Healthcare
Keypoints
• Historically low levels of investment • Initial yields remain under pressure • A vision for primary care: core teams for primary care • Funding: NHC changes complete • GP commercialisation under the microscope • Waiting lists remain long
Historically low investment volumes
Rising interest rates, inflation and construction costs are driving the healthcare investment market. Projects are being postponed or are no longer financially viable. In addition, financing problems are dampening demand from debt investors. As a result, the number of transactions and the volume of investment in healthcare real estate reached their lowest levels since measurements began in 2015. As in the first quarter, the number of investment transactions in the second quarter can be counted on two hands. The number of transactions in the first half of 2023 was only 20 to 25 percent of the average number of transactions in the same period in previous years. The second quarter investment volume of €78 million brings the total for the first half of 2023 to €113 million. This is less than 10 percent of the average annual investment volume over the past five years. However, there is no shortage of demand for healthcare real estate. Healthcare real estate is high on the wish list of many investors. Supply and demand prices need to be balanced before transactions resume.
HEALTHCARE INVESTMENT VOLUME BY QUARTER (X € BILLION)
* data 2015-2018: CBRE; 2019-present: Capital Value
Source: CBRE (2021), Capital Value (2023)
Initial yields remain under pressure
The stagnant investment market is partly a consequence - but also partly a cause - of rising initial yields. For the fourth quarter in a row, yields have risen across the various healthcare property segments. In the second quarter, the yield shift was slightly higher for care properties, which mainly include assisted living facilities, than for the inpatient and curative segments. This is due to the strong similarity with the housing market, where yields have risen more sharply. However, the increase in initial yields for healthcare properties was lower than in the previous two quarters.
This seems to herald a stabilisation in initial yields. According to Oxford Economics forecasts, the interest rate on 10-year Dutch government bonds peaked at 2.79 percent in the third quarter. Compared with the 2.66 percent As property yields react with a lag to long-term interest rates, a slight rise in initial yields in the third and possibly fourth quarter is not out of the question.
YIELDSHIFT Q2 2023 (IN %-POINT)
Source: Capital Value (2023), edited by Achmea Real Estate
Primary care vision: First line core teams
The design of the Dutch healthcare system is an ongoing topic of debate due to an ageing population, rising costs, staff shortages and inefficient processes. The Council for Public Health & Society (RVS) has made a number of recommendations in various publications, one of which is to strengthen primary care. They argue that primary care is too fragmented, both in terms of specialisation and cost. There needs to be more cohesion, from the GP to district nursing. The healthcare system is too complicated for citizens and is not organised efficiently through competition. Outgoing Minister Kuipers agrees with this criticism of the RVS, but sees the solution in the Integral Care Agreement (IZA). In this agreement, it was agreed that health care providers in the region would cooperate across sectors. The Ministry of VWS wants basic teams per district: first-line core teams with a point of contact. The core team would include the GP, district nurse, pharmacist, someone from the district social team and possibly the physiotherapist or geriatrician. According to outgoing ministers Kuipers and Helder, the core team plays an important role as a gatekeeper to specialised care. A 'future vision of primary care 2030' is currently being prepared and should be ready in autumn 2023. We expect the role of district health centres to become even more important as a result of this political vision.
lower nhc in 2024
Funding: change nhc final
In May 2023, a manifesto entitled 'Keeping the healthcare real estate challenge feasible' was published by healthcare organisations and industries. They argue that budget cuts and rising costs are making it impossible to make the necessary property investments. They fear an investment freeze. The manifesto identifies the bottlenecks facing healthcare organisations. Among other things, they lack compensation for the growing target group with higher care needs, a commitment from the care authorities that there will be no structural discounts on care property, better integration of rents in the financing system and compensation for increased construction prices.
The manifesto still assumed a generally adopted discount on the normative housing component (NHC) of 7-8%. On 27 June, the NZa published a new policy rule clarifying that the recalibration of the cost-sharing component will be partly compensated by bringing forward the long-term planned investment funds for sustainability. On balance, the reduction in the NHC amounts to 4.2 percent in 2024. The regular annual indexation of 2.5 percent will continue to apply, but the sustainability surcharge of 0.16 percentage points will be abolished. Thus, the final recalibration of the NHC is not too bad. Nevertheless, it represents a setback for healthcare institutions in financing healthcare real estate, and it certainly does not help with the major task the Netherlands is facing. The recalibration is in line with the government's aim to provide more care outside the institutions by separating housing and care. More and more care is being provided through the so-called 'full package at home' in clustered care homes. Residents rent their own accommodation. The financial capacity of the residents is the driving force behind the construction and rental of these extramural homes.
Commercialisation in GP care under the microscope
The involvement of private equity in the healthcare (property) market is not new. In private residential care and clinics, we have seen these commercial providers for a long time. In primary care, there are also pharmacy, dental and physiotherapy chains. Last year there were 103 acquisitions by private equity in the healthcare sector. For GP care, this is a relatively new phenomenon. Several parties have entered the Dutch market in recent years. These parties are trying to achieve efficiency, for example by centralising telephone support or administration. Recently, there have been a number of media reports about the poor accessibility of some affiliated practices. The Dutch Health Care Authority (NZa) and the Health Care and Youth Inspectorate (IGJ) are investigating commercial GP practices, in particular whether quality and accessibility are guaranteed. We do not see the development of commercial GP practices as a threat to healthcare property investors. From a business perspective, it can be conducive to maintaining a professional tenancy relationship, and institutionalisation with healthcare providers may also be an advantage in the future design of primary care. From a public health perspective, the supervisory role of the NZa and IGJ remains important, and the current shortcomings are hopefully part of the early stages of the commercialisation of GP care.
Waiting lists remain long
Waiting lists for a place in an nursing home remain long. Although unchanged from the previous quarter, the waiting list for people wanting to live in an nursing home has increased by around two thousand compared to a year ago. The group most in need of care has grown by sixty percent. They sometimes have to wait weeks or months for a place to become available. With demand for care expected to increase in the coming years, the need is urgent. There is a shortage of staff and places in care and nursing homes to meet the growing demand.
WAITING FOR LONG-TERM CARE HOUSING (2020 Q3 = 100)
Source: Zorginstituut Nederland (2023), edited by Achmea Real Estate
Outlook
In the occupier market, demand from housing and care consumers remains strong, but care providers face challenging financial conditions and staff shortages. For healthcare investors, the market appears to have stalled by mid-2023. The number of transactions is very limited and initial yields continue to rise. Our expectation is that this is a delay rather than a standstill, with improvement on the horizon. Projects and transactions have remained in the pipeline for longer and, from an investment perspective, more financial stability seems to be slowly emerging. With inflation slowly falling, long-term interest rates are stabilising and may even start to fall in the coming quarters. The rise in initial yields should continue to moderate, bringing supply and demand more in line with each other and allowing transaction volumes to slowly increase again.
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