Real estate investment trusts (REITs) are switching their portfolios from office to healthcare commercial properties. Lease terms of 25-30 years and yields of roughly 6% are an attractive offering in a growing market. Underlying growth drivers in healthcare ensure long-term demand for Opco, mitigating risk for the Propco.
TIAA Henderson and Cofinimmo have both made investments in the sector. TIAA has just announced the acquisition of a portfolio of UK care homes comprising Caridean House in Edinburgh, Foxbridge House in Orpington and Kent and Bowes House in Hailsham, East Sussex. Cofinimmo invested in a rehabilitation centre in Baden-Baden, Germany in December 2014.
Respective lease terms of 30 and 25 years for these two deals show the appeal of healthcare property. Yields are typically lower than other sectors according to Jean-Marie Caucheteux, head of equity research at Degroof Bank. In Belgium, for example, they hover around 6%, whilst offices can earn 7% and logistics even 8%.
But yields are long and occupancy levels high. Offices can have vacancy rates of between 10-25% for buildings constructed five years ago, said Caucheteux. Finance is readily available and often assets have bank guarantees. Management risk is also largely transferred to the operating company.
An increasingly liquid market is reflected in tight spreads. Caucheteux sees minimum yields of 5.7% and a maximum of 6.4% in Belgium for example. Or between 5.25-5.5% for Belgian nursing homes, estimates Stéphane Pichon, managing partner at Your Care Consult.
Nursing homes and rehabilitation centres have proved the most attractive sectors so far. Nursing homes have long leases, typically between 25-30 years. Rehabilitation centres is still a huge, fragmented market in Germany that will attract consolidators.
The size of hospitals can put off potential investors. Cofinimmo has invested in small clinics in the Netherlands, but hospitals are more attractive for a club deal, according to Pichon. France and the UK are much more active markets for hospitals, but legislation can be a barrier elsewhere.
In Belgium, for example, no one asset can represent more than 20% of a REITs portfolio and for PPPs they must own a majority stake. Hospitals at €100m plus, may be out of reach. It is also easy for operators to get financing as the asset is often backed by guarantees from the regional government. Pichon believes regional governments are increasingly loath to do this and we could see the market open up.
Across Europe the market still varies substantially. In Germany yields are higher at 7% reflecting less barriers to entry in the nursing home sector. Licenses are not required to open a home, although this is partly mitigated by difficulties in securing reimbursement from the statutory insurer. In France yields are around 6.5% due to shorter leases.
In Southern Europe the market is almost non-existent. Italy suffers due to a lack of sellers; family ownership of hospitals; a combination of low yields and short leases; and an exemption of hospitals on VAT. In Spain, despite strong assets, the prevailing issue is a lack of buyers. Quiron, the largest Spanish hospital chain, nearly sold two hospitals to Sabadell and then retreated.
Pichon believes we will see the emergence of pan-European players in the healthcare property sector. “Cofinimmo is already active in four countries,” he says. “A number of insurers and American REITs are starting to take an interest in the market”. Caucheteux, however, believes there is sufficient potential in Northern Europe and the availability of secure financing and a different culture of care will slow expansion elsewhere.
Our Analysis: The underlying drivers of demand towards healthcare and elderly care, in particular, are well-known. Demographic shifts will ensure that nursing homes have no shortage of clients across Europe for the foreseeable future. The expense of nursing homes, however, is encouraging a shift towards cheaper home care, which is often preferred by the patients. How much this will take away from the nursing home market remains to be seen.
The value of healthcare property as a low risk defensive investment or as a diversification ploy is very apparent. Cofinimmo told us that it intends to focus solely on healthcare from now on and is offloading offices. But yields may struggle to keep up with other sectors. An increase in investment by REITs in healthcare property should mean operators have no difficulty in offloading assets.
Low interest rates should also gradually feed its way into the market applying downward pressure. As should a lot demand. Yields can only go one way.
Source: Healthcare Europe / February 19th 2015