Healthcare & Later Living—building for the future

Family life and moving-house are universal examples of momentous life-defining moments that are immovably embedded in the human psyche. Our deeply personal experiences of health and ageing, especially over the past year, transcend the usual discussions about asset value. The resilience of the healthcare and later living property sector are derived both from this ubiquitous emotive connection plus the mega-trend magnifiers of population growth, ageing and growing healthcare spending as a function of economic growth.

Our experiences over the past 12 months have accelerated the trend towards purpose-built later living accommodation, with professional support on hand. In many respects, the later living market is hugely predictable. We already know the property preferences of the 50 million or so additional seniors that will make up the population of Europe over the next 25 years—because we will be those older individuals!

Yes, the public framework under which most operators function can be unpredictable, but life and housing will carry on regardless. Governments will struggle to cut healthcare budgets in the face of such strong consumer preference, as the recent reversal of the 20-year aim to reduce the number of in-patient hospital beds has shown.

We predict that private operators and private funding will play an increasing and more coordinated role in the healthcare sector. Private operators will also dominate specialist sectors such as diagnostics, cancer treatment, dialysis and imaging. We also expect to see an evolution in hospital design. Buildings used to be designed for bulky scanning equipment, requiring special floor loading, but advances in technology and the miniaturisation of equipment will ensure that hospitals evolve rapidly to resemble medical offices, able to cater for a wide range of community uses.

So where does this leave the real estate needs of the sector? The European healthcare sale and leaseback market is well established, with circa €12 billion leased real estate transactions completed over the past 12 months. The sale and leaseback market has been dominated (40%) by specialist cross-border investors (such as Belgian REITS Cofinimmo and Aedifica) and French operators. Alongside unrivalled ESG credentials, lease terms tend to be appealing—with 25-year indexed linked leases common where operators can set prices for their customers. Finally, the sector has unrivalled ESG credentials with effect on society and the economy going far beyond simply the provision of “housing units”.

Understanding what operators do, how their reimbursement channels work and how that trickles down to net rent is critical for investors. Those few investment-grade tenants that exist command pricing on a par with prime residential or commercial space. For example, in May 2021, the REIT Cofinimmo committed to acquire 24 nursing homes in Italy and Spain leased to multiple tenants, at a price of €340m (gross rental yield of 5%).

However, operations need to be permitted to grow and evolve within the real estate envelope. On top of a supply shortage, there is a pressing need for first-generation facilities to be replaced or upgraded.

Community-based later living is a sector that we will all have some form of connection with, either personally or through a family member. It is likely to grow and take market share from the more medicalised care sector. If you are considering investing in this market, our experienced colleagues are on hand to provide expert insights and support.

John Gladstone, Head of Healthcare, Living Capital Markets, EMEA

This article forms part of our latest European publication titled ‘Investing in Living’. To download the full brochure, please click here.