Text: Matti Schenk

Investors interested in care properties in Germany are sometimes confronted with fuzzy terminology. The info box on page 2 shows how Savills defines care properties. Investors are also interested in how large the market is and how much capital can potentially be invested. We will go into this in this chapter.

17,700 care properties in Germany
Based on the data of Pflegemarkt.com and our own review and data enhancement, we have recorded the supply of care properties in Germany: There are currently around 16,300 care properties with about 910,000 full inpatient care beds and about 292,000 assisted living units. At the beginning of May 2022, there were also about 1,350 care properties with an estimated 46,500 full inpatient care beds and 34,500 assisted living units under construction or in planning.

Investment universe is around 201 billion euros in size
The capital value of care properties is also interesting for real estate investors. There are no corresponding publicly available statistics or studies. We estimate that the investment universe of care properties currently has a volume of approximately 201 billion euros.

Approximately 128 billion euros or 64 percent of the market volume is accounted for by care homes and 73 billion euros or 36 percent by assisted living facilities. The volume of existing properties amounts to approximately 186 billion euros. A further 15 billion euros are accounted for by properties under construction or in planning.

Small property volumes dominate
Many care properties have a comparatively small volume: The median is 9.6 million euros. For assisted living facilities, the median is even only 7.1 million euros.

Overall, about 57 percent of the care properties have a volume of less than 10 million euros. Another 33 percent are worth between 10 and 20 million euros, according to our estimate. Properties in the mid and higher double-digit million range are thus the exception. The large-volume properties are disproportionately often located in urban districts, while smaller properties are particularly common in rural districts.

71 percent of the market volume are properties in the double-digit million range
Even though large-volume properties are rare, they account for a larger share of the market volume. Based on a market volume of 201 billion euros, properties with a volume of less than 10 million euros account for around 29 percent. Approximately 11 percent of the market volume is accounted for by properties with a volume of at least 50 million euros.

Growth regions account for the largest volume
There are care properties in all districts and cities in Germany. The size of the stock correlates strongly with the size of the population. In terms of the investment universe, the volume is concentrated in regions with growing populations. According to our estimate, about three quarters of the market volume is accounted for by growing districts or districts with above-average growth.

Around 112 billion euros or 56 percent of the market volume is in locations outside the so called 127 RIWIS cities and thus in smaller and predominantly non-transparent real estate markets. In the case of properties under construction or in the planning stage, such locations even account for about 70 percent of the volume. Some of these are municipalities in the suburbs of large cities. In many large cities themselves, on the other hand, new care properties can only be developed with difficulty due to scarce and expensive land.

Our conclusion
With an estimated market volume of around 201 billion euros, care properties are a niche in the German real estate market. By way of comparison, according to the Federal Statistical Office, the value of all commercial and residential real estate is estimated at around 15 trillion euros. Accordingly, care properties account for only about one percent of the investment universe in the German real estate market. Nevertheless, the market for care properties offers diverse potential for investors and thus the opportunity to further institutionalise the investment market. However, interested investors have to deal with predominantly small property volumes and a large number of small and often intransparent locations. Low property volumes are unattractive for some investors in view of the process costs for the purchase or the acquisition audit, so that the bidding competition is particularly intense for the few large-volume individual properties. Due to the low property volumes, care properties are often combined into portfolios and put on the market. Overall, investors who can also handle small lot sizes therefore have advantages when looking for products on the market for care properties.

It is positive that the majority of the market volume is located in growing districts. Due to demographic change, the demand for care properties is likely to increase in shrinking regions as well. However, the shortage of nursing staff will become particularly acute there and pose major challenges for operators - a risk with regard to the long-term stability of rental income. Districts that are growing are doing so largely through immigration. Accordingly, there is a greater chance of addressing the staff shortage there. Table 2 summarises the volumes by property and location characteristics.

Care properties - a clarification of terms
The world of care properties is characterised by a multitude of terms. For example, care homes, retirement homes, senior residences, residential homes, assisted living or even serviced living are advertised. Some of the terms are used synonymously and are not clearly distinguished from each other. Two property types of care properties can be distinguished in Germany: 1. properties that mainly serve the inpatient care of people in need of care. In our spotlight, we call this type of property a care home. 2. properties in which residents largely run their own households independently and can access care and support services as needed. We refer to these properties as assisted living facilities. In practice, care homes and assisted living facilities are increasingly combined or built on neighbouring properties. This has the advantage that residents of assisted living facilities only have to move within the building ensemble in the event of a greater need for care and can thus remain in their familiar surroundings. Many care homes therefore also have units for assisted living and vice versa.

Methodology for determining the market volume
We have estimated the market volume of care properties as follows.

1. Our basic assumption is that investors can theoretically acquire any care property. Particularly in the case of assisted living facilities, properties are divided up among various private investors, so that they are de facto not available for global investment. How high their share is not known.
2. To determine the market volume, we have estimated the volume for each existing and currently planned property. The basis for our property list is the database of Pflegemarkt.com.
3. In the absence of property information on the number of care beds or assisted living flats, we have used average values for existing buildings and new construction projects in each case. For care homes, this is 78 beds in existing buildings and 81 beds in construction projects. For assisted living facilities, we assume 43 units in existing buildings and 39 units in construction projects.
4. To estimate the volume of care homes, we have derived typical capital values based on comparable transactions from 2020. Care homes can be divided into three categories in terms of building age: All new buildings or modernised existing buildings completed from 2015 onwards are considered as new. Properties that were built or last renovated between the years 2000 and 2015 are classified as modern. All older properties are assigned to the old category. We have also assigned existing properties without information on the year of construction to the old category. In the next step, we applied typical average capital values per care bed for the three categories. These are 150,000 euros per bed in the category "as new", 130,000 euros per bed in the category "modern" and 112,000 euros per bed in the category "old" or "unknown". We did not take location information into account.
5. In order to estimate the volume of assisted living facilities, we used key figures from the free housing markets. In the first step, we used the maximum rent for apartments in first occupancy for the respective district in 2021. The data is taken from Bulwiengesa. For all assisted living facilities built or refurbished in 2015 or later, we applied a rent premium of 50 percent. For all older buildings, the premium is 30 percent. These assumptions are based on empirical values. In a second step, we have set the average size of an assisted apartment at 55 sq m due to a lack of property-specific information on the size of the space. This value is based on a market report by Terragon. In the third step, we determined a purchase price factor for the global sale. To do this, we first used the average multiplier for apartment buildings in the respective district in 2021. The data here is also taken from Bulwiengesa. We then applied a yield premium of 100 basis points. This corresponded to the difference between the prime yields of multi-family buildings and assisted living facilities at the beginning of 2022. In the fourth step, we multiplied the annual rental income by the determined purchase price multiplier.
6. For properties that have both care home beds and assisted living units, we applied the methodology for the respective use and then added both volumes.

Due to data gaps, our methodology is a rough estimate. Thus, our average results may differ significantly from the actual property value in individual cases. However, after comparing them with actual purchase prices, we believe our methodology provides a rough indication of market size. Our estimate is based on capital values at the beginning of 2022, so the market volume we have determined is a snapshot and further development depends on future conditions on the capital and investment market.