German healthcare real estate is suffering along with most other asset categories, as current conditions continue to cloud market sentiment. Healthcare real estate has been a growing investor favourite over the last few years, as Germany's demographic bulge predicts solid demand over the coming years, and many investors have been adding healthcare assets to their holdings as a safe form of diversification.
Figures in from broker NAI apollo show that the healthcare transaction volume in the first half of 2022 is €1.27bn, down 20% on the same period last year. (Under 'healthcare', NAI apollo includes nursing homes and assisted living (including day care facilities and residential group models), medical centers and medical care centers, as well as hospitals and rehabilitation facilities.)
According to Sebastian Deppe, managing partner of NAI apollo Healthcare, "This development is largely based on a lower transaction volume in larger portfolios. Accordingly, the portfolio share has fallen from over 55% in the same period last year to 35% percent now, which means that in absolute terms around €440m were traded through portfolio deals. The largest package of the past six months was the sale of nine senior and nursing care properties for about €170m from the Carestone portfolio with a total of 1,000 nursing units, which include assisted living, day care and inpatient care."
Individual acquisitions had a market share of 65% or around €830m in the first six months of 2022, which is also above the previous year's level in absolute terms. The most significant individual deal was Captiva's purchase of the "Medical Cube" in Rosenheim. The ensemble comprising a medical centre and medical service centre was bought for €69 million.
Within the healthcare market, the "nursing homes and assisted living" segment dominates market activity with a transaction volume of €960m, or a share of 75.7%. The second strongest category is "medical centers and medical care centers", which recorded a volume of around €245m (19.3% share). "Hospitals and rehabilitation facilities" account for a market share of 4.9%.
So who is doing most of the buying? Germans have displaced foreigners as the dominant investor group, in contrast to last year when international investors were most active, investing over €900m. That was down to €410m in this year's first half, about a third of the volume traded. The big investors Swiss Life and France's Primonial have emerged as big buyers, to compete with UK investor.
Dr. Konrad Kanzler, NAI apollo's head of research, said: "Among investor types, the picture is clearer than in previous years. For example, in deals with well-known buyers, "open-ended real estate funds & special funds" have been responsible for more than half of the total volume with purchases of around €660 million euros. New vehicles like the 'Kingstone Living & Care I' of Kingstone Real Estate or the fund 'Senior Living' of DLE Living have also contributed to this."
Reports from the past few weeks have indicated slightly falling prices for healthcare assets, while several development projects have been halted and transaction processes terminated. So far the prime yield for fully inpatient nursing homes at the end of the second quarter of 2022 was still holding at the 2021 year-end value of 3.90%, contrary to the general trend in capital market yields and interest rate increases. This is because of the still high demand for healthcare assets, and because many of the deals in recent months were initiated back in 2021.
This is unlikely to hold, said Deppe. "It will be interesting to see how long the purchase price factors supported by high demand pressure will be able to withstand the current market conditions. Inflation and massive increases in construction prices due to the energy sector and supply bottlenecks will almost certainly affect both returns and transaction volumes in the coming months."
One prominent casualty of the rapidly deteriorating situation for project developers is Terragon AG, a leading developer of upmarket senior living homes throughout Germany. The company filed recently for insolvency and protection from its creditors, after negotiations for the sale of a project in Duisburg and a joint venture for a project in Dortmund fell foul of banks' increased demands for more equity as costs spiral out of control. Other projects in Berlin, Wilhelmshaven and Hamburg all ran into trouble ranging from the delayed granting of permits to slow release of bank funds for supplier payments. The company had already been forced to ask bondholders to defer a payment on a bond issued in 2019, to which they had agreed.
Terragon has a project pipeline of about €800m, which CEO Michael Held has said the company will do everything it can to hold on to and bring to completion. His business model is still valid, he said in a media interview. "We just need a bit of air, because we've been hit by many negative factors all coming together at once, while we were trying to put three financing extensions in place. Serviced living for seniors, particularly in the premium segment, is an under-served sector, with the demand from both tenants and institutional investors for our class of product undiminished."
