TSC’s Berthold Becker outlines the opportunities in Europe’s healthcare markets.

TSC Real Estate, headquartered in Berlin, is a fully integrated asset manager specialising in healthcare and social real estate. Managing director Berthold Becker tells Insight about the opportunities and challenges for investors and operators in the German market.

How would you describe the current state of the senior living and care real estate market in Germany and Europe? What key trends and investor dynamics are you observing?

What we are seeing is that investors are increasingly screening the market and looking for investment opportunities in the healthcare sector. This is true for investors already familiar with healthcare, but especially so for new entrants to the sector. Investors are prioritising resilience and cashflow, and there is a positive trend towards value-add. The most sought-after markets appear to be Germany and Spain, particularly in the senior living sector.

Capital from the US, Asia and the Middle East is focusing primarily on higher-yielding and long-term investments, core-plus and to some extent on the value-add segment. On the other hand, true core, yielding less than 5% cash-on-cash is unlikely to attract demand.

Nursing care homes are still most sought-after assets due to the growth of ageing populations and characteristics such as long-term double or triple net leases, and single tenant structure with relatively little management intensity.

TSC Real Estate covers the entire real estate value chain – from investment advisory to technical property management. How does this integrated model create added value for international investors seeking long-term stability in social infrastructure assets?

Our model is particularly suitable for those investing across multiple jurisdictions, but want to adopt a passive approach – either in funds, joint-venture structures or directly – and hence do not want to, or cannot, establish a presence in the respective jurisdictions.

Our vertically integrated model, combined with our high degree of specialisation and expertise across the entire healthcare sector is perfect for such investors. We offer investment strategy, deal sourcing and deal creation capabilities, deep market intelligence based on networking, local expertise, analysis and business planning. Combined with strong execution and management capabilities across the value chain, we provide investors with a high degree of security in terms of the sustainability of their investments and minimal need for involvement and management on their part.

With sustainability and ESG becoming key criteria for investors, how is TSC Real Estate embedding these priorities into its senior living and healthcare portfolio?

ESG and sustainability have become key elements across the entire investment process and are as such a core part of our nine-phase role management process. Already during sourcing, analysis and business planning processes, we carry out assessments to establish a preliminary climate pathway, including the corresponding cost-benefit analyses, investment programme and funding opportunities, including SFDR (Sustainable Finance Disclosure Regulation) strategy if applicable.

Integrating this into our nine-phase management process, we then produce a clear roadmap to be followed. This applies to individual and basic measures such as the implementation of smart metering and energy monitoring, but also the implementation of reporting systems and structures covering regulatory matters, but also benchmarking (ie GRESB) and certification (ie BREEAM). We also look at green lease clauses to be implemented, at acquisition and also afterwards, which include transparency regulations and various initiatives on the different aspects of ESG.

This holistic ESG-related approach enables us not least to ensure that we exploit all options and opportunities in line with investment objectives, ie value preservation and appreciation, and conversely, that risks are avoided as far as possible in the future.

What type of capital are you aiming to attract at this stage? Are you targeting long-term institutional investors, strategic co-investors, value-add capital, or are there other models you’re exploring?

We are active in all segments, ranging from core, core-plus, value-add to opportunistic. We are constantly screening various opportunities offered by the market. However, traditional core capital remains very hesitant and genuine super-core/prime investment opportunities are being pursued rarely. Furthermore, the corresponding returns in this segment are still not particularly attractive compared to more liquid assets.

‘We are at the beginning of a transformation with a wide range of investment opportunities in real estate, including existing properties, further development and conversion of existing properties.’

Berthold Becker, TSC Real Estate

However, this could change in the future due to the current uncertainty seen in liquid assets, which in turn could lead to a shift towards real assets. We are working on investment opportunities in this regard, but it will take time – nine to 12 months at least, in our view.

In contrast, pure value-add opportunities with target returns of 15-18% IRR are not often available in the home care and healthcare segment.

Attractive investment opportunities are currently most likely to be found in the yielding asset segment, ie core-plus, also in combination with value-add components. This is where the match between capital and available assets is greatest. This type of capital is looking for long-term investments – a minimum of five to seven years. There is also interest in evergreen structures, typically either in funds or joint-venture structures, sometimes directly. We provide or establish the vehicle required, be it a fund or separate account structure. 

From your perspective, what are the biggest opportunities and challenges facing investors in senior care real estate today – particularly in balancing quality of care with asset performance?

Staffing in healthcare remains a substantial challenge, not only in Germany, but across Europe. In addition, the structural varieties of regulated healthcare systems, as well as new operating models and implementation of new technologies, will be challenging in the future.

On the other hand, reforms are being implemented as we see multiple opportunities emerging. As a whole, the healthcare segment is increasingly benefiting from growing awareness among a broad group of institutional investors, which goes along with increasing institutionalisation and, ultimately, yield compression. Taking the period from 2014 to 2025 as a reference point, we have experienced about 150 to 200 bps yield compression, translating into 6% to 6,5% gross internal yield for existing assets even in today’s still challenging market, which compares to about 8% 10 to 12 years ago.

A more recent promising development is the emerging integration of real estate and operations. Separation is no longer the default option. Investors can improve margins through new operating models and innovation by acquiring or participating in operators and involvement in operations next to real estate ownership.

Which sub-asset classes do you see as most impactful or promising – senior living, assisted living, long-term care for dementia, or ambulatory care solutions?

We see huge, long-term potential in all areas of healthcare. I never tire of calling it a “great demographic and care opportunity”. Across Europe (EU plus the UK), the share of people aged 65 and over in the working age population is projected to rise from around 35% in 2020 to around 58% in 2050. These figures may even be adjusted later given that longevity and increased health spans are further drivers.

It is therefore not surprising that investors who have traditionally invested in other asset classes are showing growing interest.

We see the greatest potential in terms of growth and expansion in the senior and assisted living sector. This is the age group (60+) that does not require care, or only to a limited extent. These are people for whom moving means starting a new (third) chapter in their lives, with a new lifestyle and community aspect.

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In addition, long-term care for dementia will become a kind of commodity as a ‘standard product’ due to demographic developments and strong fundamentals, and will therefore remain attractive to many investors.

On the other hand, outpatient and ambulant care is also an area with great strategic potential and high growth. Again, demographics deliver growth, but in combination with younger age groups, this segment encompasses health, treatment of illness and also care. More importantly, it is a necessary component of the restructuring of the German healthcare system, from expensive inpatient care to more affordable outpatient treatment.

Add to this the shift in mindset among a growing number of boomers and ‘best agers’ towards significantly more prevention and a whole range of medical services, including beauty medicine, health awareness and longevity treatment, will see robust growth in demand.

We are right at the beginning of a transformation with a wide range of investment opportunities in real estate, including existing properties, further development and conversion of existing properties.

But there are also new construction projects with high and very long-term investment volumes, both privately and publicly initiated. These are backed by a variety of investment models via joint ventures, funds and sale-and-leaseback. Pure financing models are also possible, for example structured as public-private partnerships and financial leases.

Investors willing to weigh these demand patterns in their investment case will benefit from these attractive fundamentals and variety of options.