The falling risk premium for investing in care properties
Yields for elderly care properties have risen substantially since 2021 across major European markets, as property valuations have been pushed downwards due to falling demand from investors. But yields for government bonds have risen faster, meaning the risk premium for investing in elderly care real estate is now much lower than it was two years ago.
As borrowing costs have risen in 2022 and 2023, the ability of investors to do debt-leveraged transactions has been substantially weakened, so demand has fallen, which is why there have been less deals for both opcos and propcos. But there hasn’t been any shortage of real estate owners looking to sell, so property valuations have seen downwards pressure. And this means rental yields have gone up (rental yields for elderly care properties tend to move almost exactly inversely to the property valuation, as rental rates tend to be more or less fixed).
But real estate is relatively illiquid, so valuations have been slow to adjust downwards (sellers are naturally reluctant to accept lower valuations). Yields on government bonds, which are much more liquid, have risen much faster than yields for elderly care properties across Europe’s Big 5, as can be seen in the above infographic which shows yield data provided by real estate advisory firm Cushman & Wakefield.
This means the risk premium (the difference between the yield for more-risky property investment and less-risky government bonds) for investing in elderly care property has fallen substantially between 2021 and 2023, making investing in care properties appear comparatively less attractive.
Italy is the country where the risk premium has fallen the most, falling 283 basis points, to 137. Spain and France have seen theirs fall by 243 and 223 basis points respectively, whilst Germany has seen its fall by a less substantial 160 basis points. The UK has seen its risk premium fall by ‘just’ 198 basis points, but given its low starting point this meant the risk premium was just 72 basis points in 2023, which is pretty close to zero!
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