Article by Patrick Brinker and Florian Schmitz-Muckenhaupt
Hauck Aufhäuser Lamp
Especially since the Corona pandemic, outpatient healthcare real estate has increasingly attracted the interest of investors because awareness of the importance of healthcare facilities has increased. Investors appreciate the resilience of this asset class due to the cyclical business model and high value stability through indexed leases with high, inflation-adjusting adjustments. The investors who engage with this asset class vary and can include a wide range of stakeholders. These include, for example, institutional investors such as funds and real estate investment trusts (REITs). Private equity firms and asset managers specializing in the healthcare sector can also invest in outpatient healthcare real estate. But individual investors or family offices are also interested in it, especially if they are aiming for a diversified real estate portfolio.
Purchase of medical centres and health centres
As managers of larger funds that invest in outpatient healthcare properties, we very often find ourselves on the buyer side and represent institutional investors such as pension funds, insurance companies, pension funds or banks. This can also be done on the basis of larger individual mandates. We are primarily concentrating on the acquisition of medical centres and health centres with a diversified tenant mix. We do not consider small-scale properties, e.g. with an office use on the ground floor and one or two small medical practices on the first floor, to be an investment-ready outpatient health centre for institutional investors. Instead, we count properties with a usable area of between 1,000 and
10,000 square meters and a predominant proportion of health-related users. Operator properties are only an option for us in the form of practice clinics or outpatient surgery centers, because in the course of outpatient care, such properties will be increasingly needed in the future and, depending on the operator, we see rather low risks in operation.
In contrast to many other asset classes, medical centers and health centers do not always have to be a top 7 city in terms of location. On the contrary – in our view, the higher returns are more likely to be generated in the long term in C and D cities or even in the larger medium-sized cities with 50,000 inhabitants or more. After all, basic medical care is permanently necessary everywhere in Germany. And last but not least, other factors such as local conditions, type of use, tenant mix, terms of leases and the (energetic) condition of the building, etc. are also important in the overall assessment.
On the seller side, we often deal with owners who are still tenants in the healthcare property themselves – i.e. doctors, pharmacists or other health professions. Recently, we have noticed an increasing professionalization of the market, not least due to the fact that large and small brokerage houses are also dealing more intensively with the needs of professional investors with regard to this asset class. As a result, the understanding of the concerns of institutional investors has increased among many owners in recent years, and so the quality of the prepared documents is also increasing, although due diligence processes are sometimes unnecessarily prolonged due to missing or incomplete documents. Here, thorough preparation and documentation make the purchase process much easier. In addition, institutional investors are able to carry out a faster preliminary check in advance by sending them an up-to-date list of tenants with information on the tenants and their rental space, contract terms and extension options.
Good asset management requires a holistic view of the property.
Various challenges for asset managers
Asset managers must have a profound knowledge of the market when acquiring and managing such outpatient healthcare properties in order to be able to adequately meet possible challenges within this class. Regardless of the investment strategy, they must be able to work quickly and flexibly both on the property itself and with its (potential) tenants. Due to unforeseen events, management tasks such as re-letting can occur again and again. In such cases, especially when renting to doctors, it is necessary to know the local demand planning and the licensing modalities within the safeguarding mandate of the respective Association of Statutory Health Insurance Physicians (KV). Doctors always form the basic framework in such real estate. Depending on the specialty and focus of activity, they can be important prescribers for other health-related tenants in the property or offer an opportunity to work on patients in an interdisciplinary manner. Knowledge of such synergy effects allows the asset manager to implement a utilisation concept that is specially tailored to the tenants.
Good asset management requires a holistic view of the property. Current and future market developments, especially legislative and other market developments, must be taken into account and anticipated. Leases must already be adjusted during the acquisition process and onboarding. There are often errors in written form and there is a lack of sufficiently written regulations on topics such as operating costs and maintenance. In recent years, the topic of ESG (environmental, social and governance) has become increasingly important, and with it so-called green lease clauses in leases, which are necessary for compliant (regulatory) reporting.
ESG criteria have now become an important decision-making factor, as investors prefer sustainable and ethical investments. The growing sensitivity to environmental and social issues is reflected in an increased interest in sustainable investment products such as so-called Article 8 funds, which combine financial returns with positive social and environmental impacts. All of this also plays a decisive role with regard to possible exit scenarios. And last but not least, a permanent exchange with tenants is necessary so that asset management can react to changes at an early stage. Often, for example, when a tenant moves out, other tenants in the building are willing to take over the space due to expansion requests. In the context of active tenant management, such potential can be identified at an early stage. A successful investment in this asset class therefore also depends crucially on the skills of the asset manager, which is why investors should only work with players with market experience.
Proof of concept using the example of the
Brandt Areal Hagen health centre
Medical centers and health centers can hold a wide range of development potential, as can be shown by the example of the Brandt Areal health center in Hagen. The property was purchased in 2020 for one of our funds – including a general lease. After this was dissolved at our request, our asset management faced some challenges. In particular, the rental contracts had to be transferred to the owner. In the course of this, our own leasing management also terminated a center management contract and "cured" written form errors. In further addendums, green lease clauses were negotiated and implemented with the tenants. Furthermore, it was also possible to agree with some tenants on an early exercise of their extension options.
On the rental side, one medical supply store, which had to leave the property in the meantime, was also seamlessly replaced by another. The vacant spaces could be rented to doctors on a long-term basis. For example, a general practitioner's practice was won for the location, which improves the general medical care of the district and is also an important prescriber for the other tenants in the building. In addition, an ophthalmology practice could be rented in the property. In addition, other tenants from the healthcare sector such as pharmacies, hearing aid acousticians, physiotherapy, outpatient care, occupational therapy and psychotherapy work at the site. In this way, the health centre has been developed into a top location for outpatient health services. The market value of the property could be significantly increased as a result. Other upcoming asset management measures relate to ESG issues such as the implementation of a smart metering concept and the installation of a photovoltaic system on the roof as well as the construction of charging stations for electric cars. We are convinced that these measures will also have an indirect value-enhancing effect on the property.
