SHHA: consolidation coming to German senior housing market

Consolidation will soon deal with the fragmentation in the German market, experts agreed at the SHHA webinar on ‘Senior living & care – is Germany ready for consolidation and international capital?’, which was organised in collaboration with Real Asset Media.

“We have a lot of small operators with four or five care homes and that can be a challenge for foreign companies”, said Max Eiting, Director, Head of Healthcare Operational Capital Markets, Savills. “We need to educate international capital to work with smaller operators and family businesses who may be doing a great job in their region. There are some negative cases but also many good stories. We have to educate both sides to work well together.”

Cultural differences can be bridged and different expectations can be managed, for the benefit of both sides. For foreign investors, it is necessary to have a local partner on the real estate side and on the operational side, to help them navigate the complexities of German regulations.

For small operators an injection of cash and expertise allows them to improve their assets and keep up with increasingly stringent requirements.

“There are still a lot of small operators who don’t have the capacity to cope with technical updates and have no plans to upgrade their assets”, said Yeliz Bicici, COO, Cofinimmo. “So in the end a diversified market, that has both domestic and international players in it, is better for residents who will get better care and will live in better buildings.”

Foreign players’ presence is likely to accelerate the transformation of the German senior housing market. Consolidation is seen as the necessary next step so it can grow to meet demand.

“There is a huge potential for consolidation”, said Berthold Becker, Managing Director, TSC Real Estate. “It is a requirement as well, as this is not a high margin business but it relies on efficiency and synergies. A lot of small owner-operators cannot deal with increasing bureaucracy and regulations.”

Private equity is needed to make consolidation happen, but “it needs to be the right money and the right approach, without piling on debt and with reasonable return expectations”, Becker said.

Consolidation is not an end in itself but must be made to work, experts agreed.

“Size is not a guarantee of success”, said Becker. “A good operator today needs to be locally integrated, focused on the region and efficient with staff.”

It is crucial to find a strong local partner, an operator with a regional presence and teams on the ground, which allows foreign companies to expand across different federal states.

“Germany can follow the very effective UK model, as in the last five years there has been a lot of work done on connecting operators with local people and doctors”, said Michael Hodges, Managing Director, Capital Markets, Christie & Co. “This increases the visibility of excellent local operators and also provides clarity to capital coming in.”

Foreign capital can also help with another big problem in the German market: the lack of supply caused by years of underdevelopment or no development.

“There has been no development at all in the last two years and that has to change,” said Becker. “The majority of investors come into Germany looking for yield, they don’t like risk so they don’t want to develop. They prefer to add value to existing structures, which is very difficult to do.”

Construction costs have stopped rising, but they are still high and this is an added barrier to development.

“I am optimistic that developers are on a recovery path now”, said Bicici. “I believe that the situation will improve in the next 12 months. There are challenges in the market, but they are nothing compared to the tremendous opportunities.”