Investment market for nursing homes remains dynamic
Transaction volume across Germany rose to 811 million euros in 2014
Prime yields dropped by 75 basis points year on year
Keen interest in German nursing homes and healthcare property among foreign investors
The investment market for nursing homes and senior residences maintained its impressive growth course last year. Overall, a transaction volume of approximately 811 billion euros was registered in 2014, implying a 24-percent increase year on year. This is the upshot of a recent analysis compiled by the real estate consultancy CBRE.
“Among real estate investors who have the proper know-how in this asset class, the demand for German care homes remains as high as ever because of the higher yield potential compared to classic property segments such as office or retail,” observed Dirk Richolt, Head of Real Estate Finance at CBRE Germany. “This is suggested by the brisk momentum of the investment market, where transaction volume grew for the sixth time in as many years. Especially the demographic trend in Germany and the resilience of the nursing care market from economic cycles imply investment opportunities both in the real estate sector and on the operative level, as the acquisitions of German companies by foreign care home operators illustrates.”
Pressure on Healthcare Property Prime Yields
By year-end 2014, the prime yield for high-end care homes stood at 6.25 percent, which represents a one-year decline by around 75 basis points. “By adding the alternate asset class of social and healthcare property, achievable prime yields are reduced by the keen demand of mainly institutional investors who seek to achieve the profit targets of their investments in terms of risk and return”, said Jan Linsin, Head of Research at CBRE Germany. “The focus in this context is essentially on institutions that provide inpatient care for elderly people, and that are run by experienced high-net-worth operators established on the market long enough to guarantee a stable long-term cash flow from rent revenues.”
“Given the historically low yield rates on the bond markets and an already advanced yield compression for office and retail property, investors are interested in ways to expand their investment universe, and are desperately looking for alternatives beyond the classic real estate segments. As a result, the interest in the niche market of healthcare real estate is growing across Europe, and this has lately been reflected in a rising price level in this market segment,” said Linsin. “Accordingly, we have registered a slight scale-back in annual dividend guidance among some property funds as they try to identify market-consistent ways to respond to the changed yield expectations that buyers are willing to accept.”
“For assets in sustainable locations that are let on long-term leasehold agreements and that are characterised by modern high-quality fit-out quality and flexible use options, the net prime yield currently ranges from 175 to nearly 215 basis points above the yields for prime assets in the office and retail segments. Even compared to investments in prime hotel real estate, care homes offer a positive spread of 100 basis points,” said Richolt to elaborate the growing interest in this growth market.
Heterogeneous Investor Landscape – Institutional Investors Dominate the Buyer Side
The buyer side in 2014 was dominated by institutional investors such as insurance companies and pension funds either via direct investments or through specialised fund structures. They accounted for a 22-percent relative share in the transaction volume. Other highly active investors in this asset class included foreign asset and fund managers with a market share of 17 percent, followed by listed property companies/REITs from abroad with a 13-percent share. Closed-end fund providers, traditionally a strong player in this field, maintained their prominent position with roughly ten percent of the investment volume. In addition, care home operators are active in the market as buyers in their own right in order to gain competitive advantages by further diversifying their portfolios. Corporates accounted for altogether 17 percent of the total transaction volume.
Above-Average Share of Portfolio Deals
Portfolio transactions represented around 43 percent of the investment total in 2014. Packaged deals included, inter alia, the acquisition of eight care facilities by Aedificia, a property company listed in Belgium, the takeover of the so-called Silver real estate portfolio, which included five care homes in Göttingen, Wetzlar, Erfurt, Eisenhüttenstadt and Schwedt, by the property investment fund “PATRIZIA Pflege-Invest Deutschland I” in Q4, and the sale of a portfolio of six care homes in North Rhine-Westphalia by the Comunita Group to the Munich-based operator Silver Care Holding during Q2. “Especially in the area of special-purpose property we have noted a massive interest particularly among institutional investors who are planning to build up a significant Germany portfolio by buying up real estate packages in this segment. The talks we are currently conducting with foreign investors confirm the trend toward the niche segment of German social and healthcare real estate, not least because this is an asset class that has long been established in the United States and in Canada,” said Richolt. Last year, foreign investors accounted for 310 million euros or a relative share of 38 percent of the transaction volume.
“It is safe to assume that the investment volume committed by foreign investors will keep growing in the coming years. For the time being, the healthcare markets remains strongly fragmented both on the operator and on the property owner sides, while a large share of it remains in the hands of the public sector or private charities. Yet especially the public sector lacks the investment capital for operating and maintaining the care facilities. The demographic trend, the increasing severity of care-dependency, and a high prevalence rate will exacerbate the demand for modern care homes. This will inevitably prompt private investors and foreign property companies specialised in this asset class to step up their commitments on the German market,” Linsin added.
As far as single-property deals were concerned, the investor side of the healthcare real estate market was dominated, aside from initiators of closed-end funds, by institutional investors like insurance companies and institutional funds as well as by asset and fund managers.
Healthcare and Social Properties are Sought Niche Products
As the transaction revenue total rose to more than 800 million euros, care homes scored a share of well over two percent of the commercial property transaction total in 2014. Adding healthcare property such as hospitals and rehab clinics added will actually push the overall share beyond the five-percent mark.
“Going forward, we expect investors to become more willing to embrace this investment opportunity with its promise of a lucrative rate of return far above the returns paid by classic real estate investments,” said Richolt. “This is all the more likely because the demand for inpatient nursing care places will see a significant surge regardless of business cycles in the coming years – even if for no other reason than the demographic trend – and because the ageing portfolio properties with their high investment back-log urgently call for the injection of private capital.”
Transaction volumes for nursing homes and senior residences, 2005 – 2014
CBRE Group, Inc. (NYSE: CBG) is a Fortune 500 and S&P 500 company domiciled in Los Angeles, California. It is the global leader in commercial real estate service by 2014 financial year revenues. With over 52,000 employees operating out of more than 370 branch offices worldwide (not including private equity partnerships and affiliate offices), CBRE provides services for commercial real estate owners, investors, and occupiers. The company's services focus on the areas capital markets, letting, valuation, corporate services, research, retail, investment management, property and project management, as well as building consultancy. Formed in 1973, CBRE Deutschland has its headquarters in Frankfurt am Main, and maintains branch offices in Berlin, Düsseldorf, Cologne, Hamburg, Munich, Nuremberg and Stuttgart. www.cbre.de