CBRE
Jan Linsin - CBRE
‘As we predicted half way through last year, investment momentum returned to more normal levels over the course of 2017 compared with 2016 when a record result totalling €3b was set through some very large scale portfolio acquisitions,’ said Jan Linsin, head of research at CBRE Germany.
Foreign investors have muscled in on Germany’s care home market in a big way, accounting for 64% of deals last year, according to CBRE’s analysis for the fourth quarter 2017, published this month.
Care home transactions topped €1b last year, marking the third best result since records began, although lower than the exceptional year witnessed in 2016. Last year, care homes took a 1.8% share in the overall real estate market (2016: 5.6%). Belgian investors accounted for the lion’s share of deals, at 31.5%, followed by Luxembourg-based investors (12%) and Swedish investors (11%).
Property companies specializing in health care and social welfare properties were the most active buyers, at 51%, followed by spezialfonds (17%) and providers of closed-end fund vehicles (15%).
‘As we predicted half way through last year, investment momentum returned to more normal levels over the course of 2017 compared with 2016 when a record result totalling €3b was set through some very large scale portfolio acquisitions,’ said Jan Linsin, head of research at CBRE Germany. ‘But even without large property transactions, the care home market remains a growth market. The transaction volume has increased every year by an average of 20% since 2008.’
Consolidation boosts sector
Consolidation is also boosting the sector. In December, Swedish buyout group Nordic acquired Alloheim, Germany’s second-largest nursing home operator, for about €1.1b including debt, from the Carlyle Group. Nordic Capital said it intended to support Alloheim’s management and to invest in further expanding the company’s facilities and services. The sale followed a competitive auction process, which included bids from the French group DomusVi, backed by International Capital Group, as well as buyout groups Ares from the US and Chinese group Fosun. Also, in August, the owners of Vitanas Holding and PFLEGEN UND WOHNEN HAMBURG sold their majority shareholdings in the companies to funds managed by Oaktree Capital Management. Vitanas and PFLEGEN UND WOHNEN HAMBURG are amongst the largest private nursing home operators in Germany with a combined offering of 8,300 care beds. The parties agreed not to disclose any details of the transaction.
‘Even if we do not expressly count these transactions toward conventional real estate market transactions, which means they are not added to the investment volume, this is an indication that the market is developing dynamically and that consolidation in the care home market is in full swing,’ Linsin added.
And in a move that would have been unthinkable a few years ago, care home funds are also springing up. Earlier this month (Feb), fund manager INTERNOS launched its second open-ended care home fund, Care Invest II. The fund will invest in a balanced, regionally diversified portfolio of healthcare properties offering stable, long-term value. The fund will focus on German nursing homes, outpatient care, sheltered housing facilities and rehabilitation clinics treating patients in psychiatry, gerontology and oncology. INTERNOS is targeting care homes in the €7m to €20m range, as well as rehabilitation clinics and medical centres costing between €10m and €30m. The fund’s target size is around €300m, of which half will be equity. Care Invest II aims to achieve a distribution yield of up to 6% over a 10-year average.
The new transparency
Nonetheless, despite their increased popularity as an asset class, around 2% of German care homes are in acute danger of bankruptcy and 16% are in difficulty, according to management consultancy TERRANUS Real Estate’s latest care home report, published this month.
For investors, a big part of the problem has been the lack of transparency when it comes to care home rents. In a bid to change that, TERRANUS has created an investment cost index. ‘With the investment cost index, we are able to offer investors and operators a fascinating comparison for each federal state,’ said Markus Bienentreu, managing director of TERRANUS.
Interestingly, TERRANUS’ investment cost index throws up some surprises. In the state of Berlin, where there are 385 care homes, rents and leases are showing little upward movement.
‘The growth in investment costs - which are integrated into the care rates - has been quite small in Berlin, at 2% in total over the last five years,’ Bienentreu told REFIRE. ‘There are several reasons for this, including the fact that investment costs are just higher in Berlin. However, in other states, such as Thuringia, there has been 8% growth in the same period. This is largely because there was a lot of subsidized housing in the state after reunification, so investment costs today are growing from a low base. Care homes are also subject to different regulation in different federal states, which can also have an impact on the investment costs.’
In the state of Thuringia, where around half of Thuringians will be in their mid-50s by 2040, demographers are already anticipating a lack of care homes, despite the 457 care homes in existence today.
Another state showing strong growth is North Rhein-Westphalia. However, the legislation has recently changed there, which means that indexation will no longer be permitted, which will have a negative impact on growth, according to Bienentreu. And although around 150 to 170 new care homes are built in Germany every year and some others will be refurbished it’s not enough to meet existing needs, he added.
Yields continue to tighten
At the end of 2017, the net initial yield for premium care homes came in at 5%, down slightly from 5.5% the year before and 6.25% at the end of 2015.’Even if care home properties are still considered a niche product, the yield compression over the past 24 months is impressive proof that alternative asset classes are also highly sought after by institutional investors,’ Linsin said. Along with the current yield advantage over the established asset classes such as office properties (up 1.86%) or hotel operator properties (up 1%), the spread versus the reference rate of a 10-year government bond of 4.59% is an argument in favor of institutional investors stepping up their commitment to the sector, according to CBRE.
As a result, Linsin is predicting a strong 2018: ‘Advancing consolidation on the operator market is ensuring increasing market maturity while also creating the greater transparency required by investors, notably in alternative niche markets,’ he said. ‘Consequently, we anticipate a transaction volume in 2018 that is likely to be considerably higher than the long-term average of around €750m, particularly as a number of larger real estate portfolios are currently at the selling stage.’
Who pays the service
Nursing home operators charge their total amount of fees to the inhabitants who, in turn, are mainly reimbursed by the long-term care insurance. Normally, the average nursing care rates charged exceed the reimbursement. In this case the inhabitants have to pay the difference from private resources (e.g. pensions) or savings. Furthermore, the catering and accommodation costs have to be paid by the inhabitants themselves. If a patient is not able to cover all of these expenses out of their own funds, close relatives will have to contribute. Only those amounts not covered by relatives will then be paid for by the social welfare.
The reimbursement rates are subject to (annual) individual negotiations (Pflegesatzverhandlungen) between the nursing home operator and the nursing care insurers as well as social insurance carriers. Whereas reimbursement for care services is clearly defined for the respective care levels and not negotiable, the rates for catering and services as well as accommodation are subject to negotiations between the nursing home operator and the local social insurance carrier (e.g. municipality). The nursing home operator has to initiate renegotiations.
Although politicians claim to the contrary, the refinancing conditions for the operators of nursing homes have deteriorated. This is also determined by the tight budgets in the public sector. (ssk)