Care crisis: risks and opportunities for seniors and investors

Care gap widens

Anyone looking for an inpatient or outpatient care place for themselves or their relatives is already struggling in many metropolitan areas. This is because both retirement homes and outpatient facilities must close, are full and/or very expensive. This situation is likely to worsen even further as a result of demographic change in Germany. As a result of the aging of society, 4.9 million people in need of care are expected in Germany by 2030, which represents an increase of 20 percent compared to 2019. Study by the “RWI — Leibniz Institute for Economic Research” Around 322,000 care places will be missing in Germany by 2040. This is primarily due to general demographic developments: By 2045, all people of the so-called baby boomers (strong births from around 1958 to 1972) will retire. The first-born will then already be dependent on care services.

Particularly precarious: While the number of people in need of care is increasing rapidly, more and more nursing homes are having to close. For example, the economic situation of German nursing homes has steadily worsened since 2016. In 2019, around 20 percent were in the “red zone” with an increased risk of insolvency, and a good 26 percent posted an annual loss. This year, there was even a “wave of insolvencies” across the nursing home market: IThere are around 11,700 in Germany Nursing homes, hundreds of which are facing bankruptcy or have already had to file for bankruptcy. By June 2023, around 33 nursing homes, 255 care services and 100 day care centers have been closed, reports the LÖschradar from the branch service Pflemarkt.com. As a result, 1,665 full-time places were lost and over 11,000 people had to look for a new care service. How dramatic the situation is is also shown by a Survey of almost 2,500 nursing homes and outpatient services by the Federal Association of Private Providers: According to this, almost 70 percent of care facilities in Germany regard their economic existence as threatened. A survey by the Bank für Sozialwirtschaft came to similar results, in which 40 percent of the participating institutions expect a negative operating result for this year.

There are many reasons for the (impending) wave of bankruptcies: increased energy costs, general inflation, higher wages thanks to the new tariff compliance law and a massive shortage of nurses. In any case, the victims are the people in need of care and their families, who have long since stopped finding the care they need as a matter of course.

But how can the care gap be closed in the future? Experts are discussing three main points in this regard:

1. As payers, the federal and state governments should be reminded of their duty to refinance cost increases.
2. The upcoming revision of the Skilled Workers Immigration Act is likely to attract more nurses.
3. Nursing homes and retirement homes as properties for private investors could increase capacities.
   

Investing in the growing market of care properties

The increasing demand for care places combined with a falling supply naturally also attracts investors who sense return opportunities. But investments in nursing homes can do more: Investors often have the opportunity to secure so-called preferential occupancy rights. This is a legal claim that operating companies of a nursing home or nursing home guarantee the owners of residential units in these facilities. Although it does not guarantee the right to stay in one's own care apartment immediately when the need for care occurs, it still secures the first position on the waiting list for the next vacant place - although not necessarily in the apartment or room you have purchased yourself. This preferential right of occupancy may also be transferred to relatives.

In addition to this personal care advantage, real estate returns are also sometimes attractive, as the operating company pays investors rent for the care apartments. Die average rental yield is 4 to 6% per year, but may differ significantly depending on location, quality of the facility, contract terms and operator. A recent Study by real estate consultancy Cushman & Wakefield However, it assumes that purchase prices for care properties will fall in the short term - rents, on the other hand, are likely to rise in the medium to long term.

For a long time, retirement homes and nursing homes were only for major investors due to complex regulations and high costs of many millions of euros. However, they are increasingly being divided up like residential properties and then sold in slices to private investors. This asset class presents both risks and opportunities:

Risks:

• initial costs

In order to invest in a nursing home, equity of around 20 percent is required. A total investment volume of at least 130,000 euros is expected for the purchase of a nursing home.

• operators

The return on a nursing home rises or falls with the entrepreneurial skills of the home owner. In other words: the quality of care services, the personnel code or the costs. Investors are also at risk of insolvency of the home operator or of a prolonged vacancy.

• upkeep

Nursing properties often involve a lot of renovation work because the requirements for their equipment and design can change quickly, e.g. due to legal regulations. The premises of nursing homes are also heavily used and wear out accordingly quickly. Associated costs can reduce returns.

Opportunities:

• Long-term approach and predictability

Demographic development is not very variable. The so-called baby boomers (those with strong births) already make up the majority of society today. Each of them will have to claim care benefits in one way or another over the course of their retirement period. The political significance of care for an average aging society cannot be overstated.

• return opportunities

Investments in care properties develop largely independently of market developments. Of course, returns can fluctuate, especially in times of high personnel, land and construction costs. But retirement homes are pillars of care with no alternative and are therefore always “in demand”.

• market growth

Because more and more people are in need of care, the subsequent sale of nursing homes is usually easily possible and can even achieve a decent increase in value.

Of course, buying and selling nursing homes is more complex than buying and selling a condominium, for example. But demographic change combined with ever fewer care places - especially in metropolitan areas - is likely to ensure that retirement homes and nursing homes will also become more attractive for private investors in the future.

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