By Dan Brewer, Chief Fund Manager
If you’re up on your senior housing investment news, you likely know that many publicly-traded healthcare REITs focus more on medical office buildings and other health care real estate than on senior housing. At the same time, many private equity funds continue to be bullish on senior housing—not just for projected returns, but for its ability to stabilize an investor’s portfolio in an otherwise unstable market. So: who’s right? And which—REITs or private equity funds—make a smarter investment in today’s senior housing marketplace?
When it comes to senior housing, every investment is unique. This is especially true in senior housing, where different segments, from active living to skilled nursing, are moving forward on their own specific growth trajectory. Now more than ever, it’s not whether to invest in senior housing—it’s where, what type, and with whom (i.e. which operator) that really counts.
Below I share some pros and cons of both REITs and private equity funds focused on senior housing.
Publicly-Traded Healthcare REITs
Pros: By far, one of the greatest benefits of a healthcare REIT is that it gives investors a chance to invest in real estate—including senior housing—at a smaller investment threshold, for a shorter amount of time. In essence, publicly-traded healthcare REITs provide investors the benefits of an alternative investment like commercial real estate with the liquidity of investing in the more traditional stock market. There is no pure publicly-traded senior housing REIT, and each REIT will vary in terms of how much senior housing it carries. Thus, REITs are generally fairly diversified in terms of their focus on healthcare real estate, rather than specifically senior housing.
Cons: While real estate can help diversify a stock-heavy portfolio focused on healthcare, investing in a publicly-traded healthcare REIT won’t necessarily provide the same assurance. Generally, a diversified investment portfolio means holding investments that react differently at the same point in time. However, while real estate and the stock market usually offset one another, that’s not necessarily true for publicly-traded healthcare REITs, which don’t qualify as an alternative investment.
Senior Housing Private Equity Funds
Pros: Classified as an alternative investment, private equity funds have the benefit of not correlating to the greater stock market. As such, they can help stabilize and diversify an investor’s portfolio. Private equity funds are also just that: private. Thus, they have a bit more freedom and agility to move in an unstable marketplace. Private equity funds can pick-and-choose their investment communities very selectively—in smaller, less saturated secondary and tertiary markets. When it comes to senior housing, this is especially important, as some primary markets have experienced over-saturation, leading to lower occupancy rates—which impacts investor returns.
Cons: Unlike publicly-traded healthcare REITs, investments in private equity funds are not liquid. Most investors will need to secure their investment for at least two years, and perhaps up to 10 years or more. Many private equity funds also require larger investment thresholds—ranging from $50,000 to $1 million or more. In addition, private equity funds are generally managed by a much smaller team, with fewer regulatory-required checks and balances than publicly-traded REITs. As such, they may experience more volatility.
Senior housing is a complicated sector—part healthcare, part hospitality, part housing. The strongest performing investments will be made by those who have keen knowledge of the industry and who stay close to their investments. So, when it comes to senior housing, which is a better investment?
While the senior housing sector has been the highest performing real estate sector over the last one, three, five, and 10-year periods, healthcare REITs have been the weakest performing real estate sector over the past year due to rising interest rates and—in my opinion—a lack of understanding of the senior housing sector. I believe senior-housing focused private equity funds are better poised to provide the personal attention required to make the “right” investments in senior housing in today’s marketplace. They can focus more selectively on the “where, what, and with whom” of any deal, and they do not correlate to today’s chaotic stock market. For any investor, that’s an investment worth considering.
This article was originally published on BiggerPockets.com.