stable investments. As Daniel J. Hogan, director of research at RED Capital Group explains to SHN, “In the short-term, this can only have the effect of reducing cross-border capital flows into U.S. real estate.”

It’s in the long term where things get more interesting though, as Hogen anticipates an “incremental demand” from foreign investors eyeing US markets.

“When the dust settles,” he says, “we are likely to find capital flows return to recent levels, especially should the pound rally as investors take a more measured view of the economic consequences of Brexit.”

Helping capital flows will be a possible freeze on interest rates by the Federal Reserve. If that happens, it will drive more investors to REITs.

“As a general rule, if you believe interest rates are going to be remain low for a longer period of time, it makes higher-yielding stocks like REITs more attractive, assuming investors like the underlying assets,” says Stephen Theobald, CFO and Treasurer of Walker & Dunlop.

Domestic Strength

While all eyes are on Europe and the U.K., for U.S. senior living providers, Brexit will most likely end up more as a blip than a game changer. This is due, in part, to the strength of the country’s domestic market. Most significant for senior living providers is that increased occupancy will continue to be a powerful driver.

Theobald sums up the situation to SHN saying, “We have an aging population…At the end of day, from a seniors housing perspective, nothing that happened impacts the demographics.”

Margaret Kerins, managing director-head of fixed income strategy at BMO Capital Markets underscores Theobald’s assertion, telling SHN in a conference call that U.K./E.U. separation is not likely to create a global recession or undermine the “fundamental strength of the U.S. and Canadian markets.”

Kathryn Burton Gray, senior managing director at RED Capital Group is equally confident. “My position is that most capital that comes into the seniors’ housing/health care sector is primarily domestic,” she tells SHN. “Therefore I am not overly concerned that this Brexit will dramatically impact the sector in the long-term.”

Future Proof

Ultimately, senior housing is a numbers game. Success depends on the number of residents a facility serves. As baby boomers surge towards retirement, senior housing providers will be able to tap into this almost limitless resource.

As The Motley Fool’s Sean Williams points out, rising healthcare costs and medical care fall neatly into the REIT wheelhouse, a situation immune to the Brexit’s influence.

“The Brexit vote doesn’t change the fact that America’s older population will keep growing to an estimated 83.7 million by 2050 per the U.S. Census Bureau,” concludes Williams, “and it’s not going to dictate when people get sick.”