Senior housing in Germany – a demographic necessity and solid investment
Demographic change is pushing demand for all forms of senior living and healthcare facilities in Germany.
The real estate investment market has shown a steady upwards trend for investments in healthcare facilities in recent years. One popular sub-group is assisted living (betreutes Wohnen). Despite rising interest rates and inflation in 2022, this popular asset class has remained stable. Market demand and forecasts are strong, especially looking long term.
Healthcare investment market in Germany
The trend has been helped by the COVID-19 pandemic, as it highlighted the importance of stable healthcare for society as a whole and brought the importance of housing back into the spotlight. Returns on healthcare real estate investments were relatively stable compared to other asset classes like office or retail, which were affected much more by the pandemic.
Assisted living facilities in particular are already popular investment properties. This sector, which is much less regulated than nursing homes, is clearly focused on residential use.
The German market is extremely fragmented, so there are only a few large players and each holds a relatively small market share. Developers are often locally or regionally based. In addition to understanding these market circumstances, advisors need different negotiating skills to close the deal.
The population is getting older and the number of young people is decreasing, shifting the demographic framework in Germany to an unprecedented extent. “Baby boomers” – those born in the years of Wirtschaftswunder between 1955 and 1970 – have already started to retire. Consequently, demand will significantly y increase. At the same time, the number of people over 80 is steadily increasing. This affects Germany even more than some other countries. The effects will be visible in a few years.
Even if there were enough places in assisted living, it will no longer be the case in the next few years. Demand will increase significantly. This applies to all categories of healthcare real estate.
Currently only a small percentage of seniors live in homes that can be qualified as age-appropriate or even barrier-free.1 This deficit has been recognized by developers and investors. Therefore. assisted living is already a popular asset class.
What is senior living?
What is senior housing and how does it differ from assisted living? Neither the term “senior housing” nor “assisted living” are legally defined in Germany. So, the offers on the market and scope vary from project to project. Assisted living (betreutes Wohnen) comes down to age-appropriate and self-determined living for seniors, combined with outpatient care service. Assisted living also exists in other care forms like for people with psychiatric illnesses or disabilities.
In the context of this article the term only refers to senior assisted living. Residents of assisted living facilities usually have a condition that requires varying degrees of care services. But they’re still (physically) able to live in a self-determined way in an age appropriate, barrier-free environment.
Services in assisted living facilities, as opposed to nursing homes, are structured so some form of base-service is mandatory and paid monthly. Additional care services are optional and can be chosen by the residents at additional costs.
Senior Housing, on the other hand, means age-appropriate living for seniors who don’t need special care, at least at the time of moving in. But care can be optioned as an additional service if needed. So, needs for can be taken care of in a senior housing facility – to some extent – which would not be possible in a non-age-appropriate home. Nursing homes, which currently have very limited capacity in Germany, can be used for serious cases of care-dependency.
Senior housing as a concept is relatively new in Germany, as opposed to the UK or France. But it has quickly become relevant, especially for institutional investors. This asset class is less regulated and closer to residential projects from a legal perspective.
Facilities are even integrated into mixed inner-city neighborhood developments and are increasingly taking into account the demand for affordable housing. The fact that residents move in in a relatively healthy physical state leads to less fluctuation compared to assisted living or even nursing homes. And the lower demand for healthcare services makes the facilities less dependent on an operator than assisted living or nursing homes.
Legal implications for investors
Senior living has quickly become very interesting for investors. For investment funds established under German law it is critical that the investment matches the established investment criteria for the fund. To enable a healthcare fund to invest in all kinds of senior living objects – including senior housing irrespective of the degree of care or nursing service – it is advisable from a legal point of view to correctly determine the investment criteria upfront. For example, it might be classified as “living and care facilities for elderly” while avoiding limiting the investment criteria to “healthcare real estate.” This is particularly important as special investment funds make up almost half all investors in the healthcare real estate market.2
In addition to completing legal due diligence, any investor interested in this field should do a commercial assessment of the operator and technical due diligence of the facility.
Additionally, healthcare real estate and residential properties have great ESG potential for investors. ESG initiatives have been present in the residential market and the life science sector for some years already. The Social pillar is the key focus area of this sector as housing and healthcare are of great social relevance in society.
What can we take away?
It’s a certainty that the need for healthcare facilities will drastically increase in the coming years, in Germany even more than in other countries. This trend is expected to affect senior housing to a similar degree. With the demographic development and the shortage of housing, senior living has and will continue to be an integral part of the residential reality for the elderly. This might even reduce care needs by creating safe residential living with optional care services.
Senior living is less regulated, the fluctuation rate of residents is less high and the dependance on the operator is even smaller. So, this asset class promises to be a solid investment with growth potential in the coming years.
1 According to BNP Paribas: Gesundheitsimmobilien im Trend | BNP Paribas Real Estate
2 According to BNP PARIBAS REAL ESTATE, At a Glance Q4, Healthcare-Investmentmarkt Deutschland