European healthcare real estate market expected to take a hit following record year

UK market to stablise after Brexit subdues investment

The European healthcare real estate market is expected to drop off over the next 12 months after a buoyant year, according to new research.

Your Care Consult this week announced the publication of its annual study of the European markets, which shows the UK is falling behind other countries in terms of investment.

Stéphane Pichon, managing partner, said: “The results reveal that, against a backdrop of historically-low interest rates, the search for secure returns via long leases once again boosted investment in the European healthcare real estate in 2016.”

In fact, the investment volume reached a record €6.7billion, up 10% compared with 2015, thanks to several ‘unique’ secondary deals in both France and Germany with cap rates significantly down.

A real pan-European market is being formed helped by the acquisition strategies of many European nursing homes operators and real estate investors.

The results reveal that, against a backdrop of historically-low interest rates, the search for secure returns via long leases once again boosted investment in the European healthcare real estate in 2016.

“Due to this unfavourable baseline, we expect the investment volume to be down to €5billion in 2017, with cap rates still decreasing.”

The market has enjoyed growth in investment volumes since 2014 and is characterised by nursing home operators and geographical diversification by healthcare-focused real estate investors, which are now investing in several European countries and, in secondary deals, sell assets to each other.

European insurance companies are also becoming increasingly active, revealing ambitions to invest in healthcare.

In 2016, European investors mostly favoured the markets of Germany (+100%), France (+50%) and the Netherlands (+30%), while activity was subdued in the UK, which was down by 60%.

The trend of sale and leaseback continues to dominate as it enables operators of clinics and nursing homes to dispose of their real estate in order to improve their balance sheets and free up cash for development.

With interest rates historically low, investors are taking a close interest in healthcare real estate, especially recent facilities operated by sector leaders with high-occupancy rates, secure rental income, and recurrent cash flow.

Unlike bank loans, where both the interest and the capital must be repaid, these agreements simply require healthcare companies to pay rent during the term of the lease.

The report states: “With interest rates historically low, investors are taking a close interest in healthcare real estate, especially recent facilities operated by sector leaders with high-occupancy rates, secure rental income, and recurrent cash flow.”

“Moreover, the lack of dynamism in the office rental market of continental Europe is impacting the strategies of real estate companies, who are now turning towards alternative assets, notably in healthcare real estate.”

While, 2017 is unlikely to be another record year, cap rates are expected to stabilise by the end of the year.

For the UK specifically, after a subdued 2016 which was hampered by Brexit, investment volume in 2017 is expected to be around €1billion.

Source: BBH – Building Better Healthcare – 15-March-2017

French hospitals await MCO cut anxiously

French private hospitals are waiting anxiously to hear what the new MCO (medicine, surgery, obstetrics) rate will be.  The figure should be announced tomorrow. Last year it was delayed by two weeks and effectively came to a cut of a disasterous 2.5 percentage points. So what is the betting on this year?

Stephane Pichon at consultancy Your Care says: “A cut of half a percentage point would be good, one percentage point is entirely possible and worse than that can not be ruled out.”  Others fear worse. One source said that the consensus is that MCO will be cut by 2 percentage points. Frantic lobbying is going on behind the scenes.

Our Analysis: A cut of 2 percentage points would hit even the large groups fairly hard. Capio has been making much in its results of the fact that it just about managed to counteract the effect of last year’s cuts and a strike through effiiciency savings and shorter AVLOS.  Pulling that particular bunny out of a hat year-on-year will not be easy.

It is a sign of impotence that the sector doesn’t know what it will be and doesnt even know when the price will be announced. EBITDA margins for larger private hospital chains hover at around 17-20%.

Source: Heathcare Europa 2-mar-16

Quiron to spin off propco

The private equity group, CVC Capital Partners, which majority owns Spain’s largest hospital chain, Quiron Salud, plans to hive off its 50 or so hospitals into a separate company. It then wants to sell 49% of the propco equity. We look at what it will fetch and why it adopted this approach. The deal if it comes off will be by far the largest property transaction in private healthcare in Spain.

We hear that this structure has been chosen to avoid paying VAT on the rent. The Spanish press reckons the property portfolio in its entirety is worth €600m.

Stéphane Pichon, managing partner at Your Care Consult, said: “IDC has had difficulties relating to VAT exemptions. It would have had to pay VAT on the rent, if it had gone down the sale-and-leaseback route, and it couldn’t recoup it. For a hospital group, the rent is the second biggest cost. It has been trying to find a way around the problem since the beginning of the year, unsuccessfully”

Pichon also said that a similar problem exists in Italy, but people have been able to get around it

The JV option, however, will put off some investors.

“The liquidity is much less than with a sale-and-leaseback deal, as Quiron keeps the majority stake. That will reduce the level of interest in this deal to a fairly small group of investors”.

CVC owns 61% of IDC and was rumoured to be looking at an IPO. This deal will release capital from the group, but wouldn’t stop a future IPO, according to Pichon.

Source: Healthcare Europa, 23dec15

Training

Please join us for a training in French on pan-European healthcare real estate organized byles_echos_formation

 

Next training dates are the following:

  • Wednesday & Thursday, November 2019, 20 & 21
  • Wednesday & Thursday, February 2020, 5 & 6
  • Wednesday & Thursday, May 2020, 13 & 14
  • Thursday & Friday, September 2020, 24 & 25
  • Tuesday & Wednesday, November 2020, 24 & 25

Here are more details.

Healthcare Europa Report: Reforming healthcare – trends and trajectories

European countries are undergoing rapid and substantial demographic and technological changes. Yet, healthcare systems are still mainly state-funded and acute-focused, as they have been for the past 70 years. This is starting to change.

European countries are undergoing rapid and substantial demographic and technological changes. Yet, healthcare systems are still mainly state-funded and acute-focused, as they have been for the past 70 years. This is starting to change.

Source: Healthcare Europa : [Read More >]

Report: Healthcare Europa Property Survey 2015

There is intense investor interest in healthcare services property across Europe. Fund manager Marc Phillip Martins-Kuenzel, at German real estate investor Corpus Sireo claims that he had 400 approaches from prospective buyers in a single year. This reflects the global search for high yielding investments. But healthcare property also carries risks. Some sectors such as the French hospital market, where major deals have been done, look risky as the government cuts tariffs. And the sector remains opaque and poorly segmented. There are plenty of traps for the unwary. It is also far from clear how much new capacity will come on stream for investors over the next decade. Here we look at whether and when the boom will go bust. First, we run through the headlines and what has happened to prices. We then go on to look at supply and demand. Other articles profile the main US and European property investors and the main national markets.

Source: Healthcare Europa : [Read More >]