Can new investors bring life to Germany's elderly care sector?
Germany’s polarised care homes market is in major need of investment, despite the arrival of a handful of sector specialists in recent years.
U.S. REIT, Medical Property Trust and Belgium’s healthcare REIT, AEDIFICA, are among those who have invested in the sector in recent years. But domestic capital, accompanied by operating companies, remains dominant in a market where demographics support longer-term investment; the number of over-80s in Germany predicted to rise by almost 50 percent over the next 20 years. Chancellor Angela Merkel’s visit to a care home in July put the spotlight on Germany’s rapidly aging population – and the lack of modern facilities and staff to cater for them.
The country’s circa 14,000 care homes are divided between basic care and private, more high-end concepts – such as Berlin’s Villa Clay with its cinema screenings, landscaped gardens and classical concerts. There is a gap in the market for investors willing to target mid-market care homes – but teaming up with local operators through joint ventures is a sensible route.
“There needs to be a shift towards providing more for the middle market,” says JLL Germany Head of Research, Helge Scheunemann. “But you need the operator who can run the daily business.”
Finding private care home providers is not an easy task, with the top 10 private firms holding less than 20 percent of total market share, according to recent JLL research.
An alternative income stream
For real estate investors seeking long-term stability, the benefits of care home investing are manifold, says Peter Tölzel, Healthcare Valuation Advisor at JLL Germany.
“Care homes are an attractive investment and currently offer higher and more stable returns than many other asset classes,” he says.
In the office sector, for example, tenants – driven by developments such as co-working – are increasingly demanding more flexible rental terms with shorter leases.
“Care homes offer extremely long-term rental contracts, often with terms of 20 to 30 years – an attractive proposition for long-term, income-focused investors,” Tölzel says.
Redevelopment, rather than new-build, is a more likely route into the sector.
“We have a large stock of older properties where renovation is needed,” Scheunemann says. “That may not suit every investor, but there’s no doubt that more international expertise can find a home in a sector in need of rejuvenation.
“We need more buildings – but crucially we need different, more modern buildings.”
With sustained demand – more than four million people will need care by 2038 – buildings that used to be hotels, hospitals, recreation homes or offices could well become nursing homes, JLL predicts.
For now, demand for care home places varies depending on location. In some more remote parts of Germany, both the wider population and the number of older people is decreasing, bringing about the prospect of pockets of oversupply of care homes, according to JLL research.
Germany’s federal structure means that not every aged-care home concept works in every region. Guidelines for single room rates, fire protection and rules on general home size vary from state to state and are subject to frequent changes, adjustments and extensions.
“Strong federal legislation coupled with the mix of regional and local government may sometimes slow the investment process,” says Scheunemann. “But international investors are now bringing experience and knowledge gained in their home countries to what is a new real estate asset class for Germany.”
As Germany ages, a new real estate investment sector could grow up fast.
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