Spiralling wages, construction and energy costs are crippling the sector
By Sara Seddon Kilbinger, Senior Reporter, REFIRE
Last month, Bremen-based residential and nursing home operator Convivo filed for partial insolvency for key companies in the group. Convivo operates in several federal states across more than 100 care facilities, most of which are located in north-west Germany, and employs around 4,800 people.
In total, five Convivo companies have filed for insolvency: ‘The group of companies is aware of its responsibility towards people and will conscientiously accompany the next steps,’ Convivo said in a statement. The wages and salaries of the employees are secured through the insolvency money until March. Convivo cited low occupancy rates in the area of inpatient care as one reason for filing for insolvency as well as the high cost of hiring temporary workers. Convivo has also named price increases as a reason, in the case of indexed leases.
‘The year began with sad news,’ Peter Tölzel, senior team leader Healthcare at JLL Germany, told REFIRE. ‘Convivo have been growing too fast and high interest rates did not help. They have partly bought and partly developed their care homes.’
Myriad of challenges is crippling sector
Tightening margins are also creating huge challenges in the sector. In the last quarter of 2022, the Bremen-based Specht Group completed the construction of four senior living projects and care properties and plans a similar number for this quarter. However, the group’s managing partner Rolf Specht has spoken openly about the myriad of challenges that developers face, citing margins of just 2% to 4%, rising energy costs and salaries as well as inflation. Older properties are even more likely to suffer. The Diakonieverein Berlin-Zehlendorf used to operate a care home with 90 places on Kirchweg in Bremen's Neustadt, filing for insolvency in December. The Specht Group has already been commissioned to build the replacement facility with 110 places by 2024 on the site of the former Koch und Bergfeld silverware factory. Specht, who is co-developing the site, now plans to have Specht & Tegeler Seniorenresidenzen operate the facility.
And as the market becomes more complex, investors are becoming more reticent: ‘We still have demand but at reduced pricing because of higher interest rates,’ Tölzel said. ‘We’re seeing cash on cash returns of around 4.5% for prime product. Last year, there were around €2.5 billion of healthcare deals in Germany but 2023 is extremely hard to predict.’
CURATA Care Holding also filed for insolvency last month and the company has filed applications for the opening of insolvency proceedings in self-administration for individual companies within the group.
‘Due to the concurrence of different, persistently economically burdensome developments, we are called upon to act in order to protect and sustainably strengthen the stable core of our association,’ said Peter Paul Gruber, managing director and CEO of CURATA Care Holding, in a statement. ‘In large parts, we will continue the business activities of the Curata Group without restrictions. At the same time, however, it is to be expected that facilities will have to be permanently closed at a few locations if they cannot be managed in an economically viable manner in the long-term.’
The proceedings will offer management the opportunity to draw up a restructuring plan over the next three months in cooperation with the business partners of the group and in consultation with the provisional administrator. If this plan meets with approval, the restructuring can be implemented on this basis. Wages and salaries of the employees are fully guaranteed by the state during this period.
Curata is being supported in the preparation and implementation of the reorganisation plan by the law firm BBL Brockdorff. Hamburg-based management consultancy PUKE DRESEN MALL, which specialises in the health sector, is providing business management advice, particularly with regard to liquidity planning. Berlin-based lawyer Dr. Christoph Schulte-Kaubrügger, a partner in the law firm White & Case, which specialises in restructuring and reorganisation, is acting as provisional administrator.
On average, a Curata nursing home has 100 full inpatient places. Most Curata places are in Hesse (735), followed by North Rhine-Westphalia (435) and Berlin (431).
Deal size is falling
Currently, German investors and healthcare funds lead investment, according to Tölzel but the size of deals has come down: ‘Portfolios of €400 million to €500 million are too big for the market today,’ he said. ‘Most investors are looking to invest between €50 million and €100 million. They’re also interested in medical office buildings, which are very resilient in the current economic situation.’
Life sciences real estate in Germany is increasing on investors’ radar following the enormous success of BioNTech in Mainz in creating a COVID-19 vaccine. BioNTech has transformed Mainz’s fortunes and, predictably, real estate investors now want in. For the first time in three decades, Mainz has become debt-free thanks to the tax revenues generated by the company’s global success. The company announced first quarter revenue of €6.4 billion and forecast total revenue for 2022 to be up to €17 billion.
Such assets have long been a part of many investors’ portfolios in the US and the UK. In addition, COVID-19 vaccines have generated record sales in the pharmaceutical industry over the past 18 months, including in Germany. And international investors want in on the action, according to Helge Scheunemann, head of research at JLLGermany. ‘Companies from the U.S. are pushing into Germany, thanks in part to the success of BioNTech,’ he told REFIRE last year. ‘This increases the pressure on the real estate market and makes it interesting for investors.’
Life sciences proving to be crisis-resistant
Part of the attraction for investors is that such properties are considered to be less susceptible to crises and offer a constant cash flow as they typically have long-term tenants. This has very much shown to be the case during the pandemic. In Germany, investments are primarily made in so-called clusters in which companies from various industries, including chemicals, biotechnology and pharmaceuticals are located, according to JLL, which describes Berlin, Munich, the Ruhr region, connected with the metropolitan regions of Düsseldorf and Cologne, Hamburg and Leipzig as such clusters.
Last year, almost 800,000 square metres were transacted in these clusters, soaring 26% y-o-y, according to JLL. Munich leads the pack, accounting for 211,800 square metres, followed by Hamburg with 102,200 square metres. Typically, properties of between 1,000 square metres and 2,500 square metres accounted for most take-up. The pharmaceutical industry is the biggest tenant, accounting for 29% of all take-up, followed by the two biotechnology segments of therapy and diagnostics (20%) and research and development (19%). Yields are typically between 3% and 6%, depending on the location.
Still, there is no denying that the market has slumped. Last year, the deal volume fell around 30% y-on-y, according to C&W, as rising interest rates, political uncertainties and inflation drive buyers' and sellers' perceptions apart. Care homes accounted for 43% of overall healthcare deals last year, far short of the five-year average of 60%, according to Savills. Project development is increasingly hard to finance, according to Tölzel, and that is backed up by the stats: in the first half of last year, project development still accounted for 23% of the overall transaction volume, dropping off to a measly 6% in the second half of the year, according to Savills.
Germany’s economic stabilization fund steps in
The question now is to what extent the state will step in. Increased energy costs are crippling many care homes and Health Minister Karl Lauterbach has announced that €8 billion from Germany’s economic stabilization fund will be made available, although how and when the money will become available is still unclear. The ministry names "hospitals, university clinics and care facilities" as facilities worthy of support.
Bernd Meurer, president of the Federal Association of Private Providers of Social Services, doesn’t pull any punches: ‘A nursing service in Leipzig that is going out of business, a nursing home in Flensburg that has to file for insolvency because of the high costs - in the last few days alone there have been several examples of businesses closing down because of the galloping cost development.’ He has warned of a potential chain reaction ‘endangering nursing care in Germany’ if help isn’t fast or widespread enough. Care homes certainly aren’t out of the woods yet.
