Brexit Aftershocks Reverberate Through Senior Housing

June 26, 2016, Tim Mullaney, Senior Housing News - Markets around the world were reeling Friday on the news that the United Kingdom intends to leave the European Union, raising major questions about impacts to global business - including senior housing.  The potential good news is that senior housing as an industry might be essentially unscathed by any large-scale economic disruption following the so-called “Brexit,” experts told Senior Housing News.

U.S. senior housing might actually benefit in some ways from the new world order that emerges as Great Britain become the first country to leave the E.U., which will have 27 remaining members.  The separation process will not formally begin until October, when Prime Minister David Cameron leaves Downing Street; he announced his resignation after his side lost the national referendum on whether to remain in the European Union.

However, there’s plenty of ominous news as well. Britain’s separation from the E.U. is an unprecedented event, meaning its full implications are hard to discern.  Worst-case scenarios put the very “stability of the international financial system” in peril, as The Washington Post put it.  While economic armageddon did not transpire on Friday, the value of the British pound tanked, and U.S. stock markets plunged following sell-offs around the world.  Senior living companies felt the Brexit aftershocks: Brookdale Senior Living (NYSE: BKD) was down 4.21% and Capital Senior Living (NYSE: CSU) was down 4.40% in late afternoon trading Friday.

Yet, underscoring the somewhat mixed picture emerging for senior housing, some of the major real estate investment trusts (REITs) were having a good day: Ventas (NYSE: VTR) was up 1.26% and HCP Inc. (NYSE: HCP) also ticked up 0.41%.

In trying to understand this mixed picture and how Brexit might play out for senior housing going forward, there are considerations as to what will happen in the U.K. market - including for U.S.-based real estate owners that have significant investments there - as well as how the event could change the playing field here on home soil.

U.S. Gains Edge in ‘Occupancy War’

Put simply, Brexit is not likely to immediately change the major dynamics at play in the U.K.’s private-pay senior housing sector, which is favorable to some major U.S.-based companies, according to Keith Harris, London-based executive director for specialist markets at CBRE Limited.

Senior housing and care is a needs-based sector, and so demand for the product is largely resilient to larger economic dislocations, he emphasized to Senior Housing News.  In addition, there is a diminishing supply of private-pay beds in the United Kingdom with no forecasted falloff in occupancy.  Furthermore, increasing regulations are putting unsustainable pressures on smaller operators, leading to closures.

“Purpose-built, future-proof buildings are really winning the big occupancy war,” Harris said.

Two of the largest U.S. health care REITs have made significant plays to build portfolios of these types of buildings in the U.K.: Irvine, California-based HCP and Toledo, Ohio-based Welltower (NYSE: HCN).

Welltower owns 89 properties in the country, mostly in Greater London, and generates approximately 8% of its net operating income from investments in the U.K.  HCP has a portfolio of about 30 senior housing properties triple net leased in the U.K., as well as a handful of post-acute and skilled nursing assets.

Both these REITs are largely hedged on their exposure to the currency devaluation in the U.K., putting them in a good position, Green Street analyst Kevin Tyler told SHN.

CBRE’s Harris concurred that these U.S. players may have an edge moving forward.

“[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,” he said. “So, 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.”

Those opportunities may extend to Canadian pension funds as well, he added.

Unlike HCP, Welltower did see its share price slide 0.71% on Friday.  But the company is taking a circumspect stance publicly on Brexit.

“We evaluate regularly the markets where we have invested to determine the appropriate strategy to maximize shareholder value,” a company spokesperson told SHN.  “This is the approach we are taking with the referendum.”

HCP declined to comment for this article.