All in good health? Today’s and tomorrow’s healthcare market

Healthcare is a topic that concerns us all, and currently more so than at other times. But what kind of role does healthcare play on the real estate market? What do we associate with the subject, and what sort of ramifications does it have for the present situation and for the future development of the industry?

RealCast is a podcast series by fiveandfriends for the real estate industry. RealCast discusses relevant topics and mega trends of our day and age, the focus being on the communication and marketing of sustainable investment solutions.

The first thing we do is therefore to study the facts and figures of the market action, and then to use these to derive a trend in demand for eldercare properties in the years ahead. In 2012, slightly over one fifth of all Germans were older than 65. This proportion will have gone up to nearly one third by 2030. By 2050, one in seven Germans is expected to be above the age of 80, necessitating a corresponding increase in proper care facilities. Healthcare is therefore a growing market any way you look at it.

Even today, healthcare represents one of the fastest growing segments of Germany’s entire real estate market. With this in mind, let us take a quick look at the differences to other European markets and at the different retirement planning and eldercare cultures in various countries of Europe. When you look at southern Europe, you will note a much stronger reliance on family ties in this context. Pension schemes do not have the same significance as in northern Europe. By converse argument, this means that the potential for retirement planning and investments in this segment is much higher in northern Europe and not nearly exhausted. While the market in southern Europe still shows a certain potential as well, it is clearly not as strong as in the north of Europe.

Fascinating to see are the differences setting the German situation apart from our next-door neighbour France. Polls on the subject of private retirement planning revealed that more than 50% of the French take the issue quire seriously and have some sort of private retirement scheme. The percentage in Germany is half that figure, just 26%. This suggests that the German market harbours a particularly strong catch-up potential. Despite the low-interest cycle, initial yields in this segment are auspicious. And while even these have hardened over the past 2-3 years, the market shows a high level of stability, and there is a good chance that yield rates may start softening again. We may not see a return to former levels of 5.5% to 6.0% again in this segment. But generally speaking, it is an up and coming market. Over the next 10 years, an estimated 80 billion euros will have to be invested in new-build construction and in upgrades of care facilities in Germany.

It is reasonable to assume that the projected sum of 80 billion euros implies sufficient potential to tempt private investors to increase their commitments in this sector. It is well known that the coming decades will see the country’s babyboomers reach an age in which they will require assistance and care. The upward trend in healthcare and eldercare demand is inevitable, being driven by a natural process. Accordingly, these topics will gain in relevance for the real estate investment market in the coming years and decades.

What is the key question for investors willing to engage?
Probably the most important point, as evidenced by various polls and survey, is the issue of selecting the right location. Where should a healthcare property, whether it is a medical centre, a care facility or a traditional retirement home, be located? Of course, such facilities are extremely relevant close to urban centres, ideally in metro area or major cities. You will rarely find such facilities in rural areas because their catchment areas are insufficient to ensure a sufficient inflow of residents while the potential of such a property for alternative or subsequent use is limited. The problem is compounded by the generally small ticket sizes or batch sizes in the healthcare sector. It means that the investment volumes familiar from other asset classes simply do not come into play, making such investments a less rewarding proposition. To make them a success, you truly need a perfect match of location and adequate target groups within a given catchment area.

Another thing we have noted is that market players have started blending this kind of property with new-build residential quarters, permitting various formats and types of use. Property developments of this type aim for the creation of a neighbourhood ambience.

Relevant other types of use to combine with them include common facilities like day nurseries, cafeterias or outpatient care facilities or healthcare properties allocated to such residential quarters. These manifest trends will define the future market, as far as we can see.

Our conclusion

The eldercare and healthcare market will continue to grow at a brisk pace, necessitating an estimated 80 billion euros in investments, with large sums already being committed. This means it pays to keep a close eye on this market.

Having discussed these facts and figures, we move on a fascinating and extraordinary inside story from the healthcare segment in our next blog post. In his second interview, Paul tells us more about his enterprise, whose business is the digitisation of care home properties.


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