ANALYSIS: Supply outpaces demand in Germany's senior housing sector

Nursing homes in Germany are 'hot' among real estate investors, but there is growing evidence that they may be chasing fool's gold now that insolvencies are on the rise as supply outpaces demand.

Autumn is lighting up the oak trees in the spacious park surrounding 'Haus Rügen' in Hamburg, but there is nobody to enjoy nature's spectacle. The parking lot is empty and the curtains of every single window of the historic brick building in hanseatic style are closed.

For decades a renowned nursing home for the elderly in the upmarket district of Rellingen in Germany's largest port city, Haus Rügen is one of the latest victims of the growing number of insolvencies ravaging the market for senior homes in Europe's largest economy. In the last couple of months alone, the country has seen more than 50 nursing facilities go bankrupt.

Even large operators like Caritas and Diakonisches Werk, non-profit organisations affiliated to the Catholic and Lutheran Churches in Germany, have been forced to shut down nursing homes leased from investors after seeing their balance sheets dive into the red. 'There are just too many nursing homes on the market,' says Maria-Theresia Gräfin von Spee, Managing Director at the Caritas Association.

In the last couple of years, investors from in and outside the country have encouraged developers to construct new nursing homes with multi-billion euro investments. Not only pension funds, insurance companies and private equity funds have also entered the market and plenty of private money has also flowed into the sector. INP, a public closed-ended fund provider in Hamburg, has just launched its 22nd fund for private investors focussing solely on homes for the elderly.

The wave of money is pushing up prices. Two years ago, institutional investors were paying a maximum multiple of 12 times the annual rent for a senior home, equivalent to a gross yield of 8%. In 2014, the multiples went up to 13.5. 'Now, institutional investors are paying multiples of more than 14 times the annual rent,' according to Markus Bienentreu, Managing Director of Terranus Real Estate, a Cologne- based consultant company for healthcare investments.

But that may not even be enough to stay in the race with private investors accepting even higher multiples of up to 18 times the annual rent, resulting in gross yields of less than 5.5%. 'At this point, it is a challenge for institutional investors to find attractive deals,' Bienentreu said.

What makes senior housing so hot are the demographic changes in Germany. With birth rates declining since the mid-1960s and life expectancy on the rise, senior citizens are the fastest growing population group in the country. According to the Federal Statistical Office, already 21% of the 81 million German citizens are above the age of 64. With the first members of the baby boom generation now reaching retirement age, that number will grow form the current 17 million to around 23 million by 2050.

'The number of people in need of permanent care will rise and so will the need for nursing homes,' noted Patrick Holze, Co-Founder of Marktplatz-Pflegeimmobilie.de, a Hannover-based internet portal which developers can use to sell apartments in nursing homes to private investors.

But supply has grown considerably faster than demand. In 2001, the Federal Statistical Office counted 9,165 senior homes with a combined number of 674,292 beds for those in permanent care. Today, there are 13,030 homes with close to one million beds - an increase of almost 50%.

At the same time, the number of the elderly in need of constant care within a facility has risen by only 26.5% to 764,000. The gap of almost 30% between supply and demand is now forcing more and more senior homes into bankruptcy. According to a study by EY Real Estate, the situation is so dire that in the next couple years one in seven nursing homes in the country could be threatened by insolvency.

What is bad news for investors is good news for today's seniors. 'Investors have fallen victim to the continuation trap,' according to Thomas Beyerle, Head of Research at property consultant Catella Real Estate. 'They have wrongly assumed that the percentage rate of the elderly being struck by permanent illnesses will be as high as in previous generations.'

But that is not the case, agrees Professor Tobias Just, Managing Director of the IREBS Real Estate Institut of the University Regensburg. 'Thanks to improvements in the medical sector, seniors are far healthier today than in the past, resulting in continually rising rates of life expectancy' - and rendering quite a few nursing homes obsolete.

Richard Haimann
German correspondent