Investors home in on outpatient healthcare

Investors are turning to outpatient healthcare properties in a bid to boost returns.

Outpatient healthcare properties have increasingly become the focus of institutional investors' strategies in recent years, according to REInvest fund manager Stephan Böttger: ‘This is understandable, as healthcare properties offer stable income, especially in the long term, and are let in most cases to long-term tenants with above-average creditworthiness,’ he said. ‘At the same time they represent specialised properties which require higher levels of investor expertise due to the specific user constellation in each case.’

There are different reasons as to why investors are interested in outpatient healthcare properties, according to Böttger: ‘They have a lot of money to invest but the main driver is actually the political will, that’s to say that government regulation is geared towards outpatient rather than inpatient investment because it’s cheaper and easier to treat patients as outpatients. Orthopaedics is one example – a few years ago, it would have been unthinkable to have some of the treatments as an outpatient service.’

ReInvest will launch an outpatient healthcare property fund, Ambulante Medizinische Infrastruktur Deutschland (AMID) within the next three months. However, the outpatient healthcare property market is quite opaque, so properties can be harder to find.

‘Initially, we’d like to grow it to a €250m vehicle, including gearing, although we have the option to take it up to €350m,’ Böttger said. ‘We expect to have it fully invested within two-to-three years. We’re targeting A to D cities with at least 50,000 inhabitants and deal sizes of between €8m and €40m, so we expect to acquire between 18 and 25 properties, also via off-market deals.’

Earlier this month, REInvest Asset Management published a study in conjunction with the Healthcare Management Competence Centre of BFS Service on outpatient properties. The aim of the study was to differentiate between selected forms of properties within the outpatient healthcare sector and to identify requirements for successful investment.

‘We see great potential in cooperatively run health centre properties. Detailed knowledge of the market is essential here in order to separate the wheat from the chaff,’ said Jens Dreckmann, head of the Healthcare Management Competence Centre at BFS Service.

Move towards co-operative healthcare properties

Traditional, single-doctor practices are disappearing in favour of co-operative arrangements, according to the study. Between 2008 and 2018, the number of single-physician GP practices fell by around 19% in Germany to 26,668. In the same period, the number of specialist practices fell by 13% to 30,589, whereas the number of health centres rocketed by 260% to 3,173.

The shift is also reflected in demographic changes, prompting the need for a different level of care. In 1950 just 10% of Germans were over 65 years old. Today that figure is over 20% and forecasts suggest that it could rise to around 30% by 2060.

And as more and more doctors shun self-employment, co-operative arrangements offering permanent employment contracts are becoming more popular. Around 20% of doctors had co-operative arrangements in 2018, up from just 4% in 2007, according to the study. There has also been a shift towards part-time work, with 24% of doctors opting for part-time contracts between 2009 and 2018, up from 4%.

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, according to Dirk Richolt, head of healthcare real estate at CBRE Germany, who says 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 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,’ he added.

Prime yields for care homes fell by 25 bps during 2019 to 4.5%, according to CBRE. However, 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.