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Pandemic potential: Why investor demand for rehabilitation clinics is rising

Verena Bauer • 01/04/2021
Rehabilitation report Germany Rehabilitation report Germany

Extremely high demand and net initial yields of between 4.3 and 4.8 percent  investing in rehabilitation clinics has become a trend in recent years. No wonder, given the demographic shift and the associated increase in chronic illnesses as well as operations requiring subsequent inpatient rehabilitation. Increasing demand for such services is therefore pre-programmed, and an investment which appeared absolutely future-proof. Then along came the COVID-19 pandemic and changed perspectives and forecasts in all areas. What does the current situation now mean for the long-term viability of investing in rehabilitation clinics? Does it still make sense? Has the rewards possibly even increased? Where are the risks? And what should you pay attention to now when considering an acquisition? An interview with Jan-Bastian Knod, Investment Advisory Capital Markets.

Is investing in rehabilitation real estate still worthwhile despite the pandemic?
Jan-Bastian Knod
: Definitely. Investment in rehabilitation real estate remains a crisis-proof asset class. Rehabilitation will continue to gain in importance in our society, because people’s lasting recovery from illness and operations is not only a social imperative but is system-relevant for society. Even if the pandemic means that rehabilitation measures are only possible to a limited extent at present, it is essential from an economic point of view to reintegrate people who have fallen ill into work  especially in view of the fact that demographic change means that there are ever fewer people paying pension contributions and ever more people receiving benefits. And the pandemic is not reducing the need for rehabilitation. On the contrary, psychosomatic illnesses in particular have increased and, together with the growing number of post-COVID patients suffering from long-term consequences, will only further increase the need for rehabilitation facilities.

Are there additional risks to rehabilitation investments as a result of the pandemic, and how can they be minimised?
JBK: What has currently been added are primarily challenges for the operators themselves. Effective hygiene concepts have to be implemented and possible sources of infection prevented by, for example, tightened or suspended visiting regulations. For investors, however, these short-to-medium-term restrictions have little to no relevance. Rehabilitation clinics are still open for medical rehabilitation and accept patients - keyword system relevance.  

 

Has the pandemic also brought new opportunities for rehabilitation or investing in this field?
JBK: Yes, both in terms of operations and directly in terms of investment. Lockdown and social contact restrictions are currently forcing operators to drive forward the digitisation of their own facilities and rehabilitation measures, to become smarter, to rethink processes and management. And where more efficient "management" takes place, the performance of the facility itself also improves.
What many people are not currently aware of is that the continued existence of the rehabilitation clinic asset class has already been a topic of public debate regarding whether rehabilitation clinics might not be better integrated into acute hospitals in city centres. However, the pandemic is showing that solitary complexes in rural regions are much more suitable for carrying out rehabilitation measures - and this is precisely what should be further expanded in the future. 

Additionally, healthcare real estate in general, and rehabilitation clinics in particular, fulfil investors' currently increased requirements for security, stability, and the ability to plan. This is due to their ability to guarantee long-term, value-secured leases, making this asset class increasingly attractive. Which, in turn, will be accompanied by a corresponding rise in prices. 

In addition, new opportunities are likely to arise for interested investors in the short term, also in view of the available supply. For operators with their own real estate portfolios in particular, the rising prices are bringing the topic of sale and leaseback into focus - a sale would currently make perfect sense for certain operators in order to gain new liquidity and remove the real estate from their own balance sheet.

Rehab buildings Rehab buildings

Characteristics of a profitable rehabilitation property

  • Long-term and market-conforming value-secured lease (min. 10 years) with creditworthy tenant and corresponding rent security
  • Profitable operating business with a rent cover (EBITDAR / rent) of at least 2.0
  • Renowned physicians and strongly networked clinic management
  • In the best case, several specialties that each exhibit increasing demand (musculoskeletal, mental disorders, cardiovascular diseases)
  • Maintenance / repair: double or triple-net lease agreement
  • Very good building quality and building structure that can flexibly adapt to the operator's concept and changing regulations.
What should investors watch out for now when considering an acquisition?
JBK: On the one hand, mainly on the business figures and the quality of the respective operator. As I said, it's about long-term rental contracts, so these “basics” have to be right, of course. And that is exactly what makes sale & lease back deals interesting, as the tenant is already using the property in a tried and tested manner, knows the conditions and operations are running. On the other hand, the quality of the building has to be right and its structure has to be flexible enough to be able to adapt to possible changes in the regulatory area. In the best case, one should rely on facilities that treat and rehabilitate a good mix of different clinical pictures in order to make occupancy and success not just dependent on one disease. Another point that should not be forgotten: There are personnel bottlenecks in almost all regions, but it should always be analyzed locally whether this bottleneck is perhaps particularly high in the targeted region.


To what extent does a rehab investment make sense, especially as part of an investment strategy in the health sector, or can it be a standalone solution?
JBK: Since the investment volume in the rehabilitation sector in Germany is very dynamic, it makes sense not to specialize exclusively in the rehabilitation real estate sector. Rehabilitation is a very good addition for investors who have a holistic investment strategy in the area of healthcare real estate, as rehabilitation is an integral part of healthcare in Germany. Rehabilitation clinics are a complex structure - know-how and years of experience in this area - or good external advice - are crucial in order to differentiate between good and less good investment opportunities. This applies in particular to refinancing and an understanding of the operators' operational structures.

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