THE INVESTMENT CASE FOR CORE HEALTHCARE PROPERTY IN FRANCE AND EUROPE
BNP Paribas REIM September 2018
Real Estate L’immobilierfor a changing d’un monde qui change world L’immobilier d’un monde qui change
MORGANE LELIEVRE Investment Management Research Analyst
MAURIZIO GRILLI Head of Investment Management Analysis and Strategy
THE INVESTMENT CASE FOR CORE HEALTHCARE IN FRANCE AND EUROPE
The underlying economic and demographic trends driving demand for healthcare properties from both users and investors are compelling. The aging of the French (and European) population and the increasing need for care is reflected in the steady increase in spending for this sector. Moreover, high barriers to entry result in a significant demand- supply mismatch. The relative consolidation of the major operators across Europe means that the industry is also maturing and, in turn, becoming more attractive to institutional investors.
Healthcare real estate is more defensive against downturns in the economy than other real estate assets, due to the prevalence of long lease terms, the need-based nature of the services and the lack of correlation of healthcare returns with the business cycle. The French healthcare property sector has outperformed all the other major sectors over the last 9 years. Moreover, within a context of generally low property yields and fierce competition for core assets, investing in healthcare offers very attractive income.
As a result, the healthcare sector has characteristics that should be attractive to investors aiming at both defensive and offensive strategies. In this primer report, we provide an overview of the healthcare real estate industry in France and in other selected European countries, including supply and demand drivers, industry background and key valuation metrics.
2 THE INVESTMENT CASE FOR CORE HEALTHCARE PROPERTY IN FRANCE AND EUROPE
DEMOGRAPHIC FACTORS SUPPORT THE DEMAND FOR HEALTHCARE
While population in France is steadily increasing, the most significant phenomenon is the change in the structure of the population itself. Indeed, baby boomers, who are aged 45 to 70 years old, are progressively retiring. By 2050, people over 65 years old will represent around 27% of the population (vs. 20% in 2017), which means a 6 million increase over the whole period1 (Exhibit 1). In the rest of Europe, the demographics are quite similar. Indeed, within the continent, the number of over 65 years old is expected to increase by around 64 million people over the same time span.
EXHIBIT 1: AGE STRUCTURE IN FRANCE IN 2017
1921 - 95 Men Women 1926 - 90 1931 - 85 1936 - 80 Baby boomers arrival 1941 - 75 1946 - 70 1951 - 65 1956 - 60 1961 - 55 1966 - 50 1971 - 45 1976 - 40 1981 - 35 1986 - 30 1991 - 25 1996 - 20 2001 - 15 2006 - 10 2011 - 5 2016 - 0 -600,000 -400,000 -200,000 0 200,000 400,000 600,000
Source: INSEE
Not only is the number of people over 65 increasing, they are living longer as well. At the end of the 19th century the average retiree lived for two years post-retirement compared to more than 20 years today. This stable increase in longevity is affecting human behaviour over the different stages in the life-cycle. First, working life tends to start later because of a period of “extended youth” characterised by people studying and living with parents for longer, and marrying later and also renting for longer. As a result, working life tends to start later as well and to be longer as retirement age is progressively shifting forward. Currently, 70 is the new 65 (Exhibit 2). This working life may well include multiple careers, having fewer children and later. The early years in retirement will feature some years of leisure and activity, but as people age, health will start declining, especially from the age of 80. Crucially, the proportion of people over 80 years old in France is expected to change from 6% in 2017 to 11% in 2050, a net increase of 4 million people. Within the same time span, Europe will see an increase in people over 80 years old to more than 35 million people, corresponding to twice more compared to today.
3 1 Source: UN. L’immobilier d’un monde qui change
EXHIBIT 2: THE EVOLVING LIFE-CYCLE
Year
100 Extended 90 Retirement 80 Active early retirement 70 Retirement 60
50 Longer Working Life Adulthood 40 (Working life)
30 Extended youth (18-30) 20 Childhood 10 Childhood (School) (School) 0 20th Century - Life cycle 21st Century - Life cycle
Source: Grosvenor, BNP Paribas REIM Research
Another factor contributing to the growing need for medical services is that the percentage of people of all ages having chronic diseases is constantly increasing2. This includes illnesses such as cardiovascular disease, obesity and diabetes. These illnesses demand more complex and costlier treatments.
