Demographics: Germany shows its caring side
Germany’s care-home provision is rapidly changing and could be an important investment opportunity, says Indraneel Karlekar
As the population of Europe inexorably ages, demand for real estate to suit the varied needs of this growing demographic is increasing, with solutions ranging from senior living, assisted and care living, nursing, to end-of-life accommodation.
According to Eurostat, dependency ratios across Europe are projected to increase from 53.2% in 2016 to 79.7%. by 2080. To meet this demand, Europe is expected to follow the trend already established in the US where healthcare has become a major institutional asset class within residential housing. In Europe, the type of solution and the rate of uptake will depend on several factors, not least the system of healthcare payment that will determine the level of financial responsibility.
Historically, Europe has offered a single-payer system, with the state largely responsible for cradle-to-grave healthcare provision. As state-backed infrastructure comes under pressure, wealthier countries are increasingly seeking private-sector alternatives to meet this demand and, consequently, spending on healthcare is rising. This is nowhere more evident than in Germany where private systems are increasingly prevalent and important.
Of the European countries, Germany has the largest ageing population forecast to drive up demand for care homes. It is predicted that by 2030 the nursing-home market will be operating with a deficit of 300,000 beds, based on current levels. To meet this anticipated demand, about 250 new nursing homes will be needed each year.
We believe that much of this demand will be filled through private investment. Indeed, over the past 20 years, private investment has been responsible for a 60% increase in the number of facilities in a market that is dominated by non-profit operators, representing 53% of available facilities – the private and public sectors account for 43% and 5% of the market, respectively.
To fully understand the scale of the opportunity, it is important to understand the structure of the care-home market, specifically the types of property available to investors. The sector is primarily divided into five segments, all serving a different subset of the market and operating in some cases under different regulatory regimes, determined by a heavily decentralised regional system of governance.
Nursing homes provide hospitalised premises for people in the last stage of their lives. They are regulated by both national and German social law and require specific authorisations from the federal state and insurance companies.
A newer trend in Germany is the emergence of alternative living concepts – small-scale residential communities created for patients. Examples include a community for dementia patients in Berlin and outpatient households in North Rhine Westphalia and Baden Wurttemberg. These are regulated by federal state law.
Assisted living focuses on the provision of apartments adapted for the elderly, normally incorporating a range of additional services including restaurants and housekeeping. Importantly, these can be incorporated into nursing homes.
Residential homes are a cross between nursing homes and assisted living – comparable to four and five-star hotels – and offer facilities such as swimming pools and fitness centres. These are regulated by federal state law.
Finally, integrated institutions are residences for the disabled who are becoming elderly and unable to work, as well as for those aged below 60 who need special care. These are regulated by federal law.
Assisted living stands out due to its attractive investment attributes. Unlike nursing homes, assisted-living assets do not require special regulatory considerations, but rather fall under standard building code requirements. For users and operators, assisted-living assets have distinct features such as an emergency call systems and extra common space, which are appealing attributes.
From an economic perspective, the assisted-living model is categorised as outpatient care, allowing recipients to tap into different funding systems for services. Finally, as new technologies come onto the market, operators expect assisted-living facilities to be a long-term solution to meet an ageing population’s housing needs.
While commercial real estate investors expect occupancy trends to be heavily influenced by the economy, the care-home sector is less subject to cyclical demand factors. In fact, a key difference for real estate investors looking to build diversified portfolios is that the factors influencing the care-home market are different from those driving other property types.
The care-home market is primarily influenced by large structural trends that include demographic factors, as well as regulations linked to the welfare state and social security – quite different from the factors affecting the office or retail investment cycles.
Regulation is also an important factor. The regulatory environment surrounding German care homes is complex, being further complicated by the devolution in 2006 of responsibility for care-home regulations to the individual federal states.
While this regional complexity favours real estate investment managers with experienced feet on the ground, it is also one of the factors stimulating the development of new facilities. Some regional regulators have gone as far as stipulating specific room sizes and occupancy ratios. For example, in North Rhine Westphalia, existing nursing homes must provide a minimum of 80% single-bed rooms, with obvious implications for supply.
The search for yield and long-term liability-matching investments in the low-interest-rate environment has pushed institutions to consider several alternative asset classes, of which German care homes is becoming a more attractive investment opportunity.
With a significant yield advantage over German office (about 175bps) and strong structural drivers, German healthcare has meaningful potential for long-term institutional investors.
Indraneel Karlekar is senior managing director and global head of research and strategy at Principal Real Estate Investors