Sweden's Hemsö targeting €450m in German nursing homes

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Sweden's Hemsö Fastighets has been expanding rapidly in Germany since setting up in business in Berlin in 2011. It focuses on the nursing home sector (Pflegeheime), and just recently bought a further four properties, bringing its Germany holdings up to 30 properties with a market value of just over €300m. The group has invested €70m last year alone in six properties.

The most recent acquisitions included a 132-room, 15-supervised-apartment property in Darmstadt, plus a complex with 139 beds and 20 apartment units in Hadamar, both in Hesse, and both bought from Merkur Development in Rüsselsheim. The operator of both care homes is a subsidiary of AWO Hessen-Süd.

Earlier last month Hemsö bought a 168-bed nursing home in Taunusstein along with a property in Wiesbaden with 139 beds, also both in Hesse. The seller was Waldburg-Zeil Kliniken (WZK), which had simultaneously been the operator; Hemsö is bringing in the managed-homecare operator CMS Consulting from Cologne as tenant and operator. For all four of the acquisitions, Hemsö was advised by Quadoro Doric Real Estate in Offenbach.

REFIRE recently sat down with Hemsö's CEO for Germany, Jens Nagel, in the Hemsö offices in Berlin. The company has strong roots in Sweden, where it is 85% owned by the AP3 pension fund, a buffer fund established by the government as a backup for national pension payouts. The remaining 15% is held by Swedish listed group Sagax.

With no current drawdown on the fund's €30bn in assets, gains are re-invested in the fund, without a dividend requirement, so Hemsö is well capitalised to invest in its existing stock, as well as buidling a war-chest for suitable acquisitions.

In Sweden the group invests in 'public properties' ranging from managed-care homes, healthcare, educational establishments and municipal properties such as court houses and police buildings. In Germany, its remit is very much to focus on the healthcare sector. With the number of elderly in Germany who will require care likely to have doubled in ten years, Nagel says there is plenty of opportunity for growth in the sector in Germany. Hemsö plans to expand its holdings to €450m or more by 2019.

Part of the attraction of Germany, says Nagel, is the higher yields available in the market here, perhaps 1.0% - 1.5% more than in Sweden, where every suitable asset attracts 5-6 competitors looking to buy. The company achieved an IRR of 13.7% last year in Sweden, and Nagel indicated that returns in Germany were north of this, "well in the two-digit area".

Refinancing costs are lower in Germany than in Sweden, albeit the company is exposed to a currency risk as its parent denominates in Swedish kroner. Hemsö generally buys in Germany with cash, and subsequently refinances using a combination of mortgage loans, certificates and obligations (Pfandverschreibungen), enlisting the blue-chip status of the Swedish state to obtain favourable financing conditions.

The company works with four or five banks in Germany, never using non-recourse financing, and with the close supervision of the parent company's finance department to attract the best terms. This is increasingly advantageous as the company becomes better known in Germany, says Nagel.

Hemsö is clearly highly-attuned to risk in its investments, particularly to ensuring a geographic and regional spread to avoid being beholden to any one state legislation or even tenant/operator. With Germany's federal states having different approaches to subsidising nursing homes and managed care, with the southern states of Bavaria and Baden-Würrttemberg tending to promote more care in the home by family members, for example, Nagel says its important to stay on top of local political attitudes. Asset management in the sector is very intensive, he stresses, with a real requirement to understand the operators' business models almost as well as they know it themselves, to avoid business problems developing later.

So far occupancy in Hemsö's German properties remains high, at 98%, and there have been no rent fallouts in the four years since the company's been in the market, but it's clear that assessing political risk and location risk are embedded in the company's DNA.

Nagel says that 25-year lease agreements are not necessarily a source of comfort – since that time frame is too long for any meaningful contract to remain intact. Instead, the key factor is the location of the asset. In his case, he looks for properties that are less than ten years old, have at least 90% single rooms, and are managed by one of a short list of about ten operators. If the location is very good, he says, he has bid on properties with almost nothing left on the lease agreement, as a good asset can always renegotiate terms with operators, in their mutual interest.

In contrast with Sweden, where municipalities have an obligation to provide new nursing homes where they are needed, this obligation does not exist in Germany. Demand is now rising faster in Germany than often there are available permits for the construction of new nursing homes, leading to older properties being closed down and not being replaced, perhaps because of a lack of zoned land. And yet these are the very places where demand is proven to exist, where existing homes may be full. But frequently they are built or granted planning permission just to replace an older building, shifting the risk to the investor who has to pay a lot more as replacement cost. 

Hemsö's strategy of not having an exit strategy is critical in its assessment of what contracts to sign in the first place, and to avoid dependency on one or two large operators as tenants (no single Hemsö tenant has more than 5% of the overall rent roll, for example). As Nagel emphasises, if you're in the market for the long term, as Hemsö is, then location and politics remain the two main risk factors in the German nursing home sector.

Separately, a recent report issued by CBRE highlights how a number of sizeable care home portfolios are on the market in German, presaging transactions likely to number many hundreds of millions of euros. The report says that with Germany's ageing population, investment of between €54bn and €73bn is required to provide care home places by 2013. 

CBRE's Jan Linsin comments that “Institutional investors in particular are planning more acquisitions, and we expect interest in this asset class to increase continuously, especially as German institutional investors have now joined foreign institutional investors in recognising the opportunities within the sector and are ready to exploit these to achieve attractive yields.”

Jan-Hendrik Jessen, senior fund manager at Patrizia Immobilien in charge of healthcare, said that annual returns of 6.5% (using the German funds association BVI's benchmark definition) are realistic and sustainable in the sector. Jessen, who joined Patrizia in 2013 from fellow German healthcare heavyweight Corpus Sireo, is building up Patrizia's LB-Pflege-Invest Deutschland I care home special fund to €500m by 2017.