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Emerging asset class: Cushman & Wakefield investigates rehabilitation clinics

11/02/2021

Healthcare properties offer advantages as investments, such as long-term leases and stable and often indexed rents. They benefit from demographic trends such as the rising age of the population. What is true of senior flats and nursing homes is also true of rehabilitation clinics. The asset class is gaining significantly in importance among healthcare properties. Real estate transactions involving rehabilitation clinics with a volume of 150 to 400 million euros per year have taken place in recent years, pealing at more than double that amount. Net initial yields are between 4.3 % and 4.8 %. Transaction activity is slowed solely by the lack of products on the market. These and other conclusions, as well as important investment basics in the still-young asset class, are summarised in the new "Rehabilitation Clinics Report 2021" by Cushman & Wakefield.

Strongly fluctuating transaction activity 
The real estate market for rehabilitation clinics in Germany experienced peaks in 2014 and 2018 with transaction volumes of €800 million and €950 million. Volumes of between €100 million and €400 million have been common in the last ten years. The strong momentum is attributable to fluctuating product availability. Currently, the demand for properties in this asset class significantly exceeds supply. 
Jan-Bastian Knod, Investment Advisory at Cushman & Wakefield, explains: "It is to be expected that above all clinics whose particular treatment focus has led a strong increase in patients in recent years will enjoy increasing popularity with investors. These include indication-specific clinics in the fields of psychosomatics, orthopaedics as well as cardiovascular disease and oncology."

Net initial yields of up to 4.3 %
The major reason for the growing demand from investors is the relatively good level of net initial yields. Jan-Bastian Knod: "For such operator properties, net initial yields depend on the location, the building quality, the key points of the general lease and the creditworthiness of the operator as well as the future viability of the treatment concept, and range from 4.3 % to 4.8 % for core investment opportunities. This is a clear difference to most current real-estate yields, such as those of the office segment." 

Large real estate stock from the 1990s with extensive refurbishment requirements.
The existing real estate stock is relatively clearly distributed throughout Germany. Most rehabilitation facilities are located in the regions with the largest populations. With 260 facilities, Bavaria is the federal state with the most rehabilitation clinics, followed by Baden-Württemberg with 193 and North Rhine-Westphalia with 138. Most of the facilities date from the early 1990s, when Germany experienced a "rehab boom". The health insurance funds had full coffers and rehabilitation measures were generously approved. This changed from 1997 on, with the Growth and Employment Promotion Act, which led to a market shakeout and reduced construction activity in the rehabilitation clinic sector. Accordingly, the majority of the stock is 35 years old and older and requires extensive refurbishment. "When investing in the existing stock or new developments, the future viability must always be included in the planning and calculations," says Jan-Bastian Knod.

Average occupancy rate: 84 %
With a view to profitability, current and forecast occupancy rates also play a major role. The number of beds and specialisation are important here. Although the average occupancy rate of all facilities was recently 84 %, smaller facilities with up to 49 beds often have below-average occupancy rates, while facilities with 150 beds and more have occupancy rates above the average. This is due to the specialisation of the smaller facilities - they are more dependent on the case numbers for specific medical indications. However, patients’ length of stay in smaller facilities is significantly longer than in those with a large number of beds.

Legal requirements for the building fabric 
It should be noted that rehabilitation clinics are less rigorously regulated by law than, for example, nursing homes, which is a further reason for interest in these facilities. Nevertheless, some specific regulations do apply. Preventive care and rehabilitation facilities are defined in legislation via § 107 Para. 2 SGB V. The building structural requirements are set by the German federal pensions body. Thus, depending on the treatment focus, rehabilitation clinics must have training rooms, functional rooms such as training kitchens, exercise rooms and pools, rooms for individual discussions and individual treatment as well as rooms for group activities. In addition, barrier-free access must be ensured in every rehabilitation clinic in accordance with the Equal Opportunities for Persons with Disabilities Act (§ 4 BGG). 

The time for entering the market is right
It is clear that the market for rehabilitation clinics is growing and this is favourable time to commit to it. Jan-Bastian Knod explains: "Rehabilitation clinics are not yet such a prominent focus for investors as other healthcare properties, which have experienced an investor boom in recent years. However, it is precisely this current perception of it as an “outsider” asset type which, in view of the achievable returns and a differentiated investment portfolio, gives it a clear competitive advantage."

 

>> Read report

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