Nursing home operators muscle back into senior living market

Over the last few years private equity firms have invested heavily in the German market for senior living, particularly in managed care homes. However, a new study by consultancy group Terranus shows how the operators of such homes are successively clawing back market share at the expense of the private equity investors.

The half-yearly state-of-the-sector report by the Cologne-based Terranus, which specializes in social property, illustrates how the tables have turned. In the first six months of this year, of the more than 10,000 beds that were bought or sold, less than 20% were bought by operating companies backed by private equity. The rest were bought by operating companies on their own behalf, companies who operate nursing homes, managed care facilities and retirement homes.

Terranus says the trend was becoming evident last year. Of the 15,500 beds transacted in the German nursing home sector in 2018, operators without private equity backing bought 8,600 beds, a market share of 60%. With 6,900 beds, or a 40% share, private equity investors’ share was well down on previous years.

Foreign operating companies are showing increased appetite for the German nursing home sector, the report shows. The French group Maison de Famille bought 5,500 beds from the Dorea stable from private equity group Quadriga Capital. As we report elsewhere in this REFIRE, the Italian group KOS S.p.A bought 3,800 beds from private equity group EQT’s Charleston Group.

According to Markus Bienentreu, CEO of Terranus, “After the last few years which saw the private equity groups investing massively into the operating sector, now the operators themselves are reclaiming market share. Several big private equity shareholdings have since been bought out. What we’re seeing is new distribution in the market, with long-term oriented original operating companies trying to secure more market share in Germany.”

Terranus expects the volume of transactions to rise strongly again this year, after a weak year in 2018 compared to the year before (41,000 beds). Property advisors CBRE say that nursing homes was the most popular category in the asset class Senior Living last year, with 84.4% of the transactions going to nursing homes, ahead of senior residences and retirement homes.

A recent study by managed care project developer Terragon (not to be confused with Terranus, above) highlights the looming supply deficit in the premium segment assisted living market in Germany. The study also combines data from research group Empirica as to the rent levels that seniors will be in a position to pay over the coming years.

The study – „Versorgungssituation der 30 größten deutschen Städten mit Betreuten Wohnungen“ – highlights how 94% of German municipalities are undersupplied with assisted living facilities for senior citizens, creating an investment potential of 350,000 residential units, or €64bn.

Of the undersupply, Terragon sees an investment potential of €33bn in the four-star market for senior living.

According to Terragon’s CEO Dr. Michael Held, “The majority of people would prefer to be cared for in their own homes in their old age. And millions of these seniors can afford this serviced living.”

The research with Empirica determined that about 20% of the respondents would afford about €2,500 monthly for rent, utilities and care services. This assumes an outlay of 50% for the rental portion alone.

Dr. Walter Zorn, Terragon’s head of research, said: “Our suvey shows that households in the age group 70 and older have considerable purchasing power, since in addition to income they often have cash reserves and property assets.”

About 90% of respondents in the 61-70 year old category stated a clear wish to grow old, alone or with their partner, in their own four walls, with 60% saying they would wish an additional service element to their living arrangements i.e. managed care services. Among 71-75 year-olds the majority expressed a clear preference for home living, along with disability access and care service options.

65% of respondents assume that any apartment meeting these new age-appropriate criteria would likely be smaller than their current abodes.

The Terragon study highlights where the best potential is for investors among Germany’s 30 biggest cities and their existing managed care facilities.

The cities with the best current coverage are Frankfurt am Main and Leipzig, while bottom of the table is Mönchengladbach, with a rate of 0.5% (only one qualifying apartment per 200 elderly people).

The top 5 cities for assisted living for the over-65s are (per 100 inhabitants:

Frankfurt am Main (7.7%)

Leipzig (7.6%)

Stuttgart (5.1%)

Hamburg (4.8%)

Hannover (4.6%)

Berlin (3.6%) lies in twelfth place, while Duisburg (0.9%), Gelsenkirchen (0.7%) and Mönchengladbach (0.5%) prop up the table. The average rate of provision of managed care across the top 30 cities is 3.3%.

The best coverage is in towns and cities with more than 500,000 inhabitants, with a rate of 4% for the over-65’s. This rate falls to about 1.3% in towns with less than 20,000 inhabitants – although there are exceptions here, with towns exhibiting both the lowest and the highest rate in all Germany.

The current dominant housing model is a small building with less than 30 apartments, offering only a limited degree of services. Around 50% of the total of 7,000 houses surveyed fall into this category. A further 36% of the houses surveyed have less than 80 units.

“Very few senior citizens find anything appropriate near their current locality – at least not that which would interest them and which they could afford”, said Zorn.

Terragon has analysed the market for four-star service within the overall category of assisted living housing, and puts it at about 5% of the market for self-financing over-70 year-olds. This category would indicate a potential of about 2m households, of which 5% could afford the premium rates of €1,800 upwards monthly, resulting in about 100,000 new service apartments, or an investment potential of €33bn for the upper end of the market.

According to Terragon, there is further investment potential of €18bn for 100,000 service apartments in the price category of €900 monthly, and 150,000 new apartments (for €13.5bn) in basic quality for €600 monthly. The total potential for self-financing apartments for over-70 year-olds is put by Terragon at 350,000 units, for an investment volume of €64bn.

Terragon itself has been around for 20 years, and has become increasingly specialized on project development in the care sector, focused on apartments with disability access. It has developed more than 2,000 residential units for elderlies. It currently has about €340m of projects in development, and a pipeline of project for €150m to €200m for the next few years, at an average individual project volume of between €40m and €60m.

Through a joint venture signed last September with the SAX Group, Terragon now has the firepower to invest €500m to €600m over the next three to five years in its developments.