The positive trend in healthcare property revenue continues unabated according to market figures for 2020 published by BNP Paribas Real Estate. The asset class generated almost €4 billion in revenue, 68% more than in 2019, and looks set to become increasingly sustainable.
The dynamic development in healthcare property investments during the first year of the pandemic reveals that investors are increasingly recognising the sustainability of this asset class. Remarkably, the ten-year revenue average was exceeded by around 130% in 2020. According to Georg Ritgen, Director of National Healthcare Services at BNP Paribas Real Estate Germany, one reason for this is that demand for healthcare properties is less affected by market fluctuations. This increases their rental security and makes them particularly attractive in today’s difficult macroeconomic environment. Ritgen also suggests that dependence on healthcare operators is becoming less of an issue due to their increasing professionalisation, which is decreasing the risk of default.
More portfolio transactions and increasing investment in assisted living facilities
Portfolio transactions made a strong contribution to this positive development, as they increased by around 140% to almost €3.09 billion. Yet revenue from individual properties dropped by around 18% compared to 2019. “Nevertheless, it is the second-best single deal volume ever recorded,” explains Ritgen.
Care properties accounted for a record-breaking two-thirds of healthcare real estate revenue (€2.7 billion), while properties such as doctors’ practices, hospitals, and medical centres more than doubled to €842 million. Particularly noteworthy is the 120% increase in the investment volume in assisted living properties. According to the BNP analysis, this is due to society’s changing attitudes towards old age living arrangements and a shift towards facilities that offer both assisted living and nursing homes.
Project developments are on the rise—nearly half of all sales topped the €100 million mark
Project developments contributed 24% to the overall result and in absolute terms represented by far the highest investment volume. Still, finding suitable sites often posed a problem as developers are increasingly competing with regular residential developments. Portfolio deals with a value of over €100 million accounted for almost half of the transaction volume.
Three groups of investors account for the bulk of the revenue: special funds (43%), investment managers (18%) and corporates (11%). Foreign investors are investing more than ever in German healthcare properties, although their share has fallen by around ten percentage points compared to the two previous years and is currently 46%. This reduction was primarily driven by interest from German buyers, who are discovering the attractiveness of healthcare properties as an asset class.
Rates of return are clearly declining
High demand for healthcare properties coupled with limited supply is reflected in the price trend. At the end of 2020, the net prime yield for high-quality, modern care properties was only 4.00%. It fell by 90 basis points in the last three years alone and this decline is likely to continue in 2021.
Despite this figure and the challenges posed by the pandemic, the significant increase in investment revenue indicates sustainable growth in healthcare real estate. According to Georg Ritgen, medium- and long-term growth is expected to continue over the next few years thanks to demographic trends, the rising average age and growing social acceptance for different types of old age housing. “Sales in 2021 are more likely to be determined by the existing supply, as investor demand will most likely continue to rise," Ritgen explains.
