“Special real estate calls for specialist investors”

Jens Nagel

Interview with Jens Nagel, Managing Director Hemsö Deutschland

How will the market for care facility real estate develop in the wake of the corona crisis? Jens Nagel, the managing director of the German subsidiary of the Swedish social real estate investor Hemsö Fastighets AB, offers a multifaceted answer – on the one hand, he sees long-term growth potential despite the current cooling-down of the market. On the other hand, the challenges are increasing.

Mr Nagel, to some extent it would appear as if the real estate markets have fallen into a state of shock as a result of the COVID-19 pandemic. What is the situation in thesegment for care facility real estate?

We have seen no signs of a state of shock. There has, however, been a clear change in the investment prerequisites compared to those at the beginning of the year: at present we are being offered a large number of projects, and in the majority of cases at lower prices than in past years. It would seem as if many investors and project developers are concentrating on minimising their risks as quickly as possible right now. As many of the purchase factors have clearly been driven by speculation in the past two or three years, the current situation means that price expectations have to be revised. For us the position is presently more favourable than it had been because we have a long-term orientation. In some cases we have refused to go along with the recent price rally.

You say yourself that the market has become increasingly tighter in recent years. It has often been said that to some extent care facility properties are a sure-fire success because of the high level of demand. But do operator-run properties not require precise knowledge?

Yes, definitely. In the case of residential care homes and other social facilities it is quite clearly the case that special real estate calls for specialist project developers, investors and asset managers. In principle someone relates the story of the care market as a “safe haven” every year. But this is actually only true for a certain period of time as decisions at political level can lead to a fundamental change in the framework conditions. You can never be sure that the entry-level conditions will remain unchanged for five or ten years. The yield stands and falls with the refinancing costs – and I cannot calculate their economic basis without precise knowledge of the asset class. It has to be said, therefore, that those not familiar with the specific problems associated with care facility real estate will be less successful in the long term.

The majority of prognoses repeatedly underline the rising demand associated with demographic change and derive a constant growth in demand from this.

Obviously, if people are living to an older age, more and more people will require care. But this interrelationship does not necessarily lead to an automatic increase in care home demand – many people take too simple a view here. What precisely is in demand and from whom? The number of residents in care homes as a proportion of the population as a whole differs greatly throughout Europe, for example: in Italy and Spain the proportion is high, in Greece is tends to be low. And Germans generally like to remain in their own home for as long as possible. Naturally this has an impact on the degree of independence of the average resident in an old people’s home in the respective country and on which services are required. All this should be taken into account and priced in by an investor.

That sounds as if we cannot be certain that the market will actually continue to grow.

Oh, despite everything we can assume it will because the demographic aging of society is seeing a strong development. You have to look at the bigger picture and consider what society is demanding in the long term. There are other megatrends which have an impact in this area, urbanisation for example. But there are already studies which show that new facilities are scarcely being built where they are really required, above all because construction land is too expensive. At the same time, operators in Germany are dependent on the care fees laid down by the statutory social insurance agencies, something which limits the potential for rent increases. For this reason, my personal prognosis is that although the market will grow, it will not develop beyond being a niche market – and this poses a risk for purely opportunistic investors.

About: Jens Nagel ist Managing Director Hemsö Deutschland GmbH