Also boding well for the healthcare sector is the fact that the 65 and older French people of the future are likely to be better educated and wealthier than the current population of senior citizens. As a result, they are more likely to access medical services and to do so more frequently. Finally, one of the forces encouraging the growth in physician office visits is the multiplication of patient treatment options. The advancement of medical technology is likely to continue indefinitely. This suggests a growing pipeline of new treatment options that will result in growing consumer demand.
4 2 Source: Eurofound. THE INVESTMENT CASE FOR CORE HEALTHCARE PROPERTY IN FRANCE AND EUROPE
SUPPLY OF HEALTHCARE IS VARIED AND LIMITED
Hospitals have always been at the core of the healthcare system. There are public hospitals, non-profit hospitals as well as private hospitals. Other different kinds of properties comprise the healthcare real estate universe. These include general and specialised hospitals and clinics, medical office buildings, surgery centres, specialty diagnostic facilities, and medicalised nursing homes (Exhibit 3).
EXHIBIT 3: THE STRUCTURE OF THE FRENCH HEALTHCARE MARKET 3 types of Operator legal statuts
Not-for-profit private sector For-profit private sector Public sector
General Specialized hospitals Nursing hospitals Homes and clinics Rehabilitation PSY « EHPAD »
« MSO » Follow-on Residence for Medecine Surgery care Psychiatry dependent elderly Obstretrics Rehabilitation persons
Short stay1 Medium stay1 Medium stay1 Long stay1 average stay. average stay. average stay. average stay. 4 days 1 month 1 month 20 to 24 months
Source: DREES
It is difficult to evaluate the size of the healthcare property market. Green Street has estimated that the size of the US healthcare market is roughly half of the U.S. office market. In 2014, PMRECON estimated the size of the healthcare market in the UK at around £40- 60 bn, which was equivalent to a figure between 40% and 60% of the MSCI-measured UK office market3. As a result, a heroic estimate of the size of the French healthcare market, for example, would probably give us between €65 and €98 bn. However, as healthcare property is predominantly publicly-owned in France (notably on the hospital segment), the investable universe should be smaller than these figures but still sizeable.
New supply of healthcare facilities is related to several factors including aging, growth in patient demand, advancing technology and regulatory and budget constraints. Construction of new healthcare units has declined as the credit crunch, recession and public spendings cuts have curbed development. In general, the number of beds needed is falling as average length of stay is dropping too. Through investments in technology and care management to prevent readmissions, efficiencies are being gained at an accelerating pace.
As a representation, in terms of stock, there were around 3.1k hospitals (public and private) in France in 2015 with 408k beds for full hospitalisation and 73k beds for partial hospitalization (Exhibit 4). Over the period 2003-2015, the number of full hospitalisation beds decreased by 12%, as a result of a 60% drop for long-term care due to the transformation of some long-term care units into EHPAD (nursing homes). Over the same period, partial hospitalisation places increased by almost 50%. Indeed, improving technology has resulted in several medical procedures shifting to single-day hospitalisation and reduced patient length in hospitals.
5 3 Source: IPF’s « The Size and Structure of the UK Property Market 2013: A Decade of Change”. The estimate excludes around £35-45 bn of care homes. L’immobilier d’un monde qui change
EXHIBIT 4: HEALTHCARE BEDS IN FRANCE
thousand MCO Psychiatry SSR (post-acute care USLD (long term care) beds (Medicine Surgery and rehabilitation) Partial hospitalisation places Obstetrics Odontology) 500
80 400 32
92 106 300 60 57 200
236 214 100 73
0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: DREES
It is estimated that in France, by 2030, more than 500,000 new nursing home beds will be needed, complementary to the redevelopment of existing (and obsolete) ones. While precise projections about future supply are not available, market conditions – particularly the lack of construction financing and the limited number of qualified developers in the sector – make it unlikely that there will be any significant increase in new units in the near future. Moreover, the healthcare sector has natural barriers to new supply as new authorisations are subject to strict controls. The process of obtaining an operating license varies across countries with France being relatively stricter vs. other countries such as Germany and Spain.
