Assisted living
We reported in the last issue of REFIRE about the concerns that institutional investors have been having about the German healthcare sector, in particular the financial health of operators, several of whom have got into difficulties recently with a number filing for insolvency.
A new report, "Investor Survey Healthcare Real Estate 2023" by Cushman & Wakefield, nonetheless underlines the strong level of interest among investors in buying nursing homes, senior residences, rehabilitation clinics, medical centres and care centres. However, they ARE expecting purchases prices for those German healthcare property prices to fall in the short term and rents to rise in the short-to-medium term.
C&W surveyed 125 asset and investment managers, property developers, family offices, REITs and fund managers who are involved in the German healthcare real estate market. In most cases respondents are usually investing as part of a diversified investment strategy, and many invest in healthcare and residential real estate, with senior living and ambulant care being the link between both asset classes.
According to Jan-Bastian Knod, head of both Residential Investment and Healthcare Advisory at C&W, "The investor survey shows that most investors expect prices to fall in the short term, but they are divided about what will happen over the next five years. The focus is currently particularly on their own portfolio; energy-saving measures are the first choice for many in order to sustainably upgrade properties."
Still, a majority or respondents expect an increase in rents over the near and medium term, with 40% forecasting an increase of up to 2.5% over the coming twelve months.
As to geographical preferences, medical centres and medical care centres are favoured in Germany BIG 7 cities, properties for assisted living are evenly distributed in A-,B-, and C-cities, while nursing homes are weighted in favour of B- and C-cities.
On project developments, 61% stated that would invest in development projects, or buy them, on the basis of a forward purchase deal, driven mainly by the ESG conformity of many new development projects.
Transaction volumes currently well down, market remains unsettled
These survey results could suggest to a reader of the full report that all is well within the German healthcare sector. But as we've reported, all is not that rosy. Transaction volumes seem to have collapsed by nearly 40%, according to Savills, while big operator names like Convivo and Curata have filed for insolvency, unsettling the market.
In the long run the arguments for investing in the sector, given the skewed nature of Germany's demographics, are compelling, in REFIRE's view. But investors' eyes have been opened to the vulnerability of their operators' management, on which they are dependent and to whom they are bound contractually for a very long period. They are also rattled by the belligerent tone of Health Minister Karl Lauterbach's pronouncements about the undesirability of too close an involvement by the capital markets in Germany's generally well-reputed healthcare system.
The fundamentals for a market that is, in essence, a key component of Germany's social market economy and a vital ingredient in its social promise to provide adequate healthcare to its elder citizens, are good. Politics has been messing things up a bit, but German local government authorities are going to do their best to look after those in their care. It's a question of getting the right balance between in-patient and out-patient care.
A recent survey of 1,500 decision-makers by Hamburg-based project developer Cureus (and carried out by research institute Civey) demonstrated that more than 90% of these authorities recognised the need for more care capacity in their districts by 2040. According to Cureus CEO Gerald Klinck, 31% of respondents saw the greatest need in inpatient care, 43% in service living/assisted living, and 19% in day care facilities. In his view, this weighting is probably off-target, at the expense of inpatient care. He strongly believes municipal decision-makers have to do more to promote the building of nursing homes.
Klinck said, "Unfortunately, most municipal decision-makers seem to want to rely more on assisted living as a solution. This preference for care in one's own home is quite understandable from a human point of view, but: inpatient care is not a question of choice – for those who depend on it, assisted living is unfortunately no longer an alternative,"
The Cureus survey reinforces an earlier study by Wüest Partner AG in 2022, which also identified an increased need for care places in almost all districts by 2040. The demand in about half of all districts will be at least 20% higher than today's level, the study concluded.
A further study, by researchers Bulwiengesa in 2021, also showed that around 600,000 new inpatient care places will have to be built in Germany by 2040. Moreover, the occupancy rate of the available places in full inpatient care was already about 90% in 2021. In addition, the existing capacities are by no means secure. This is because 29% of the 15,400 nursing homes in Germany (data as of 2019) were already more than 40 years old in 2021 and a considerable number of them no longer meet the legal requirements or construction standards.
Klinck offered an interesting perspective as to why many of the municipal decision-makers had declared such a preference for assisted living in their prognoses. The current coalition government has declared its goal of 400,000 new apartments to be built every year (a goal it has so far woefully failed to come even close to). "Assisted living is statistically classified as housing construction. Municipalities may therefore hope to score points with appropriate housing both in terms of creating new living space and in terms of the care issue.
"But this is a dangerous fallacy, because today's baby boomer generation will hit our care system with full force. In 2040, there will be many more very old people than today. And statistically speaking, the need for care will increase disproportionately for people aged 80 and over. In addition, in times of scarce personnel and the singularisation of households, care is probably better bundled in one location and provided in-company with a colourful daily programme, rather than sending valuable care skills on an outpatient basis in a small car through traffic jams."
Klinck believes the building of more care homes is the best option. This is possible through the provision of municipal land, market-based investment cost rates for operators and by influencing state policy. The latter could, for example, provide local funding institutions with special programmes and ensure the long-term reliability of the regulatory framework.
In Klinck's view, federal policy should also be addressed in order to ensure an adequate volume of local funding, for example from the KfW, and reliable access to it in the long term, without ever increasing the technical demands on building owners. "All political levels must take measures to advance the construction of care homes as part of the social infrastructure of the future and to prevent the impending care catastrophe. This is the only way to attract more investors to this important market segment", he believes.