2016 to smash records for investment in German nursing home sector

2016 has proven to be a huge year for investment in the German nursing home and healthcare property sector, with brokers estimating that this year will top €3bn in transaction volume in the sector – the highest ever. In 2006, the previous highest year, the transaction volume was a mere €1.2bn, although this is more the norm. This year is certainly an exception.

In the first three quarters alone nursing home deals valued at €2.4bn accounted for more than 7% of the total commercial property market, and nationwide the demand for new-build projects is rising relentlessly.

Two mega-deals are however distorting the annual figures somewhat - France's Primonial REIM takeover of a 68-facility nursing home portfolio in Germany from Swiss investors for €995m, and Deutsche Wohnen's recent €420m takeover of the Pegasus Portfolio from Berlinovo.

According to broker CBRE, peak yields on good-quality modern nursing homes are 5.75%, 200 basis points above offices and retail properties. While prices have risen in the past five years by up to 20% for nursing homes, they have risen by up to 30% in other property categories.

According to Frank Löwentraut, CEO of sector specialist Aaetas Consult in Bad Homburg, thinks we're unlikely to see such high transaction volumes again for another ten years or so, when after 7-10 years of holding, the big investors will be seeking their exits.

Speaking to trade journal Immobilien Zeitung recently, Löwentraut says he expects chunks of the big portfolios traded this year to make their way back to the market next year as the wheat – in the form of the better performing assets – get sorted from the chaff, and the portfolios start getting broken up. They should still find buyers, he believes, due to the lack of fresh supply coming onto the market. Of the 150 new-built properties probably required, he said, only about a third of that amount is actually coming to the market.

Official statistics tell only a part of the story of supply and demand in the nursing home sector. In 2013 Germany had 13,000 nursing homes housing 764,000 elderly people, with about 300 new homes coming onto the market in each of the eight years up to that point.

The head of Swedish nursing home operator Hemsö in Germany, Jens Nagel, reckons that Germany now has 13,500 homes with 800,000 residents, and that the overall market value is about €100bn. Hemsö itself has 33 homes throughout Germany, with the total steadily rising.

REFIRE has talked to Nagel many times about the differentiated nature of the nursing home market in Germany, in particular the differing regulations across Germany's 16 federal states, and the crucial role of understanding local conditions in assessing the likely capex required for a refurbishment, rather than committing to a new development.

Nagel believes the nursing home market is urgently in need of a rejuvenation cure. With nursing homes requiring total refurbishment every 25 years, the need for reserves is huge. Not infrequently the capital expenditure necessary to upgrade existing properties is 100% of the purchase price, he says.

The market has also thrown up a number of developers with a specific development concept. REFIRE met recently with Michael Held, the CEO of Berlin developer Terragon, which specialises in accessible housing for elderly people. Many of Terragon's developments are in urban quarters close to high-density housing, but perhaps not on the sunniest street. This gives their residents proximity to neighbourhood services, but keeps the homes affordable.

This is important at a time when many municipalities have not been able to raise their funding for elderly socially-dependent patients enough to entice developers to provide adequate new building.

According to Held, "The supply of suitable managed-care properties is currently heavily lagging demand." Given rising construction costs and the price of compliance with numerous regulatory demands, rental increases cannot keep pace, he said. Finding sites for building has become "like hunting for truffels in the forest". We need to focus more on creating barrier-free housing from the beginning, so that this housing will also be suitable for an ageing population in later years, he added.

And with some over-eager investors paying more than a multiple of 18-times annual income to buy existing nursing homes, it's doubtful whether they can ever see a real profit – hence the attraction of developers with good local community contacts, a marketing edge and a low enough cost base to build profitably.

We reported in these pages recently of the takeover of Germany's largest specialist developer of senior housing WI-ImmoGroup by Jersey-based ActivumSG Capital Management. It's worth reviewing here ActivumSG's rationale for buying the developer.

Activum SG Fund III paid less than €50m for a 94% interest in Hildesheim-based WI-Immo Group, which generates annual sales of around €90 mln. Activum said it paid less than €50m, and total project investment costs will not exceed €100m for the group, which it will allocate to its third big fund.

Founded in 2008, Wi-Immo Group sells units in care homes and retirement complexes that it has either developed itself or on behalf of operators and owners. The company currently has a pipeline of 22 projects.

Saul Goldstein, founder and managing partner of Activum SG, said: "Germany's ageing population presents a compelling investment opportunity that we're grabbing for our investors through Wi-Immo Group’s market-leading platform. There's a lot of investor interest in senior housing in Germany and the competition is pushing up asset prices, which is why we have gone down the developer route."

European Union statistics show that 21% of Germany's population is currently aged 65 or more and this proportion will grow to 28.1% by 2030. Care providers will need to build additional space to accommodate 300,000 more of its elderly citizens by 2030, according to German government projections.

Frank Winkel, founder and CEO of Wi-Immo Group, said: "With the support of our new shareholder we are looking to broaden our footprint right across Germany and to step up the number of care-home units that we deliver to around 1,000 a year, from about 650 currently."