As life expectancy continues to go up in wealthy societies, the average age of the German population is rising. The country’s demographic issue is now common knowledge, and with the German Federal Statistical Office forecasting average life expectancy for women as 88.8 and for men as 84.8, but what isn’t always so clear is what this will mean for the property market. One development is that demand for nursing homes is set to keep growing, as a rise in the number of older people will lead to an automatic increase in the number of people requiring residential care; even at current levels, a not insignificant percentage of the population has care needs. That means that retirements homes already represent an attractive asset class: waiting lists for places are long, and this opens up promising investment prospects. Yet as tempting a prospect as nursing home investments can be, for them to actually produce profit, several issues specific to this asset class need to be dealt with.
The current state of the market
Even a brief summary of the current situation is enough to illustrate just why nursing home investments are so attractive: the number of people in Germany requiring residential care is rising continuously, with figures at almost 3.41 million in the wake of new care insurance legislation in late 2017; just two years previously, that figure was around 500,000 lower, and the sudden rise is due to a new definition of care needs, of which the new legislation recognises a broader range. As mentioned above, the number of people requiring care is set to rise in any case, and official figures released by the Federal Institute for Population Research put the number at 3.62 million by 2030 and 4.82 million in 2060.
Catering to increased demand
The huge rise in the number of people requiring residential care means that new retirement homes will need to be built; even assuming that no existing homes close in the coming ten years, 320,000 new care places will be needed, and this number increases when the need to renovate and refurbish many existing homes is taken into account. Accordingly, there is strong demand for refitting of existing homes in order to make sure that the places they offer don’t disappear just as demand is rising steeply. Not every senior citizen needs comprehensive residential care, however; many can still maintain their independence if they can move into accessible housing – but there are not enough suitable dwellings to satisfy demand, either. As a consequence, investors are directing capital into refurbishments and new-build projects in the segment, which is seen as a future-proof investment prospect in a growth market full of opportunities.
Number of privately-run homes on the rise
According to Destatis figures, in late 2017, there were around 14,500 approved nursing homes in the Federal Republic of Germany offering full or partial residential care; between them, they provide just under one million places but, at 92.4% occupancy, are running at almost full capacity. Around half of them are run by public-interest trusts, often church charities such as Caritas (catholic) or Diakonie (protestant), with another 43% run by private companies; around 5% run by state operators. These figures only reveal a story when they are put into historical context, however: the percentage of homes run by private operators has gone up consistently in recent years as the size of companies in the sector has increased and private equity capital is poured into the market from Germany and abroad; many of the nursing homes in operation have been bought up by private operators and financial investors.
Differences in occupancy rates
What these developments show is that profit-orientated operators see Germany as a market with strong prospects. Aware of the demographic development and demand for residential care, they are taking smart investment decisions; a particular focus among these operators are occupancy rates, and how high they run depends both on the location of the home in question and the type of operator. Nursing homes in North-Rhine Westphalia and Baden Württemberg have particularly high rates of occupancy, as do the eastern German states. Sometimes, this is due to the operator’s public image; in other cases, it’s a simple matter of market penetration; what is worth noting, however, is that occupancy figures are not always entirely reliable inasmuch as they are a snap-shot at a specific date and only include care-receivers who have legally documented care requirements.
How nursing homes generate turnover
In the final analysis, what investors are looking to do with nursing homes is to generate turnover. One source of revenue, but by no means the only one, is the cost of care reimbursed by the care insurance body. Investment costs, defined by legislation as costs for constructing or refitting facilities, can also be billed to residents, as can the costs for accommodation itself and for catering. Unless they are in receipt of minimum state benefits, residents have to pay for accommodation and catering themselves.
Turning old into new
A not insignificant proportion of existing nursing homes will need to be refitted and refurbished in the coming years, with estimates for investment required at around 70 billion Euros in total. This is no small sum and shows just how much needs to be done in order to meet the rise in demand increasingly discernible on the horizon. There is simply no way of finding this astronomical amount without private investment, and between 2013 and 2017, around 6.3 billion Euros was invested in German nursing and retirement homes; for 2018, property industry experts estimate the volume transactions in the segment at 1.8 billion.
Highly complex investments
While the market for nursing homes is a dynamic one, it would be foolish to simply plough money blindly into the segment: each and every potential investment needs to be considered on a case-by-case basis. This means that an appropriate indexing of rentals is an absolute must, for instance, while another aspect many inexperienced institutional investors overlook is politics, as the health and care sectors are very much subject to decisions taken on a political level which have direct effects on the market for nursing home property.
Positives and negatives
As such, as attractive as the nursing home market can be, it comes with a range of obstacles and specific requirements. First and foremost, there is the lack of transparency in the sector, which makes forward-planning difficult. Then there are the legal requirements which mean that investors have to navigate their way through a thicket of regulations – and one which can change form at any time. Another difficulty which is frequently underestimated is the level of regional variance and the importance of the operator. Leases are often very complicated, too, in a way unknown to the commercial property segment, and what therefore can, at first sight, look like a highly profitable investment may actually be far less attractive; what is more, the drags on value generation are often hard to see coming. As such, specific expert knowledge of the German care-home sector is essential to make sure that investments really do turn out to be profitable.