Senior real estate Germany: secure returns despite new challenges

Due not least to demographic change, senior real estate – both fully inpatient nursing homes and assisted living – is increasingly in demand as a capital investment amongst investors. These properties are considered particularly attractive for various investor groups due to the long lease terms, steadily increasing demand and the partial state refinancing of the rent. 

In recent years, this investment market has experienced an unprecedented dynamic upturn. From 2013 to the end of 2021, supply prices have more than doubled and an alleged operator risk was hardly taken into account in the investment calculation. Fierce competition and limited supply led to an increasing number of price rallies, especially in structured bidding competitions. The term “resilient” has increasingly been used in connection with senior real estate, as this asset class has been relatively unaffected by the Covid-19 pandemic compared to other property usage types. Not least thanks to the care bailout schemes, significant rent losses on the owners’ side were rarely observed.

But last year then saw the completely unexpected Russian attack on Ukraine. This led to uncertainties on the financial markets, explosive increases in financing interest rates and an even greater shortage of material availability. Within a few months, the market situation changed completely. Investors had to learn to cope with new return expectations, while sellers – whether real estate holders or project developers – were faced with a sharp reduction in investors’ willingness to pay. As a result, the purchase price factor for new senior real estate in the past year was often five to six annual rents above the demand side’s potential. New and, in particular, larger transactions have therefore become increasingly rare.

According to our forecast, it will take some time for new investments to re-establish a balance between the ideas of sellers and buyers – especially with regard to prices and collateral regimes for purchase contracts. In addition to the relationship between sellers and buyers, the choice of the right operator is becoming increasingly important. 

The insolvency applications recently observed at several nursing companies clearly show the traces left by the years of the pandemic and the increasing shortage of skilled workers in the nursing sector. Due to the agreed minimum wage, the cost of remuneration for nursing staff has also risen sharply in some cases. As margins in the nursing sector are relatively small anyway, we may experience one or another skew on the part of providers in the coming period, and the market will increasingly consolidate.

How can responsible investors now live up to their special social responsibility in terms of long-term returns? A critical assessment of the specific demand situation and the professionalism and creditworthiness of an operator will now be even more important, as will the potential project development risks as part of the due diligence process: Will the specific nursing demand at the specific location continue to exist after 2030? What experiences and economic circumstances characterise the proposed operator? And is project development planned with the necessary care and price sensitivity without sacrificing important quality features such as energy efficiency and architecture?

In view of the current challenges in terms of both new project developments and on the demand side, investors should not focus exclusively on new acquisitions. It is equally important to further develop the senior properties that have already been purchased. The investor business is clearly driven by growth. However, owners also have the task of making the necessary investments in their properties to offer the operator and thus the residents an appropriate environment in which to work and live. Swiss Life Asset Managers places particular emphasis on revitalising and optimising the existing properties, taking ESG criteria into account. Despite the sometimes challenging building concepts, a large part of the existing properties is suitable for high-quality renovation to enable seniors to lead a self-determined life. Swiss Life Asset Managers focuses on developing the existing properties as well as on investing in new senior real estate.