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21/10/2021 Comments (0) Views: 263 Healthcare, Home, Senior Housing, Statistics

Asset Manager’s view of Healthcare real estate in a post-Covid world

Henry-Aurélien NATTER, MRICS, Head of Research at Primonial REIM

THE NEW STRATEGIC FUNCTION OF HEALTHCARE REAL ESTATE

The ongoing pandemic crisis has highlighted the need to expand healthcare real estate infrastructure (Retirement homes and assisted-living senior housing, Nursing homes, Hospitals/clinics, Psychiatric institutions).

Society has become aware of the major role that the healthcare (treatment and infrastructure) sector might play in resolving crises.

Many weaknesses have also been revealed, however:

  • Institutions must rethink their healthcare infrastructure models and massively invest to offer suitable solutions;
  • As public supply is limited, governments will need to turn to private investors in healthcare real estate across Europe to meet future demand for new buildings and for the renovation of some ageing, and even obsolete, facilities.

These significant healthcare real estate infrastructure needs are driven over the long term by demographic factors:

  • The general growth of the population, which will put pressure on healthcare systems;
  • The rapid ageing of the population, which will result in people living longer in better health, but will also leave senior citizens facing the development of the conditions that come with advanced old age.

THE NEW STRATEGIC FUNCTION OF HEALTHCARE REAL ESTATE

The ongoing pandemic crisis has highlighted the need to expand healthcare real estate infrastructure (Retirement homes and assisted-living senior housing, Nursing homes, Hospitals/clinics, Psychiatric institutions).

Society has become aware of the major role that the healthcare (treatment and infrastructure) sector might play in resolving crises.

Many weaknesses have also been revealed, however:

  • Institutions must rethink their healthcare infrastructure models and massively invest to offer suitable solutions;
  • As public supply is limited, governments will need to turn to private investors in healthcare real estate across Europe to meet future demand for new buildings and for the renovation of some ageing, and even obsolete, facilities.

These significant healthcare real estate infrastructure needs are driven over the long term by demographic factors:

  • The general growth of the population, which will put pressure on healthcare systems;
  • The rapid ageing of the population, which will result in people living longer in better health, but will also leave senior citizens facing the development of the conditions that come with advanced old age.
change in the age pyramid for the european union graph

Source(s): Primonial REIM Research & Strategy according to the OECD and Oxford Economics

The demographic pressures already at work are having an impact in many European countries, but forecasts suggest that the pressure on healthcare systems will increase over the next 20 years. Understanding the drivers of the demographic and real estate trends affecting healthcare infrastructure is therefore essential for building a Europe-wide long-term investment policy.

Investment in healthcare infrastructure is at the intersection of major social and environmental challenges:

  • Reducing of the environmental footprint of real estate and increasing of the sustainability of buildings;
  • Prevention and management of health issues;
  • Inclusion of senior citizens in society, including the most dependent, in optimal care and safety conditions.

The social added value of these investments is coupled with an attractive and relatively reliable risk/return profile in current market conditions.

The European healthcare investment market

The European healthcare market has seen a sharp rise in the money flowing to retirement homes, nursing homes, clinics and care facilities, due to sector operators’ high demand in line with their development. Over the last decade an average of €5.2 billion a year have therefore been invested. Whereas €2.5 billion were invested a year between 2011 and 2015, investors’ strategies changed in 2016 as investments of close to €8 billion a year were made. In addition, despite the public health crisis, healthcare real estate achieved its second best year of the decade in 2020, after a record year in 2019.

Over the 2011-2020 period, €52 billion were invested in Europe, making healthcare an indispensable asset in investors’ international diversification strategies. The principal European healthcare markets have been the UK, Germany, France, Sweden and the Netherlands.

Yields, which have been under pressure for a number of years, were continually squeezed during the last decade, and have held up very well during the public health crisis. The prime yield for retirement and nursing homes has stayed below the 4.5% threshold in Sweden, the UK, France, Germany and Belgium. In France and Germany, clinic yields have also been squeezed, falling from nearly 7% in 2011 to less than 5% in 2020.

