Why German health care properties are so interesting for investors
How does the German system of care insurance work?
Pflegeversicherung (nursing care insurance) was introduced throughout Germany as a partial insurance cover in 1995. It is intended to provide security for all those in need of nursing care through physical infirmity or psychiatric changes in old age (dementia), by covering part of their monthly costs.
As part of the reform of federalism in 2006, legislative authority for the field of nursing care was transferred from the federal government to the federal states. As a result, there are now 16 different laws in the field of nursing care, as well as a large number of implementing regulations.
In North Rhine-Westphalia, new buildings may have no more than 80 beds, in single rooms. There are exceptions for special care. The floor areas, the arrangement of the rooms, the number of disabled-accessible bathrooms (DIN 18040-R) and other regulations are specified.
The Baden-Württemberg State Home Law is another example. Since 1 September 2019, it stipulates solely single rooms, even in all existing facilities. In this respect, Baden-Württemberg is currently a highly attractive federal state for new developments.
How can investors participate in the care property sector?
An investor must be well aware of the federal state in which the investment is to be made, the nature of the legal provisions there and whether there are any foreseeable changes to the law. An excellent opportunity for this is the largest German real estate industry association, the ZIA, with its established health care property committee. This enables knowledge of political trends to be obtained at an early stage and for representations to be made during hearings by political committees.
How are the financial risks mitigated?
The lack of qualified staff is a major economic issue. A care home operator may not occupy the entire facility unless there is at least one member of qualified staff for every two residents. This means that, in the absence of sufficient qualified nursing care, the supervisory authority will issue a stop on occupancy.
It is therefore very important to be aware how an operator recruits its staff and that it has the ability to retain them in the long term.
In the scope of risk management, the fund managers carry out an ongoing review of the operator, its organisational structures, the facility and its market environment. The quarterly occupation report and the reports by the home supervisory authority and the MDK (Health Insurance Funds' Medical Service) are also referred to.
Risks are often perceived in these use types.
Even before the acquisition, we ensure that the structure of the building is such that another operator or tenant could continue to operate the property without having to carry out reconfiguration works. Management is certainly a general issue when considering the commercial risks of properties with specialist operators.
What are the assumptions regarding useful life?
We have two approaches to the life cycle. Property valuers base their assessments on the assumption that a care properties have a Nutzungsdauer (useful life) of 60 years. From the management side, however, in our opinion this is too long. Even with continuous CAPEX activities to maintain the value of the facilities, after 30 to 35 years a complete refurbishment is necessary.
Additionally, in the past homes were laid out with more double rooms. Currently, in federal states such as North Rhine-Westphalia, Rhineland-Palatinate and Baden-Württemberg, these are only partially permitted or even barred. This is why, in these federal states, we only acquire properties with single rooms. We are also keeping an eye on the extent to which double rooms appear to be acceptable in other federal states and the probability that they may also introduce regulations requiring 100% single rooms.
How well do the properties retain their value?
In order to safeguard the value of care home properties, we ensure that, at the date of purchase, the leases have at least 20 years – preferably longer - to run. This gives the opportunity to maintain the attractiveness of the overall portfolio. By implementing proactive asset management, this can be steadily increased.
How are the operators selected?
We work with non-profit operators, such as DRK, Johanniter, Diakonie and AWO, as well as regional and national undertakings.
In the past, we have had good experiences with SME and non-profit operators. These usually have well established local networks in the areas of politics, the community and health management, which often means they have better access to specialist staff.
However, we are also approached by major operators aiming to secure Principal as a long-term landlord, in order to establish additional facilities.
How does Principal manage potential reputational risks?
Damage to reputations primarily results from misconduct by staff, incorrect treatment, giving wrong medicaments etc. The operator in particular is responsible for taking precautions by selecting suitable staff.
We look at the operator beforehand, in order to be able to assess how its staff is trained, the average length of time the employees have worked there, whether there is a large proportion of temporary staff in the company and how the staff interact with residents. These are preventive measures at the operator level.
Because the investment fund acquires the properties and this is initially associated with Principal, the damage to the investors' reputation is downstream.
What is the influence of the current pandemic - SARS-CoV-2 - on healthcare properties?
We are currently seeing outbreaks of Covid-19 infections in some care facilities in Germany. These are dreadful occurrences, in particular because, in order to limit the chains of infection, relatives are not allowed to be present during the residents' last few hours.
Nevertheless, it must be remembered that there are over 14,500 care facilities in Germany, with no cases of illness whatsoever in the vast majority of them, because the operators are taking great care to prevent such occurrences.
As at mid-June, in our 1,034 in-patient beds there are six confirmed cases of Covid-19. This is around 6 per thousand, demonstrating the excellent work being carried out in the facilities.
Furthermore, the operators are covered by a range of Federal government rescue systems (GKV, PKV and Pflegeversicherung [care insurance]) There is also business interruption insurance, which can be claimed if necessary.
Systemic relevance.
Care homes are required for 3.8 million people in need of care in Germany. The homes must therefore continue to operate and function during the crisis, because they are systemically relevant to the welfare state.
Covid-19 will not slow the growth in the number of people in need of care. The problem – that we will have almost 5 million persons in need of care by 2030 – has not gone away.
We also anticipate very stable trends in the 'assisted living' segment.
Other health care properties.
In our view, medical centres offer a great opportunity to provide properties with stable values and secured cash flows. The reasons for the growth in the number of medical centres are understandable in view of demographic trends. 50,000 registered doctors are due to retire by 2021 alone. In the future, the existing structures of individual practices will cease to be workable. This is because the coming generation will include more female doctors, will demand a better work-life balance and will not be prepared to take so much of the entrepreneurial risk of a general practitioner. The concept of networking is also becoming increasingly widespread.
By Mathias Staudt
Director Fund Management Health Care
Principal Real Estate Europe