The demographic development in Germany is driving up investor demand for healthcare properties. But what is important to bear in mind when it comes to making a solid investment in this growth market?
Who can buy a nursing home?
Currently, the majority of nursing homes are owned by the operators themselves or by private investors. According to research by dcpc (Deutsche Care Property Consulting), institutional investors such as real estate funds account for a growing share of more than 15%. This is due to the fact that this segment is also becoming increasingly professional. At the same time, the proportion of properties that are divided up as individual, self-contained care apartments (condominiums) and sold to retail investors is growing.
The German market is also becoming interesting for foreign investors. According to Savills, the share of German investors in 2018 was only 43% (approx. EUR 1.2 billion), whereas buyers from abroad invested almost EUR 1.6 billion (57%) in long term care or assisted living real estate.
Currently, property developments are increasingly traded on the investment market. According to information provided by Savills, in the first eight months of the current year (2019), projected care real estate properties were already traded for around EUR 264 million – more than in 2017 and 2018 combined. Incentives for investors are in particular long-term leases of 15 to 20 years, which represent a comparatively predictable income stream.
Demographic change will lead to a further increase in demand for care properties in the coming years. In some regions, demand is already exceeding the supply of nursing care places. And the increasing number of new market participants also speaks for the increasing attractiveness of the market. A transaction volume of around EUR 2.9 billion was already achieved in 2018. Even though there have been no large portfolios so far this year, many small transactions have resulted in rising market trends.
What types of care properties are there?
To date, most market players have had no clear understanding of the definition of a nursing home. Often, supposed synonyms such as old people’s homes or retirement homes are used. But caution is advised here, as there is a clear federal definition under the Wohn- und Betreuungsvertragsgesetz (WBVG – German Housing and Care Contract Act) – with regulatory and therefore financial consequences.
In addition, special regulations apply at state level, which place far-reaching demands on the operation and the property of a “home”, which observance is overseen by the home supervision authorities. There are minimum room sizes, quotas for single and / or double rooms and sometimes upper limits for the number of rooms in homes – the state level home laws are very complex.
The WBVG, on the other hand, or more broadly the vast home laws at the state level, are not applicable if the resident lives independently and, if in need of care or assistance, looks after and cares for himself or herself (e.g. through an outpatient service or relatives). In this housing segment, facilities bear designations such as residence, assisted living, serviced or age-appropriate housing. The fine line between a nursing home and traditional housing is however not always clear. If e.g. inhabitants can legally select their daily organization and care providers freely, yet the operator of the facility in fact limits choices available, the authorities might deem a housing residence as a home, which entails different legal consequences. A great deal of expertise is therefore required to make new construction or the purchase of a nursing home worthwhile.
Advantages of investing in nursing homes
- Growth market: Demand is rising steadily and, according to forecasts, there will be a shortage of around 300,000 nursing home beds in the coming years. Often the existing supply is no longer sufficient to meet demand.
- Long term investment: Lease agreements are usually concluded for 20 years or more. In segments such as offices or logistics, lease terms of 3, 5 or 7 years are often significantly shorter.
- Inflation protection: In lease agreements, indexation clauses are common which provide for an adjustment of the lease depending on the development of consumer prices.
- Independence from the economic cycle: The demand for care services does not correlate with the economic cycle; an investment is therefore less susceptible to fluctuations.
- No substitute product: inpatient nursing care will always be needed, as there are (still) no alternatives for dealing with the need for nursing care when the dependency of those affected on external help has become very high.
Risks associated with investments in care facilities
- Poor site quality: In the event of oversupply or unfavorable demographic conditions, a new building or purchase is not advisable.
- Operator: Assessment of experience and creditworthiness: How does the operator position itself in the competition and what do the company figures and results say?
- Regulation: Today’s standards can change quickly. The past major reforms in nursing home law mainly affected the type, number and size of nursing care rooms. In some places, for example, nursing homes had to close because they were unable to react to new requirements.
- Outpatient treatment / medical progress: Thanks to medical progress, people are getting older and older. Outpatient services are also growing rapidly. The admission age of the residents is increasing, so that home operators have to adjust to decreasing length of stay and, if necessary, set new concept priorities.
What needs to be considered when investing in care properties?
A location and competition analysis is obligatory
The purchase price and yield are often used as the main indicators when buying a nursing home. This does not suffice, though. A location analysis will examine the catchment area and the composition of the population. It is important that the demographic structure in the selected region is appropriate, i.e. that there is a growing demand situation in the relevant older age groups and ideally stable growth in the middle age cohorts between 20 and 65. The latter is an indication that it will be easier to find nursing staff.
Examination of the current operator of the care property
The operator of the care property also acts as the leaseholder. Accordingly, it is absolutely necessary to check the previous key figures and the economic stability of the operator. A high occupancy rate does not necessarily mean that the operator is profitable.
A critical point is often the amount and the legality of the lease: there are cases in which the operator pays a lease that is cross-subsidized from the care proceeds for the residents. Likewise, maintenance of the real estate is a common point for discussions: Who is responsible for which obligations under the lease at the building level?
A further factor are the publicly available nursing home operator ratings issued by the medical service of the public health insurance companies, which allows conclusions to be drawn about the quality of the operations.
Inspection of the property itself
The property itself must also be considered in order to rule out defects in the building and to confirm conformity with home regulations. The above-mentioned requirements of the federal states concern, among other things, fire protection, hygiene, building equipment and the number, size and type of rooms.
Just as in other real estate segments, any investment depends on the expertise and quality put forth during the pre-acquisition preparation. The care property sector can offer interesting investment opportunities, If the specifics of care properties are taken into account and current as well as potential regulations are considered and priced in.