Europe’s healthcare market is increasingly institutional, writes Lauren Parr
Europe’s healthcare property market is tipped by some as one of the best value-add opportunities for investors in 2017, underpinned by ageing and affluent populations. As the asset class has become more established and as institutional appetite has grown, lenders are embracing healthcare financing opportunities.
“It’s coming more within the scope of an institution like ours,” says Gilles Polet, head of real estate finance, CIB at BNP Paribas, speaking about the French market. “Traditionally, this type of business was family-owned in France. Over the years, both from the operational side and the property side, we’ve seen the development of a more professional approach.”
BNP Paribas financed the acquisition of Gecina’s healthcare assets by a consortium led by Primonial last July with a €450 million loan, in a major example of a European real estate financing last year.
France and Germany led a surge of trading in the care homes sector during 2016. Transaction volumes totalled a record €4.3 billion in 2016, 60 percent higher than the same period in 2015, Savills research shows.
One of the principal reasons for investing in healthcare is the shortage of supply, set against increasing demand. “Demographics are a fundamental driver. More elderly people are living longer particularly in affluent countries,” says Colin Rees-Smith, healthcare director at Savills.
Over the last few years, the healthcare market has become more global, with a rise in activity by US REITs. The likes of Ventas, HCP and Welltower have built portfolios in the UK since the sector emerged as a distinct asset class around 2012. However, many US REITS have now refocused on their domestic market.
“The UK is a disparate market ranging from a relatively small number of [institutional] providers in control of a large quantum of care homes, all the way down to ‘mum and dad’ operators running single conversions. It’s very sensitive to employment costs so you need scale, which makes it difficult to concentrate on,” says Andrew Macland, head of UK at PGIM Real Estate.
Deals can be “small and bitty”, he says, while much of the financing is achieved through forward-funding deals and corporate loans. Moreover, a lot of lenders have been reluctant to return to the market after having their fingers burnt through exposure to troubled operators in recent years.
Investors turn to Europe
One of Savills’ key predictions for the healthcare sector this year is that investors will turn to the wider western European markets for acquisition opportunities, given the dearth of investment product in the UK.
“Europe has become more cross-border,” says Rees-Smith. This was highlighted through French company Eurosic Lagune’s acquisition of 16 Spanish care homes for €116 million through a sale-and-leaseback in December 2016.
M&A activity has been a driver in recent years. In 2014, Korian and Medica merged to become the largest operator in France and Germany. “Buying platforms then bolting on synergies is the easiest way of growing; organic growth tends be more profitable but slower,” says Rees-Smith.
As the market evolves, financing opportunities are emerging. “Local players are consolidating fast all over Europe and it becomes a more interesting segment from an investment banking perspective,” says Polet.
“It’s not the new frontier that it was 10 years ago when Blackstone started investing in the French healthcare sector,” adds Christophe Murciani, global head of real estate at French debt fund manager ACOFI Gestion. “For the investors we represent it has become a safer bet because other investors have led the pack.”
Today, banks including Natixis, Société Générale, HSBC and Goldman Sachs take advantage of higher margins and predictable cashflows through healthcare financing in France, as well as other jurisdictions their clients may venture into – including Germany.
French REIT Primonial paid €995 million for a portfolio of 68 healthcare facilities including nursing and retirement homes, mainly located in Munich, Hamburg and Dresden, from Swiss private equity firm Even Capital last September.
The mega-deal inflated investment volumes in what was a bumper year for German healthcare in 2016. Nursing home deals valued at €2.4 billion accounted for more than 7 percent of total commercial property spending in the first three quarters alone.
The proportion of over-65s is expected to rise to 28.1 percent from 21 percent by 2030 according to EU statistics, one of the fastest rates of growth in Europe. Estimates therefore foresee a shortage of up to 350,000 nursing places by 2030.
Dominated by not-for-profit organisations, there has been little corporate consolidation of Germany’s healthcare real estate and state of the art facilities are lacking. While this provides scope for investment, the fact that regulation around healthcare is subject to regular reforms means that German banks are reluctant to become too exposed to the sector.
In the Dutch market, a structural shift from public to private funding has fuelled a substantial rise in development. “Old school pensioner homes and hospices are struggling because the market is being pushed towards a model where inhabitants need to pay for their lodging; the state only pays for the care component. This means families are more critical of the service being delivered,” says Robert-Jan Peters, director of debt and structured finance at CBRE in the Netherlands.
UK and especially Belgian players including Aedifica are targeting the sector, with “a race between developers to lock in sites to generate product palatable for institutional investors”, he says.
Peters notes the “extremely fast development of a sector that was effectively not there a few years ago. The market has skipped from an opportunistic play to a much more institutional market in just 24 months”.
Dutch banks such as ABN Amro and Rabobank are beginning to lend in the sector, partly because they want to be seen to be supporting a market that is important to the fabric of the country.
Healthcare remains an acquired taste among lenders, though with promising growth and strong investor appetite the sector is gradually earning its place as an established asset class. It therefore stands to become an increasingly important segment of the lending market.
Downsizing presents a big opportunity
Senior housing is identified as a big opportunity across Europe. Unlike care homes which are needs-based, “retirement living is about moving from a big family house into a two-bedroom apartment at the mid to top end of the market; there’s a paucity of that type of stock”, says Savills’ Rees-Smith.
With more capital chasing the asset class than there are large investment opportunities, investors are expected to pursue and amalgamate multiple operators.
Real estate fund Activum acquired German developer WI-Immo in October 2016, as a means of tapping into rising demand for new-build projects.
Saul Goldstein, founder and managing partner of Activum, says: “There’s a lot of investor interest in senior housing in Germany and the competition is pushing up asset prices, which is why we have gone down the developer route.”
Financing opportunities also remain limited. “Lenders historically were active across healthcare, especially senior living, but after the financial crisis everybody became more cautious. Now it’s coming back into focus because they need to get margin somewhere,” says Christoph Wagner, director of debt strategies at TH Real Estate.
As the sector matures, lenders anticipate greater activity. AEW is looking to raise a dedicated debt fund in the first half of 2018 that will invest in student and senior housing, as well as hotels, in France. “We expect to see more professional players seeking to diversify to get higher yield,” says Cyril Hoyaux, head of AEW Europe’s European debt platform.