Long-term care properties: A growing niche
Long-term care properties are drawing more and more interest from investors all over Europe. But to take advantage of the attractive return opportunities that this specialised segment offers, knowledgeable partners are crucial.
The segment of senior-appropriate living and long-term care properties offers immense growth potential. In 2017, one out of every four Europeans was already over the age of 60. According to Eurostat, the most recent average life expectancy in Europe was 80.6 years. The highest life expectancies are in Spain and Switzerland, each at about 83 years. In France, life expectancy was estimated at 82.4 years, in the United Kingdom, 81 years, and in Germany, the estimate was 80.7 years.
Many elderly people need regular help from care professionals to help them about their everyday lives. In Germany alone, some 2.5 million people rely on support, and about 30% of them live in care facilities. And the growing number of elderly people requiring care will ensure further growth, both in demand for the appropriate services and in the market for long-term care properties. The trend is likely to increase significantly as the populous “baby boomer” generation retires. Assisted living is seen as the next big thing for real estate investments in the USA as well as Europe.
Specialised properties with tremendous potential
Long-term care properties are suitable, for example, for diversifying a portfolio. Their leases extend for long periods – roughly between 15 and 20 years. Investors can diversify extensively over such long contract terms. In addition, income is largely independent of business cycles, which ultimately makes diversification even easier. These properties also offer potential for above-average returns. “In the asset class of long-term care properties, you can aim for 5%,” says Jan-Hendrik Jessen, Head of Fund Management Operated Properties at PATRIZIA.
“The legal environment plays a more crucial role for long-term care properties than in any other asset class.”
Jan-Hendrik Jessen, Head of Fund Management Operated Properties at PATRIZIA
On the other hand, certain aspects have to be considered with these investments. Long-term care properties require detailed knowledge of the laws and regulations. “The legal environment plays a more crucial role for long-term care properties than in any other asset class,” says Jessen, who also serves as Committee Chair for Healthcare Properties for the ZIA (German Property Federation).
Legal requirements in Germany are governed by 16 state residential facility laws, and diverse implementation regulations for those laws must be observed. The situation is further complicated by various transitional provisions and a variety of options for extensions and exemptions. “That’s why investors absolutely need a knowledgeable partner who is well-versed in both the opportunities and the risks inherent in this high-growth asset class,” Jessen advises.
A pan-European trend
There is a clear trend throughout Europe away from inpatient care and toward outpatient options. “In addition to traditional long-term care facilities, the market is increasingly generating other forms of residential care models,” he explains. The emphasis is on living space combined with day-care and outpatient care services. This, in turn, results in the construction of new types of properties, including senior living communities and residential communities for residents suffering from dementia. This means that the supply will ultimately become more diverse.
An important factor for investors to consider is that the operators of care facilities need to be able to manage their lease with the long-term in mind – precisely because of the long contract stipulations. “Given that situation, one of the things we look at, along with the overall concept, is the competitive situation in terms of the physical structure; and we also decide whether a care facility is of a size that makes good business sense,” Jessen says. The results of operations are incorporated into the analysis and into a variety of future scenarios.
Jessen expects more than just a good credit rating from facility operators. Other requirements include lengthy experience in the care industry, high-quality care services, a first-class reputation, and innovative approaches that will help the business manage changing conditions. Both the macro and micro locations of care facilities have to be right as well: Only cities with populations over 15,000 offer desirable locations.
Skilled personnel are crucial
Another unusual feature of care facilities from the investor’s point of view is the need to recruit skilled staff, which is an essential criterion for a successful investment. “That’s why the operator must be perceived as an attractive employer and always be able to recruit sufficient skilled personnel,” Jessen emphasises.
When skilled workers are in short supply, there’s a risk that even a property with excellent prospects in terms of its concept and location may have to declare a moratorium on taking in new residents. That can happen if the staffing quotas prescribed by law can’t be met. In metropolitan centres like Frankfurt and Munich in particular, the staff shortage in the care segment has been acute for some time. From the viewpoint of property management, this poses substantial risks, because a care facility’s staffing determines the property’s value.
Getting a handle on the risks
Even with these provisos, Jessen also affirms the growth potential inherent in this asset class. “The opportunities are so attractive that in addition to PATRIZIA Pflege-Invest Deutschland I, we’re working on additional products for this segment.” Pflege-Invest Deutschland I comprises properties with a fund volume of approximately EUR 460 million. More than 80% of these properties are less than ten years old; over 60% of the operator contracts won’t expire until after 2030. The portfolio is situated in the core segment: In other words, it’s rather conservative. “We’ve worked from the beginning to keep the risks associated with the complex legal environment as low as possible,” Jessen asserts.