Wüest Partner
The cover of Pflegeheim-Atlas Deutschland 2023
Despite the negative news recently surrounding the financial difficulties of several operators in the German healthcare and nursing home sector, the fact remains that demographic change is leading to a significant increase in the number of people in need of long-term care.
A new report from Wüest Partner addressing the challenges in the sector highlights how the number of those needing long-term care was 4.96 million in 2021 - the latest year for which accurate figures are available - up 20.2% on 2019. The study also includes a supply and demand analysis for assisted living in German cities with more than 100,000 inhabitants.
Importantly, however, the proportion of people in need of long-term care, but who DON'T need full in-patient care, will continue to fall.
The study's authors predict demand from up to 5.8 million people in need of long-term care by 2040, about one million more than two years ago. The number needing full in-patient care has fallen by 30% over the last ten years to 16% of those in need of care. This has partly to do with the increased contribution now required from those patients in a position to pay more than the €2,500 on average that they've been paying for their first year of inpatient care, according to the Association of Health Insurance Funds. The increased costs of building and running nursing homes has also been steadily restricting supply, leading to long waiting lists for residential care.
Still, the demand for in-patient nursing home places by 2040 will still have risen, working out at up to 144,390 additional places in 1,444 homes housing an average of 100 places.
There will be significant regional differences across the country. The average additional need across all 400 German independent cities and districts is 358 care places. Besides Berlin (4,369 missing places), the Ortenaukreis in Baden-Württemberg (1,444 places), Hamburg (1,443), the Hannover region in Lower Saxony (1,313) and the Steinfurt district in North Rhine-Westphalia (1,295) lead the regions with the highest expected need for nursing home places.
Some cities are already well catered for. Cities such as Chemnitz, Dresden (both in Saxony), Magdeburg (Saxony-Anhalt) and Munich (Bavaria) could actually have an oversupply of care places in the future, as they already have a sufficient number of places, while their demographic profiles show a decline ahead of people in need of such care.
Thomas Lehmann, director, Wüest Partner
Wüest director Thomas Lehmann writes in the consultancy's latest Nursing Atlas (Pflegeatlas) that fundamental change is afoot, and new concepts for elderly care are urgently required. "Against a background of the motto "Outpatient before Inpatient", chronic staff shortages in the nursing homes, and a new drive for more self-determination, we simply have to come up with new concepts." The basic social security that many patients have is just not enough for in-patient residential care.
Given the strong regional differences in existing nursing capacities, the Wüest consultants present an alternative scenario, in which the nursing home rate declines by 20%, but where the regional rates are adjusted to the national average occupancy rate of nursing homes of its current 87.9%. "In the longer term, due to new nursing homes entering the market in regions with strongly above-average occupancy rates or closures and capacity reductions in regions with low occupancy rates, the regional occupancy rates can be expected to converge with the Germany-wide occupancy rate," says the study.
Transaction volume down 62% this year
Meantime, the number of transactions this year has plunged as unsettled investors have been giving the sector a wide berth as operator insolvencies continue to rise. JLL puts the overall transaction volume for healthcare real estate over the first nine months of the year at €823m, fully 62% down on last year's €2.26 billion. JLL counts only 36 deals this year at an average of €23m, with an almost complete absence of big portfolio deals.
JLL's Peter Tölzel says that prime yields have barely budged, with 4.9% for nursing homes, rehabilitation clinics 5.5% and 4.5% for serviced living facilities (generally rated lower because of their better third-party usability and higher potential for rent increases). Price multiples for top assets are 19-20X, for properties with average quality 15X, and for poorer properties 13X.
Over at CBRE they take much the same view, although they put the prime yield at just over 5%, a rise of 1.1 percentage points on last year. CBRE's head of research Dr. Jan Linsin said, "Add to this the bank margin and the risk premium expected by investors, especially in the case of operator properties, and it is not surprising that pricing needs further correction." Similarly at Cushman & Wakefield, where the yield value for senior residences and assisted living was 4.5%, (Q2: 4.3%), while it puts the prime yield for outpatient medical care facilities at between 4.5% and 4.75%.
Medical centres are increasingly gaining in investor favour, said JLL's Tölzel. "We're noticing this in discussions with investors who are starting to look at this asset class, which is often new to them. However, it will be some time before this is reflected in concrete transactions." Medical centres have a lower operator risk, offer risk diversification across different tenants, and the rental income is 100% indexed via value protection clauses.
Operator insolvencies causing investor worry
Still, the unusual number of insolvencies in the healthcare and nursing home sector has undoubtedly led to heightened investor caution in the sector, which has traditionally promoted itself as being largely crisis-resistant. The hospital association Deutsche Krankenhausgesellschaft (DKG) said it had registered more insolvencies that at any time in its history, and that price rises since the beginning of the war in Ukraine had exposed the perennially under-financed sector to the deepest crisis in decades.
In the post-COVID era, healthcare properties were now struggling with increased energy costs, a shortage of qualified personnel, and much higher financing costs. Elderly homes and nursing homes need an occupancy rate of 95% of capacity to be profitable, a target almost impossible to achieve now due to a shortage of staff. Even where temporary staff can be organised, such staff cost double that of regular employees, and the cost is rarely covered by nursing care insurance funds.
In the case of private nursing homes, the situation is often aggravated by the fact that the operators rarely own the property used, and are forced to pay high rents. During the boom years, investors often resold nursing homes at ever-higher prices in the expectation of higher returns in view of Germany's ageing demographics. But if operators went bust or hefty refurbishments were due, the investors could be faced with rent reductions of up to 40%. This was the case recently with the insolvencies of operators such as Convivo, Hansa, Dorea Familie or Dorent.
Healthcare Day 2023 conference in Frankfurt
Berthold Becker, managing director of investor TSC Real Estate Germany, speaking at the recent Healthcare Day 2023 in Frankfurt organised by the FondsForum Platform, provided useful insights into the perspectives and potentials of healthcare centres, while acknowledging the cause of the recent turbulence had not been fully resolved.
In his view, the key missing link is strong political support and action towards recognisizing and addressing these issues. However, he emphasised that despite the challenges, the nursing care sector still holds potential when considering the overall market.
He too addressed alternative approaches to providing care for seniors, moving away from the traditional model of nursing homes. He mentioned the significant changes expected in the structure of healthcare delivery, including the reduction and consolidation of inpatient facilities, shorter hospital stays, and a shift towards outpatient care. This shift will create a high demand for appropriate outpatient care facilities, particularly in rural and regional areas.
From an investment perspective, Berthold highlighted that the healthcare market remains one of the strongest and most predictable growth markets over the next few decades. With its low correlation to general economic developments, the healthcare market offers interesting and diverse investment opportunities. Specifically, he mentioned two central real estate themes: senior living and care facilities (excluding nursing care) with new business models, and healthcare centres focused on outpatient care that promote health and disease prevention while being digitally interconnected.