6 THE INVESTMENT CASE FOR CORE HEALTHCARE PROPERTY IN FRANCE AND EUROPE
THE HEALTHCARE MARKET IS MATURING
Each European market has a different structure in terms of who supply the services. For example, in France and Italy most of nursing homes are operated by public players while in Germany, Spain and Belgium the dominant player is the non-profit sector (Table 1).
TABLE 1: MARKET BREAKDOWN BY TYPE OF PLAYERS (%)
Public Non-profit Private
France 53 27 20
Germany 6 57 37
Spain 20 40 30
Italy 47 35 18
Belgium 30 37 33
Source: BNP Paribas REIM Research, Cushman & Wakefield, CBRE
Moreover, the European market is going through a process of cross-border consolidation across the largest European groups, notably on the nursing home segment. The process is largely advanced in France, progressing in Germany but is still in its infancy in countries such as Spain and Italy where the market is still very fragmented. In principle, it is possible to diversify across different geographies while maintaining a preferred relationship with favourite tenants. For example, French health operators are gaining market share in different countries (Exhibit 5). This relative consolidation means that the industry is also maturing, which makes this market relatively more attractive to institutional investors.
EXHIBIT 5: PRIVATE TOP OPERATORS IN FRANCE AND SPAIN (000S OF BEDS)
French operators France Spain
Korian SARQuavitae & Geriatros (DomusVi) Orpea Ballesol DomusVi Sanyres & Orpea (Orpea Group) Colisée
Domidep Sanitas
Le Noble Age Amma Group (Maison de Famille) Emera Eulen SGMR Clece Dolcéa
Résidalya Vitalia Plus
0 5 10 15 20 25 0 5 10 15
Source: BNP Paribas Real Estate, Cushman & Wakefield
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GOVERNMENT AND PRIVATE WEALTH WILL PROVIDE FUNDING
Healthcare spending represented between 8 to 11% of the national GDP in European countries in 2017. The relative weight of healthcare spending has notably increased over the last 20 years but, as a result of pressures on public finances, is actually decreasing in some countries (Exhibit 6).
EXHIBIT 6: HEALTH EXPENDITURE AS A % OF GDP
% Italy Spain Netherlands Germany France
12 11.5 11.3 11
10.1 10
9 8.9
8
7
6 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Source: OECD
There are two main sources of financing for the health sector in Europe. The most important ones are government spending and compulsory health insurance (Exhibit 7). For example, all legal residents in France are covered by public health insurance, which covers more than 80% of total health expenditures. Voluntary health insurance (most of them non-profit, mutual insurers) and private funds such as households’ out-of-pocket payments, NGOs and private corporations represent the other source of financing. All employees in France have access to a specific plan where their company has to contribute at least 50% of the cost.
8 THE INVESTMENT CASE FOR CORE HEALTHCARE PROPERTY IN FRANCE AND EUROPE
EXHIBIT 7: HEALTH EXPENDITURE AS A % OF GDP IN 2017 BY FINANCE MEANS
% Government / Compulsory Voluntary Including Out-of-pocket
20
18 17.2
16
14
12 11.5 11.3 10.3 10.0 10.1 10 8.9 8.9 8
6
4
2
0 Austria Belgium France Germany Italy Netherlands Spain US
Source: OECD
As a result of the strain on public balances, an increasing share of the cost of healthcare is shifting to individuals from companies and healthcare is becoming consumer driven in a way it never has before. While the financial strain on families is expected to increase, the cohort between 50 and 69 years old is also the most affluent, i.e. with more means to afford healthcare services (Exhibit 8).
