Demographic trends will cause the number of care-dependant individuals that require nursing home accommodation to keep going up. Statistics released by PATRIZIA and the German Bertelsmann Foundation predict a material increase in demand for in-patient nursing care places by 2030. Extrapolations suggest that, by that year, nearly one-third of the German population will be over 65 years old. Around 3.4 million people will rely on care of one sort or another.
The proportion of elderly people is growing particularly fast in Germany’s conurbations and most populous regions. But fast-rising demand is to be expected in even some of the more rural counties. In Mecklenburg-Western Pomerania, northern Baden-Württemberg and in counties close to the Dutch border, the number of elderly is expected to increase by 2,000 to 3,000 each year between now and 2030.
At the same time, space allocated to permanent in-patient care in Germany is currently 87% full. Particularly high utilisation rates beyond 90% are widespread in the eastern German states, in North Rhine-Westphalia, and in some counties in the major metro areas.
The current capacity utilisation rate and the future growth in demand are indicators for particularly lucrative investment opportunities in healthcare real estate. Relevant regions are located primarily in the northern half of Germany as well as in Baden-Württemberg and in the Munich metro region.
Considering the above figures, it makes perfect sense that investors’ interest in healthcare real estate in Germany is increasing. As demand among domestic and foreign investors soars, so do prices. After all, the asset class of healthcare properties, which tend to be let on lease terms of 20 to 25 years, is deemed a stable investment.
Another benefit is that healthcare real estate is sponsored and refinanced by the government. Whenever a care-dependant resident lacks the financial wherewithal, the state social security institution provides a guaranteed cost cover, making healthcare real estate relatively independent from economic fluctuations. All things considered, the market for healthcare real estate in Germany has developed handsomely, and could gather additional momentum in the years to come.
An adverse factor, however, is the frequent absence of investment standards and a lack of transparency. In addition, the market entry is hampered by the inconsistent regulations in Germany as a whole.
Investor activity on the healthcare real estate market is hampered by the complexity of regulations in the nursing home segment, which are not uniform across Germany. They are currently governed by different state-level care home legislation in each of Germany’s 16 states. Moreover, the municipalities’ role is to be bolstered going forward, so that the need for coordination is likely to keep increasing. Collectively, this results in a high level of complexity for all market players – meaning investors and operators both. It makes the market seem unreliable in the eyes of investors.
It would be a big step forward if policymakers increased the degree of reliability by regulating the social care models on the federal level in the future. Until then, however, it is indispensable to study the local conditions, laws and regulations in depth. Having robust expert know-how is of the essence. Investments in healthcare real estate are therefore unsuitable for diversified portfolios unless investors bring in competent partners.
The example of North Rhine-Westphalia goes to show just how the regulatory efforts by the body politic affect the development of new care homes. Due to the high capacity utilisation of existing retirement homes and the high demand forecast, this German state principally qualifies as investment destination. Yet it has experienced a lull in construction in recent years. The standstill is explained, for one thing, by the tightened requirements – such as a cap of 80 slots per home, and mandatory single-room occupancy – and, secondly, by a hike in construction costs. These conditions have hampered investments in the state of North Rhine-Westphalia.
Building a new care home is often a more profitable proposition than modernising an existing one. By currently applicable standards, vintage care homes are often too small, obsolete, and lack the necessary number of single rooms. As a result, they are less than competitive and no longer attractive. And not every vintage building will lend itself to an upgrade. Operators often failed to set aside provisions for refurbishing such buildings. So there is no alternative to the development of new care homes.
In addition to care homes, senior-living residences are also becoming increasingly relevant as investment property. After all, ‘outpatient over inpatient care’ has been the maxim in Germany lately. The reason for this approach is the lack of skilled labour, which is likely to intensify between now and 2030. Even now, the gap between demand and supply in skilled labour has prompted some to speak of a looming ‘nursing crisis’. The greater the proportion of older people in care homes, the higher the need for trained professionals and the expenditures for social security systems are bound to be. This means that outpatient options take precedence over inpatient ones in elderly care. The policymakers’ objective is to downscale inpatient care to a strictly necessary level while expanding outpatient care. But senior living flats are in short supply as it is. The situation thus implies an opportunity for investors to commit themselves outside the classic nursing home sector.
That said, the middle ground between senior-living accommodation and care for the ederly will also become more interesting over time. Dovetailing the two segments in adjacent buildings is a model that will gain in significance. On the one hand, ambulatory care services are evolving more and more into residential care models, whereas operators of inpatient care facilities, on the other hand, rely increasingly on ambulatory care options. New healthcare properties tend to integrate senior-living apartments from the start.
Many other models seek to combine inpatient and outpatient care. Examples include cross-generational living, senior flat shares or dementia flat shares, assisted living communities and co-housing communities in care homes. Policymakers and care-home operators are making more effort to expand the options.
With this in mind, there is ample reason to expand the currently typical range of healthcare property investment fund products to include options from the residential segment. While residential real estate admittedly generates lower returns than operator real estate, investing in integrated models of senior housing types makes sense from an investor’s point of view because of their continuous cash flow.
For the time being, however, commitments in residential care models remain interesting only as an add-on option – on the one hand, because of the yet rarely met investment criteria, and on the other due to the comparatively narrow range of products. But the proliferation of integrated residential care models in Germany will deliver auspicious investment opportunities in both of these two segments – healthcare real estate and senior-living accommodation.
Jan-Hendrik Jessen is senior fund manager at Patrizia Immobilien