Note that healthcare’s risk/return profile places it on the efficient frontier. This confirms the advantages of including this asset class in a portfolio, in order to achieve optimum diversification in terms of both volatility and the reducing of the portfolio’s exposure to economic cycles.

Volume of investment in healthcare real estate in europe

Source(s): Primonial Research & Strategy according to RCA

PRIMONIAL REIM evaluation grid for healthcare infrastructure investment in Europe

We analysed various criteria (demographics, sociological factors, real estate, healthcare spending, bed availability ratios, etc.) to identify the most attractive healthcare infrastructure markets.

This allowed us to assign scores to the various markets analysed. The model identifies three main categories of markets. France, Germany, the Netherlands, Belgium and Sweden, for example, are the countries with the most reliable risk/return profile. These are Tier 1 markets.

Spain, northern Italy, Finland, Denmark, Norway and Austria are Tier 2 markets, with good risk/return profiles but not the same depth as the Tier 1 markets. Lastly, Portugal, Ireland, Greece and Poland, for example, are markets where opportunities will arise as the markets themselves develop. These are Tier 3 markets.

Healthcare infrastructure convictions and investment strategies in europe by primonial reim graph

Source(s): Primonial REIM Research and Strategy

When it comes to healthcare infrastructure, and despite the many barriers to entry, real estate for seniors should be analysed in detail as there are considerable disparities across Europe. We have therefore developed a specific index for easier decision-making when applying an investment policy: the Euro Nursing Home Index. We analysed more than 120 zones in Europe at municipal/regional level. To understand the issues, challenges and appeal of each zone, Primonial REIM Research and Strategy developed a ranking system based on criteria specific to real estate for seniors, covering the demographics of the senior population, the sociological implications for society, purely real estate-related criteria, the senior population’s income and bed availability ratios. A large majority of the Tier 1 markets, at regional level for the countries analysed, are in France, Germany and Austria. The Tier 2 markets, which offer the possibility of a higher yield, are mainly located in the Benelux countries, in certain regions of Spain, and in northern Italy.

The market trends for healthcare infrastructure are positive, as demand will continue to grow over the next 20 years, and there will also be a need to renovate obsolete facilities and to increase the number of assets. This state of affairs means there is an urgent and substantial demand for investment. As public finances must be kept under control, private capital will have to be relied on to support the construction of the necessary healthcare infrastructure.

spotlight on nursing homes: the euro nursing home index

Source(s): Primonial REIM Research and Strategy

CONCLUSION

There is an historic opportunity to invest private capital in healthcare infrastructure, which both offers high risk-adjusted financial returns while guaranteeing a non-financial performance that very few real estate assets can boast. Healthcare real estate infrastructure plays a key social role within our societies. We have been able to see, for instance, that these socially responsible assets are not only resilient in terms of their performance, but have also played a prominent role during the Covid-19 public health crisis.

While financial returns can be measured by business sector or asset class so that comparisons can be made between them, the non-financial benefits of an investment are more complicated to assess in some situations and for some types of assets. Measuring a socially responsible investment may involve qualitative factors that are central to a given model of society, such as the good health and well-being of individuals, healthy living, or the fact of promoting well-being for all. Socially responsible investments therefore indirectly generate risk-adjusted returns.

The continuing demographic pressure and rapid ageing of the population are creating needs that make investment in healthcare infrastructure an absolute necessity. There is a real need for the renovation of existing facilities and for additional beds in healthcare establishments and nursing homes in order to cope with future demand, and this need represents several billion euros of investment.


Primonial REIM: a key European real estate asset management player 

Primonial REIM devises, structures and manages long-term collective real estate investments intended for individual and institutional investors. Primonial REIM manages €30 billion of assets, 61 investment funds and more than 1,400 buildings in Europe. Our teams are made up of more than 400 employees located in 4 offices in France, Germany, Luxembourg and Italy.
Primonial REIM makes investments in every euro zone country. Our multi-local presence with local operational teams makes it easier to identify the best opportunities and monitor management.
Primonial REIM is able to invest in every asset class (offices, retail, residential/hotels and healthcare/education).
We select high-potential locations and make high-quality investments, while establishing lasting relationships with our tenants.

https://www.primonialreim.com/en/

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