The total healthcare property market in Europe is estimated to be worth circa €300bn, offering yields of about 6% based on net rents (excluding transfer duties and taxes). As such, there are numerous opportunities for healthcare development and consolidation across the continent.
Given the market dynamics, healthcare real estate assets have proved particularly attractive to investors over the past few years. This also reflects a global search for higher yielding investments in the context of a low interest rate environment and investors looking to increase allocations in alternative assets.
The European market is extremely varied in terms of regulation and approach to healthcare policy. However, what is common to all countries is that care fees and development policies are largely determined by local authorities which dictate pricing structures and necessary regulations.
The healthcare system combines universal coverage and a public-private mix of practitioners and financing, while relying on a compulsory national health insurance supplemented heavily by voluntary insurance.
Whereas public spending has increased slightly by around 1% annually since 2011, direct out-of-pocket spending has decreased. This is due to increased cost-sharing by private health insurance, a rise in the number of patients with chronic diseases exempt from co-payment, and a reduced consumption of over-the-counter pharmaceuticals.
Given the huge debt of the country’s national health insurance, gaining new bed authorisations and licenses has become difficult. As a consequence, the sector’s growth drivers lie in expansion through consolidation.
In particular, the private health services sector is going through a major restructuring as operators merge to form geographically and financially powerful groups. Recent deals include: the merger of Vitalia and Vedici; the tie-up between Ramsay and Général de Santé; and the deal between Médipôle Sud Santé and Médi-Partenaires.
In an era of low interest rates and real estate yield compression, healthcare assets provide a more appealing investment opportunity than offices or commercial property.
Germany is the largest healthcare market in Europe with more than 2.6 million people who are care dependent. Healthcare spending, mostly financed by the public sector, is expected to double by 2050.
The overall healthcare property market offers yields of about 6% to 8%. Prime yields for nursing care homes were around 6.25% in 2014 and close to 5.5% in 2015, above those of prime offices and commercial real estate assets in main German cities.
Due to the yield compression for prime offices and commercial real estate assets, the healthcare property market is becoming increasingly attractive for foreign investors, typified by recent deals involving Even Capital, Aedifica and Primonial.
The sector is seeing major growth as investors enter a market which is being vacated by the government as it makes significant cuts to public healthcare spending.
Hospitals have seen budgets fall by around €7bn over the past few years, encouraging the widespread privatisation of services. For instance, in Madrid six of its 20 hospitals have recently been privatised.
In such a climate, investors are particularly attracted to the strong long-term dynamics of the market given that Spanish hospitals and elderly care centres have some of the best facilities in Europe and are very efficiently run.
The market has seen significant investment from the US over the last 12 months, with four of the ten largest asset deals involving US acquirers and nine of these deals featuring REITs.
The biggest recent deal was Health Care REIT’s (now Welltower Inc.) acquisition of four private pay hospitals in London, from Aspen Healthcare. This is one of the most globally active REITs, with a focus on senior living, post-acute care and outpatient medical properties. Since the start of 2015, it has made 23 acquisitions of different facilities and operators.