Navigating through turbulent waters, the German healthcare property market faces a myriad of challenges, such as sluggish transaction volumes and cautious investor sentiment. Yet amidst these hurdles, rays of optimism pierce through, hinting at a potential resurgence on the horizon.
In the first quarter of 2024, the healthcare property market saw subdued activity, with transaction volumes reaching only up to €130 million. This decline is notable compared to previous years, signaling investor hesitancy in the face of persistent uncertainties. Nursing homes, in particular, emerged as the most transacted segment, generating approximately €81 million in turnover. However, the broader market for care homes, assisted living, and medical centers witnessed minimal activity, raising concerns about investor appetite in this sector.
Prime yields have remained relatively stable, with care homes maintaining yields around 5.1% and assisted living properties at 4.5%. Medical care centres offer slightly higher yields, ranging between 4.5% and 4.75%, while clinics present opportunities with yields between 5.5% and 6%. Despite the subdued market conditions, industry experts like Jan Bastian-Knod, Head of Healthcare Advisory at Cushman & Wakefield (C&W), and Marco Schnell, Senior Director Investment Advisory Services at CBRE, express cautious optimism about the market's potential for resurgence.
Yet, underlying challenges persist, dampening investor confidence. Jan Linsin, the veteran Head of Research at CBRE Germany, underscores concerns regarding cost-induced insolvencies among operators, discussions surrounding lease reductions, and the persistent shortage of skilled workers. These factors contribute to a complex risk landscape that investors must navigate carefully.
Hemsö boss emphasises role of index-linked rents
Jens Nagel, the Germany boss for Swedish investor Hemsö and one of the most experienced hands in the complex German healthcare market, emphasizes the unique challenges facing the German healthcare market, particularly regarding index-linked rents. He notes that international investors may be deterred by the lack of familiarity with such rental structures in Germany, contrasting with more common practices in neighboring countries. This disparity underscores the need for policymakers to create a more attractive investment environment to stimulate market activity.
"In Germany, index-linked rents are often criticised, especially in times of high inflation", he says. "In contrast, investors in many of our neighbouring countries can rely on the implementation of index-linked rents, which ensures long-term yield expectations and protection against inflation - a contrast to the conditions in Germany."
And Nagel too points to the recent wave of insolvencies of operators within the sector, which has rattled investors. Many have come to doubt whether rental agreements really can be fulfilled by operator tenants in the long term, given the extreme uncertainty surrounding their long-term refinancing - a subject we have reported on several times in REFIRE
Expansion of outpatient care should offer opportunities
On a positive note, the expansion of outpatient care presents promising opportunities for investors. Patrick Brinker, Head of Real Estate Investment Management at private bank Hauck Aufhäuser Lampe, highlights the increasing demand for modern healthcare properties catering to outpatient services. This trend is bolstered by the expanded catalogue for outpatient operations, facilitating the shift from hospitals to outpatient facilities.
Brinker commented: "The healthcare sector is one of the fastest growing industries in our country. Health and ambulantisation are megatrends. In this respect, the segment is highly interesting. Our funds for institutional investors focus on the acquisition of medical centres and healthcare centres with a diversified tenant mix. This generally includes properties with a usable area of between 1,000 and 10,000 square metres and a predominantly healthcare-related tenant mix. In contrast to many other asset classes, medical centres and health centres do not necessarily have to be located in a top 7 city. On the contrary - in recent months, properties in C and D cities or even in larger medium-sized cities with a population of 50,000 or more have proven to be comparatively stable in value."
New study highlights planned hospital reforms
Marco Schnell of CBRE, who co-operated with Hauck Aufhäuser on a recent new study on the sector, "Market Report on Outpatient Healthcare Properties", also sees grounds for growing interest in the sector. "We expect the high level of investor interest to result in greater momentum on the investment market over the course of 2024. For example, the planned hospital reform could lead to smaller and less profitable hospitals in more rural regions having to close. Medical centres and health centres could benefit from this, as they will take over a large proportion of primary, outpatient healthcare in the future. This presents attractive investment opportunities for property investors with a long-term focus."
Despite the challenges, investor interest in healthcare properties remains robust. Schnell's colleague, CBRE research head Dr. Jan Linsin notes a growing interest among institutional investors, driven by higher yields and alignment with environmental, social, and governance (ESG) targets. But as REFIRE has often pointed out, the healthcare market in Germany is effectively 16 markets, as each federal state holds great sway as to what is permitted or not permitted in their jurisdiction. This makes it really difficult for novice investors to gain a meaningful footprint in the market without a great deal of local support and expertise, to stay on top of local regulations.
In conclusion, the German healthcare property market faces significant headwinds, but also holds immense potential for growth, given the reality of German demographics. It is imperative to tackle the underlying challenges and foster a conducive investment climate - still currently lacking on many fronts.
