- Investment market halted in first quarter
- Initial yields up in all healthcare real estate segments
- Sustainable new build too expensive for healthcare institutions
- Renting more attractive than building your own?
- Concerns about financial situation of care institutions
- Demand for healthcare real estate remains high: scarcity of supply
Investment market halted in first quarter
The investment market for healthcare property came to a virtual standstill in the first quarter of 2023. Only six transactions were recorded, compared with the usual 30 to 40 per quarter. The total investment volume was only EUR 43 million. The downward trend was already apparent in the fourth quarter, when there were fewer transactions than in the previous quarter and year. The record volume that was still realised in 2022 came mainly from commitments made in the first half of 2022 or earlier. With interest rates rising sharply, several parties put on the brakes during 2022. In particular, private investors and real estate funds operating with debt capital had to slow down because the business case could not be completed. The increase in transfer tax from 8 to 10.4 per cent in January makes this even more difficult. Those who invest predominantly with their own money have also had to contend with declines in the value of planned investments in recent quarters.
This has put pressure on returns. Uncertainty about future performance has made investors even more cautious. In addition to market conditions, over-allocation in real estate has also had a negative impact on investors' willingness to invest in real estate. Proposed deals are having to go back to the negotiating table and, in the case of new construction, in some cases back to the drawing board. This has resulted in a limited supply of healthcare property. Sellers of healthcare real estate, such as healthcare institutions and developers, can no longer achieve the returns they thought and expected last year. Investors, in turn, are having to get used to lower property spreads over the risk-free rate. This impasse will continue until 2023. For those who can adapt quickly to the new reality, there may be good investment opportunities ahead.
HEALTHCARE INVESTMENT VOLUME BY QUARTER (X € BLN.)
* data 2015-2018: CBRE, 2019-present: Capital Value
Source: CBRE (2019), Capital Value (2023)
Initial yields up in all healthcare real estate segments
The fact that the investment market is in dire straits is reflected in rising initial yields. There is a strong correlation with investment volumes. Fewer transactions, or transactions at lower prices, lead to higher initial yields, which in turn lead to caution and fewer transactions. Yields have risen across all care property segments over the past quarter, ranging from 10 to as much as 30 basis points for assisted living care properties. This segment is relatively closely linked to the housing market, which is experiencing sharp falls in value in the owner-occupied housing market. Initial yields on healthcare real estate bottomed out about a year ago. In the space of a year, yields have risen by 30 to 50 basis points. Nursing and care homes and private nursing homes, where more intensive care is provided, have seen the least change in yields. Curative care properties and housing for the elderly have seen the biggest increases.
Rising risk-free interest rates show that the risk premium for investors has fallen sharply. For example, the 10-year Dutch government bond rate has risen by around 230 basis points over the past year. By contrast, the yield shift in healthcare real estate is relatively limited. The high risk premium that investors have realised for property in recent years is absorbing some of this rise in interest rates. Nevertheless, initial yields will remain under pressure. Macroeconomically, inflation is not yet under control and only when it returns to the desired level will the interest rate market normalise. However, it is expected that the biggest jumps in interest rates and yields have already taken place.
YIELDSHIFT Q1 2023 (IN %-POINT)
Source: Capital Value (2023), edited by Syntrus Achmea
Sustainable new build too expensive for healthcare institutions
Healthcare facilities that want or need to renovate sustainably are increasingly faced with higher construction costs, stricter sustainability requirements and higher interest rates. ABN Amro has calculated that the cost of a new sustainable building has risen by 83 per cent in two years. As a result, new self-build is becoming too expensive and climate targets are slipping out of sight. This is confirmed in the letter sent to the House of Commons by the industry and umbrella organisations, who say that the Green Deal 3.0 targets cannot be met. According to them, the government will have to come up with a one-off investment of EUR 1.6-3.4 billion, in addition to higher annual structural costs. The parties are also calling for the reduction in the normative housing component of long-term care to be reversed, as it eats up all the space for sustainability.
Renting more attractive than building your own?
Higher financing costs are a major part of the increased cost of new construction by healthcare institutions. Indeed, interest and depreciation costs have risen sharply over the past year. Although investors are also demanding higher returns due to the rise in interest rates, the increase is less significant. See also the section on initial yields and the lower risk premium for investors. This makes renting a more attractive option for healthcare institutions.
Concerns about financial situation of care institutions
The financial situation of healthcare institutions is under pressure. Costs for resources, energy, accommodation and staff are rising. It is difficult for revenues to grow through increased turnover, as facilities often face capacity constraints due to sick leave and staff shortages. The Financial Healthcare Thermometer, a survey of eight hundred healthcare professionals, shows that many respondents expect a loss for the financial year 2022 and a negative result in 2023. Banks and accountants also see that the financial resilience of healthcare organisations, particularly in the mental health sector, is under pressure from an accumulation of cost-increasing factors. They have even written to Minister Ernst Kuipers about this. They are afraid that financial problems are not incidents, in which case auditors will not be able to issue an audit certificate, causing institutions to default on their banks and thus fall into a negative spiral. However, Healthinsurers Netherlands (ZN) does not see high energy costs, inflation and labour shortages as a threat to the continuity of healthcare. According to ZN, the current contractual agreements guarantee continuity of care. Where adjustments are necessary, it is trying to find solutions. CBS figures show that bankruptcies in the care sector are still virtually non-existent. Especially in the care sector, the number of bankruptcies is minimal.
HEALTHCARE BANKTRUPTCIES (2 QUARTER MOVING AVERAGE)
Source: CBS (2023), edited by Syntrus Achmea
Demand for healthcare real estate remains high: scarcity of supply
Health care institutions have no shortage of potential clients. Although there has been a slight decrease since the peak at the end of 2022, the number of people waiting for a home with long term care is still high at 23,500. These figures from Healthinstitute Netherlands are the sum of people in urgent need of accommodation and those waiting for a preferred location.
Minister Helder has stated in the Housing and Care for the Elderly Programme that there is room in the future building programme for 4,800 additional (intramural) nursing home places. In this way, she intends to meet the demand for expansion in 40,000 clustered nursing care home places, mainly extramural and financed by the so-called Full Package Home (VPT). Care providers have indicated that they can realise up to 7,000 intramural places in the period up to 2027. Recently, Minister Helder said he was open to increasing the number of intramural nursing home places to between 7,000 and 8,000. A decision is expected before the summer. This insight is linked to the prediction that the realisation of the number of clustered nursing and care home places is lagging behind the desired 40,000 places. The care authorities argue that 'the current expansion plans are not sufficient to provide care for all elderly people entitled to care in the coming years'. And 'this means that all parties involved (the state, care providers, municipalities, housing associations) must continue to take responsibility and create the conditions to achieve the necessary capacity expansion'. Although not explicitly mentioned, this obviously means that institutional investors can also contribute.
WAITING FOR LONG-TERM CARE HOUSING (2020 Q3 = 100)
Source: Zorginstituut Nederland (2023), edited by Syntrus Achmea
In the first quarter of 2023, the investment market for healthcare real estate found itself in a situation where a number of negative factors were reinforcing each other. Limited supply, high construction costs, increased taxes, continued high inflation, rising interest rates and rising initial yields resulted in low transaction volumes. As this situation will not be resolved overnight, we expect the investment market to remain relatively quiet in the coming quarters, with some upward pressure on initial yields. A new equilibrium will have to be found where demand, supply, price and risk are in balance. Healthcare real estate remains an attractive addition to an investment portfolio. Those who look ahead and respond to a new reality can take advantage of attractive opportunities while others continue to wait and see.