Investing in care homes: alternative real estate with lots of potential
Owing to factors including the lack of properties in “traditional” real estate classes and good yield prospects, healthcare properties are increasingly catching the eye of investors. The care property market is a subject of particular interest. When it comes to finding the right care home, however, the challenges are considerable, with genuinely first-rate properties rare to find and the entire sector being highly diverse.
This is primarily due to a very fragmented market and manifold legal requirements, as virtually every German federal state has different care home regulations – from single room quotas to special fire protection provisions. All in all, then, care homes are a complicated business for owners and operators alike.
Three men with an excellent knowledge of care properties are the JLL specialists Marco Högl, Jiri Kinkor and Michael Bender. We talked to them about this special and up-and-coming market.
The population is becoming older on average. Therefore, the care sector does not need to worry about a lack of customers. Surely care homes are a safe investment?
Michael Bender: It’s not quite that simple. It is true that more and more people are in need of care – according to the Federal Statistical Office, the number is set to increase by around 50% over the next 30 years. There will be roughly over 25% more in the next ten years. These are mostly baby boomers, who will be among the age groups with a greater need for care in the near future. But this does not mean that every area will develop in an identical manner – or that every provider will benefit equally. There are also regional variations when it comes to demographic change. You do not only need to know what the population structure looks like today, but also how it will develop over the next 20 years. And the competition at the location in question is relevant too.
Jiri Kinkor: People want to stay in a familiar environment in their old age, too, and they have their own individual requirements. After all, people with completely different physical and mental abilities live in care homes, and some of them are combined with retirement homes. So the environment also plays a decisive role: how central is the location? How good are the links to public transport? Are there good local amenities, such as medical facilities, chemists or retail offerings? These factors all play a role in determining how attractive a care property is. The number of potential customers will rise significantly, but they will not be spread evenly among all of the facilities in Germany
So investors in care homes need to take a very close look before taking the plunge. Which criteria are most important here?
Jiri Kinkor: The complete package has to fit. In terms of single properties, care homes accommodating 50 people or more are preferred. These are investments in the mid-double-digit million range. Investors are looking for the longest possible lease agreements with standard market conditions, which are sustainable for the operator and landlord alike. This is another reason why it’s so important to keep a close eye on legal requirements – both existing ones and those which are likely to emerge in the future. Staying flexible in this environment is a genuinely difficult task.
Marco Högl: The operator’s situation is also highly important, particularly in the light of Germany’s often very diverse and fragmented operator landscape. There are many smaller providers with only a few care homes or even with just one location. While this offers investors significant potential for growth and consolidation, numerous care properties need to be analysed in a very individual way as single properties. It is rare to find a care home “off the shelf” in Germany. Is it a renowned operator with a good reputation and a credit rating to match? With many years of experience and high-quality care? What about the specialist staff at the location? What condition are the used properties and the business in? These questions are essential. And it becomes even more complex when a real estate investor also wants to take over the operator at the same time, which is an ever more common intention.
You were recently involved in such a deal – the sale of the Seniorenstift Dr. Drexler residential home in Wiesbaden. What are the special challenges of such a transaction?
Jiri Kinkor: First of all, it requires the same detailed preparation as any other large-scale property deal. Due to the high requirements of care properties, special attention is paid to what is known as technical vendor due diligence. This is about examining technical weaknesses and, where applicable, remedying them before marketing starts. You certainly need to have the right figures in mind during the negotiations. For example, what is the capital expenditure to date? And what is expected in the future? Some of the statutory requirements in this area are very strict, such as in fire protection, the single room quota, the size of the bathrooms or barrier-free accessibility. The last one is especially important in such properties.
Marco Högl: When dealing with smaller operators it is especially important to highlight the legal side of things, as this has often never been performed systematically in the past. This concerns possible pitfalls in lease agreements as well as regulatory approvals or risks.
So it’s a highly complicated market. What is needed to be successful in the transaction business with care properties?
Jiri Kinkor: An international team is very useful, as there is an above-average number of foreign investors in the healthcare segment. Sensitivity towards residents, employees and operators during the transaction is also essential. On top of that, you need a good network in the industry – after all, many market participants are only active in this niche and are therefore not as well-known in the general real estate market.
Marco Högl: Niche is a good word to use. Healthcare properties require special market knowledge. Alongside the financing structure and the special legal requirements, you also need a good feel for the market, for instance for the special contractual structures between owners and operators – and of course for their needs.
What is coming next year? Are care and healthcare properties still on the agenda for you?
Michael Bender: Definitely. More and more investors are showing interest in this asset class. And, like in other market segments, it is becoming increasingly difficult to find suitable properties. Our excellent network means we can help here. Now we are approaching the end of the year, we are already preparing further large-scale investment opportunities for 2019. The care property market will therefore remain an exciting one for us.