07.05.2021

Panel of experts analyses developments on the German care home market 

• Despite strong demand and a ready supply of capital, the care home market faces a number of challenging developments
• Rising land prices, political risks, operators’ profitability expectations and the intensifying shortage of nursing staff are problems for which solutions must be found
• Investment in care homes and assisted living complexes in Germany increased by 111% to approximately EUR 850 million in the first quarter of 2021, according to Cushman & Wakefield

Frankfurt/Hamburg, 7 May 2021. The German inpatient care home sector has once again confirmed its earnings stability throughout the Covid-19 pandemic, strengthening its status as an attractive and dynamic real estate investment market. Nevertheless, the sector faces a number of major challenges: While demand for care homes and assisted living complexes continues to rise as the German population ages, a number of hurdles exist. Rising land prices, political risks, the profitability of operator models and a shortage of qualified caregivers are among the obstacles to the provision of modern care homes that meet societal demand. These were among the conclusions drawn by a panel of experts from Cureus, Cushman & Wakefield and Swiss Life Asset Managers, who discussed the topic “Nursing care real estate market – Quo Vadis?” with journalists from all over Germany.

Over the last few years, forecasts from research agencies and institutes have significantly underestimated the growth in demand in Germany for long-term nursing care. “While most forecasts from the mid-2000s to the early 2010s predicted that around 3 to 3.5 million Germans would be in need of care by 2030, the figure had already reached almost 4.2 million in 2019”, explains Jan-Bastian Knod, Head of Healthcare Advisory at Cushman & Wakefield, who also stressed the importance of creating enough care places to meet the growing requirements of people in need of care. According to Knod, it is not a lack of investment capital that is the problem: “In 2020, the care home and assisted living investment market attracted record investment of EUR 3.6 billion – and even then, some investors were left frustrated at a shortage of investment opportunities.” Investor demand continued to exceed the supply of product on the market into the first three months of 2021. With almost EUR 850 million invested, Q1 2021 beat the total for Q1 2020 by 111%. At the same time, the market is attracting more and more players. “More new investors are entering the market, especially because of the resilience and stability of the asset class during the coronavirus pandemic and because of ESG disclosure obligations”, says Knod.

So, although demand for care places and assisted living dwellings is strong and getting stronger, and investors have capital just waiting to be deployed, it is currently impossible to guarantee the seamless provision of care homes across the whole of Germany. “The nursing care home market is being held back by political uncertainty”, says Marc-Philipp Martins Kuenzel, Head of European Health Care Competence Centre at Swiss Life Asset Managers. “For example, individual federal states introducing new regulations, such as the requirement for single rooms in existing properties, may well have a significant negative impact on real estate asset values as they reduce the overall provision of nursing care places. In any case, the German healthcare market is already massively over-regulated and the quality of German care homes is almost at luxury level in a European comparison, especially in terms of new construction, and is increasingly being built to standards that are beyond affordable for most stakeholders. Added to this, there is a dearth of attractive incentive models with regard to care workers that reward commitment and experience in the profession”, elaborates Martins Kuenzel.

In this environment, investors in the care home sector face the additional challenge of competing with other asset classes to acquire land for their developments, especially in inner-city locations. Land prices have been rising for years: “Land prices and construction costs, in conjunction with the terms of operators’ leases, are the key factors in determining the profitability of operating a care home. For operators, it is the lease, the management costs and the occupancy rate that establish the sound economic foundations of their business model”, explains Gerald Klinck, CFO of Cureus. “Knowing that excessive rents will create unsurmountable problems for operators, we can therefore only consider developing care homes and assisted living complexes at reasonable prices in appropriate locations. In addition, it is important to consistently standardise and optimise the design, planning and construction processes, as well as the properties themselves. After all, these are the relevant levers for keeping a lid on investment costs and guaranteeing affordable rents. Similarly, standardisation also has a positive impact on the operator’s management costs. In combination, this creates a win-win-win situation for operators, residents and real estate investors”.

The intense economic pressure on operators is driving the on-going consolidation of the operator market. “In 2020, we again saw a large number of major acquisitions”, observes Knod, citing the purchases of Mohring Group and Vital Wohnen Group by Alloheim Group, the acquisition of Qualivita Ag by Korian, and the purchase of Deutsche Pflege und Wohnen by Argentum Group. “This consolidation goes hand in hand with the professionalisation of the market, which makes it easier for us as real estate investors to share best practice and improve co-operation with operators, which increasingly makes it possible to build entire portfolios”, concludes Klinck. At the same time, the investor market has also changed: “It is only over the past five to ten years that healthcare has established itself as a distinct asset class among institutional investors”, observes Martins Kuenzel. Once they are invested in healthcare portfolios, Kuenzel explains, investors tend to ask themselves why they ever waited so long. In most cases, they won’t even consider disposing of their assets. “Although prices for care homes have been rising sharply, especially as there is a scarcity of comparable investment opportunities, it often makes great sense to remain invested in the sector to benefit from what can be very profitable distribution yields”, says Martins Kuenzel.