In June, Christie & Co, a specialist property advisor, announced the appointment of Marlon Schramm as its new head of healthcare Germany. The strategic hire reinforced Christie & Co’s commitment to expanding its healthcare activities, with a particular focus on the German market.
Schramm’s primary objective is to build and expand a dedicated healthcare team that will provide comprehensive services to clients in the care home sector. This includes brokerage services for buying, selling, and leasing care homes, as well as strategic consulting to help clients optimise their operations and navigate the complexities of the German healthcare market.
‘This appointment reaffirms our commitment to delivering exceptional service and expertise to our clients in the care sector and will properly re-establish our presence in the German healthcare market where we have a strong historic advisory pedigree,’ according to Michael Hodges, managing director – healthcare consultancy at Christie & Co.
Prior to joining Christie & Co, Schramm worked in BNP’s health care services team in Düsseldorf. He has a proven track record in the healthcare industry, and is well-versed in the nuances of brokerage, consulting, and valuation of care homes.
HMi caught up with Schramm to discuss the current state of the German market, the volatile financing backdrop and the opportunities that exist for investors.
HMi: Could you sum up the current dynamic in the German healthcare real estate market?
Marlon Schramm (MS): Inflation and high financial costs are reducing the number of transactions in every real estate asset class, including healthcare.In the first six months of 2023, we saw seventeen transactions, 14 for assisted living facilities and only ten in daycare facilities. That’s a reduction of about 50% to 60% from the previous year.
HMi: Is healthcare outperforming the other sectors?
MS: The healthcare market is a little bit more stable than the other asset classes. Retail is more or less on the same level but classic residential investments are down. Logistics is performing a little bit better than healthcare.
For an investor, healthcare remains a good investment when compared to other asset class in Germany and that is supported by the current demand/supply imbalance and the demographic changes, where demand for care homes is not expected to peak until 2030.
That scenario represents a good business case for operators but, on the other hand, they are being squeezed by inflation and borrowing costs. Inflation, as well as rising operational costs such as energy and personal expenses, are increasing the costs in running nursing homes.
Energy costs have risen since Russia’s invasion of Ukraine, buildings costs have increased and there is a shortage of staff. It’s a very similar position to that in the UK.
Those pressures have resulted in more and more operators becoming bankrupt.
That’s a red flag for the typical investor since, in the past, healthcare has typically been seen as a secure investment.
HMi: Has the type of investor changed?
MS: We see more international investors – from Luxembourg and France, for instance, looking at the market.
Domestic interest in the German healthcare market has reduced because of inflation and high interest rates. They’ve decided to follow opportunities in other countries where potential returns may be higher. But we have a lot of the big institutional, international investors looking to invest here. They have specific real estate funds for healthcare and for sustainability. They don’t need to borrow as they can use their internal fund structure to invest.
The German healthcare market is attractive to long-term investors as patient payments are backed by the government. That’s a big attraction for investors in German healthcare as the financial risks are very low.
HMi: Have prices fallen?
MS: Yes, prices of nursing homes and senior living are lower, mainly due to the high cost of borrowing. Interest rates have moved from around 1% to about 4% over the last couple of years.
That means that multiples in transactions have come down from 27‒28x to around 18x. That’s the midpoint of a 14x to 19x range. The spread between good assets and bad assets has widened.
Again, investors are looking for properties that fit into their fund structures, and in most cases that’s a real estate or ESG strategy. So, properties have to be more sustainable and that means properties constructed after 2000 are more popular.
HMi: So, investors prefer buildings that are already sustainable rather than refit them?
MS: Yes, in general, but there are some industrials with a strategy to make assets fit for the future. They are interested in buying up nursing homes and other facilities with the intention of developing them to sell at a profit in the future.
Currently, only one in three nursing homes in Germany were constructed after 2000.
HMi: How does the construction pipeline look?
MS: It’s currently very, very low because construction costs and finance costs are so high. The pipeline for new builds is very limited.
HMi: Are banks still lending to the sector.
MS: Banks know how important the sector is so they will finance investment in nursing homes and senior care properties. However, the requirements for collateral have been adjusted to align with the current market situation.
HMi: How do you see the market developing over the next 12 months?
MS: We’ll see some consolidation due to the number of operator bankruptcies. That holds out the prospect of organic growth for investors as existing operators already have staff in place and an established occupancy rate. Operators are going bankrupt due to higher personnel costs and the higher cost in the refinancing markets.
They are also suffering on the revenue side as government backed payments have not been keeping pace with inflation. Additionally, due to staff shortages, fewer care beds can be occupied, leading to further revenue losses.
Operators have been caught in the middle. There’s a liquidity crisis.
HMi: Are you confident deal turnover will increase over the next 12 months?
MS: I think it’s a good time for investors to enter the market because we know demand for beds will only get higher and higher, multiples are relatively low, and the liquidity crisis will be addressed over the next year or so as the government will need to adjust the cost structure.
That makes a move into healthcare investing a very attractive prospect.
If you’re one of the big institutional investors with funds under management ready to utilise, if you don’t have to borrow money, it’s a good time to get into German healthcare market.
Currently, cash is king. Well capitalised investors can buy operators or facilities that are getting into trouble.
We have clients asking for investment opportunities, but they still need to weigh up the pros and cons of taking exposure to the healthcare sector. Investing in a nursing home at a yield of 4.9% is almost the same as the return they can get on a German government bond, which is currently around 3.2% and comes without any risk.
However, investors would typically seek a larger yield difference to compensate for the additional risks associated with investing in nursing homes compared to risk-free government bonds.