Healthcare funds move out of the shadows

Healthcare funds are moving out of the shadows, with a number of investors seeking to up their exposure to an asset class that is underpinned by Europe’s ever-growing elderly population.

Earlier this month, Luxembourg-based group REInvest announced the launch of a new fund, REInvest Outpatient Medical Infrastructure Germany, with a target size of around €350m.

‘Funds are trying to diversify their portfolios and healthcare is another way to broaden their asset base,’ Dr. Jan Linsin, head of research Germany at CBRE, told REFIRE. ‘Typically, leases are for at least 20 to 25 years, so it’s like investing in a bond. As the asset class matures, pension funds and insurers become more interested.’

REInvest has already raised around 60% of the €125m to €175m of equity it is seeking, with a view to launching the fund in the first quarter of 2020. The fund will be structured as a Luxembourg-based SICAV-FIS.

The fund will invest in healthcare properties, including medical centres, in select cities with a population of at least 50,000, targeting deals of between €8m and €40m. It will only consider properties built from 2000 onwards with at least five years on the lease. The fund has a target return of 5%.

‘One hurdle when we started thinking about the healthcare asset class was how to define it as it means something different to most people,’ said Martin Nolting, business development at REInvest. ‘We knew that we didn’t want to go into care homes or assisted living because we saw the need and demand for something new instead. However, healthcare meant something different to every investor we talked to. We liked the idea of Ärztehäuser because they basically bring together commercial real estate such as offices and medical infrastructure.’

Another challenge is that different words are used for properties that have a medical use and there are multiple different definitions, according to Stephan Böttger, fund manager of the new healthcare fund at REInvest. ‘There’s a good supply of Ärztehäuser in Germany. We are being approached on a regular basis with investment opportunities, not all match our criteria but we do have a very interesting pipeline at hand. We are also happy to enter into corporations with developers in order to create modern and sustainable assets for this type of product. ‘

Interesting changes are taking place in the outpatient medical sector in Germany, which are also helping to fuel investor demand: ‘We see that younger doctors place more emphasis on a better work/life balance and would rather be employed by a corporation than set up their own medical practice,’ Nolting said. ‘This shift in social preferences is accompanied and underlined by recent adaptations in the German landscape of laws and regulations towards favouring outpatient care in comparison to inpatient care.’

REInvest is targeting institutional German investors and expects to make the first acquisition on behalf of the fund in the second quarter this year. ‘We are promising our investors a so-called “single-fund-principle”, so another fund exactly like this will not be set-up by REInvest, yet we are committed to staying active in the health care sector and to expanding our product line when suitable,’ Nolting said.

Fund manager Swiss Life has also been very active on the healthcare side and is about to launch a new fund, according to Nikolai Schmidt, the group’s head of healthcare transactions.

‘We are about to launch a new healthcare fund for Germany and a separate one with focus on particular European countries,’ he told REFIRE, although further details have yet to be released. ‘In Germany this year, we would like to invest around €500m in healthcare assets, targeting properties of €8m to €50m. We also have some portfolio opportunities. Of the €500m, around 60% to 70% will probably be invested in care homes and assisted living facilities, with the remaining 30% invested in medical centres. We will also look at development projects via forward purchasing deals. It has become more competitive, though.’

Swiss Life Asset Managers has €1bn of healthcare assets under management across six funds, all of which are in Germany and Western Europe and it has been investing in medical care centres since 2015. ‘Our “HCIII” fund, which we launched in 2015, invests solely in medical centres and has around €250m of AUM,’ Schmidt said. ‘We’d like to grow it close to €300m. We highly appreciate this asset class because of its diversified tenant structure and long-term lease terms.’

Medical care centres on the rise

The number of single medical practices has fallen by 11% in recent years, whereas the number of medical care centres has risen by 130%, according to Böttger: ‘Through demographic development, for patients in as much as doctors, technical medical progress, the changing self-understanding of future generations of doctors and the increasing need for cooperation on the part of service providers, we see strong demand and an increased supply of appropriate real estate for the operation of modern practices,’ he said. ‘Supply is, therefore, still on an upwards trend.’

There is also increased interest in medical care centres because there are fewer legal restrictions compared to care homes, according to Linsin: ‘There are 16 different federal laws for care homes but they don’t apply to medical centres,’ he said.

Care homes leading the way

Last year, €2.1bn was invested healthcare properties in Germany, a drop of 32% compared to the previous year, according to CBRE. Care homes accounted for €1.2bn of the total, followed by retirement homes and residences (€470m), medical centres (€263m) and clinics (€135m). The fourth quarter was the strongest ever record, with €757m of deals. International investors swooped in on 62% of deals.

‘The big difference compared with the larger investment volumes of 2016 and 2018 is not due to a lack of investor interest,’ said Dirk Richolt, head of healthcare real estate at CBRE Germany. ‘Instead, the market was determined by greater supply shortage that curbed the transaction volume – large scale portfolio transactions of the kind seen in 2016 and 2018 are seldom possible in terms of healthcare real estate because the market that is still relatively small compared with other asset classes. Investor interest in healthcare properties is very strong. Institutional investors, in particular, are targeting this asset class and are broadening their investment spectrum to include properties other than care homes.’

As a result, the transaction volume for medical centers grew by 55% y-o-y, according to Richolt. ‘The assisted living segment is also increasingly attracting the attention of investors,’ he said. ‘With an investment volume of €46m, this segment is still very modest, but its growth - up 131% y-o-y - is likely to be ongoing. Assisted living is attractive to investors as this segment is not yet subject to a strong regulatory framework compared with care homes,’ Richolt added.

However, this year, the lack of product is also expected to hamper investment, Richolt said: ‘We assume that the huge investor interest in healthcare properties will hold steady in 2020 as well, and will be braked only by product availability. Yields are also likely to fall further in the current year, with investors paying close attention to their investment criteria such as location, property and operator.’

Prime yields for care homes fell by 25 bps during 2019 to 4.5%, according to CBRE. ‘There will be more pressure on yields over the next three to six months because there’s a lot of money to invest but a lack of product,’ Linsin said.

Occupancy rates for care homes outstrip all other asset classes 

The European healthcare market continues to grow, with capital targeting the sector more than doubling since 2015 to €6.5bn annually, according to the latest European Healthcare: Elderly Care Market 2020 report by Knight Frank released this month.

European occupancy rates of care homes are the highest of any property class, typically close to 90%, which combined with increasing fee rates and an emerging number of efficiently run operators, has attracted further investor interest, particularly considering downward pressure on yields in key European countries, according to the report. As a result, there is increasing investment appetite for elderly care real estate assets, with investment into care home and senior living assets having increased to a record-breaking 2.5% of all European commercial property transactions in recent years.

‘Demand for elderly care beds remains robust in Europe, and with the continuing demographics of an ageing European population, there will be unprecedented demand for residential care in decades to come, creating a huge opportunity for those ready to invest,’ said Julian Evans, head of healthcare at Knight Frank.

This is part of the growing trend towards investors seeking out alternative sectors, which provide long-dated income, to diversify their portfolios, combined with the awareness of the ever-growing demographic fundamentals for these assets which are driving the sector, according to the report. In many European countries, care homes are largely under private sector ownership, making them the most accessible market segment of the broader European healthcare spectrum for investors.

The number of people over the age of 80 is expected to surge over the next 30 years, with one in six adults set to be over 80 by 2050, compared to one in fifteen currently. As a result, estimates suggest that the cost of long-term care across Europe will rise to between 3% and 5% of GDP in 2060, up from 1.8% today, according to Knight Frank.