EXHIBIT 8: AGE DISTRIBUTION OF NET MEDIAN WEALTH IN FRANCE
225,000
180,000
135,000
90,000
45,000
0 <30 30 - 39 40 - 49 50 - 59 60 - 69 70+
Source: Institute Montaigne
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THE HEALTHCARE SECTOR IS UNRELATED TO THE CYCLE
The performance of commercial property is generally based on the impact of the wider business cycles and the demand-supply dynamics of the individual sector. These factors affect each property type in a different fashion. The healthcare sector is typically less- sensitive to fluctuations in the economy than other property types, largely because its tenants are somewhat less affected by economic cycles. Individuals will still require medical and healthcare services even during economic downturns. Exhibit 9 shows that healthcare spending and GDP growth are indeed largely uncorrelated.
EXHIBIT 9: CORRELATIONS BETWEEN HEALTHCARE SPENDING AND GDP 1991-2017
1.00 signicant 0.75
0.50
0.24 0.24 0.25 insignicant 0.04 0.00 -0.01 -0.25 -0.20
-0.50 -0.40 signicant -0.75
-1.00 Germany France Italy Spain Belgium Netherlands
Source: Oxford Economics, BNP Paribas REIM Research
10 THE INVESTMENT CASE FOR CORE HEALTHCARE PROPERTY IN FRANCE AND EUROPE
ATTRACTIVE PERFORMANCES OVER THE LONG TERM
The solidity of the healthcare property sector is reflected in its long-term performance. Over the 2009-2017 period, total returns for the sector in France were 8.5% p.a. on average, of which around three-quarters, i.e. 6.5%, derived from income return (Exhibit 10).
EXHIBIT 10: TOTAL RETURNS FOR FRENCH HEALTHCARE PROPERTY
% Capital Growth Income Return Total Return
14
12
10
8
6
4
2
0 2009 2010 2011 2012 2013 2014 2015 2016 2017 -2
-4
-6
Source: MSCI Moreover, French healthcare sector generally outperformed most other sectors over different periods (Exhibit 11).
EXHIBIT 11: TOTAL RETURNS BY SECTOR – FRANCE 2009-2017
% Healthcare Retail Ofce Logistics 12 10 8 6 4 2 0 3Y 5Y 9Y (max) Source: MSCI
As shown in Table 2, risk-adjusted returns for healthcare were very attractive as well, as a result of the relatively low volatility vs. the other sectors5.
TABLE 2: RISK-ADJUSTED RETURNS – FRANCE 2009-2017
Healthcare Logistics Office Retail
2.5 1.2 1.5 2.1
Source : MSCI, BNP Paribas REIM Research
11 5 The risk-adjusted returns were obtained by dividing the average return by the standard deviation of all returns during the whole period. L’immobilier d’un monde qui change
COMPELLING YIELDS VS. OTHER SECTORS
Prime healthcare yields range from 4% to 5.25% dependent on factors such as segment, tenant covenants and location (Exhibit 12: France example). Prime healthcare yields have compressed since 2013 as a result of increasing investor appetite and the supply shortage in the market. This is expected to support further new entrants into the market and subsequently drive up prices. Moreover, even the recent strong yield compression is not expected to lessen investors’ interest in the market, thanks to long-dated income with strong covenants.
EXHIBIT 12: PRIME YIELDS BY SEGMENT – FRANCE
% MCO (Medicine Surgery SSR (post-acute care EHPAD Ofces in Obstetrics Odontology) and rehabilitation) / PSY (nursing homes) Paris CBD 9
8
7
6
5.25 5 4.50 4 4.00
3 3.05
2 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: BNP Paribas Real Estate, Cushman & Wakefield
12 THE INVESTMENT CASE FOR CORE HEALTHCARE PROPERTY IN FRANCE AND EUROPE
While the French healthcare property sector is relatively solid and mature, other European markets are also attractive in terms of investment potential6. Germany, for example, offers relatively higher yields with a decent level of liquidity. Moreover, while less liquid than Germany or France, both Italy and Spain offer very interesting income levels (Exhibit 13). The three main markets in terms of investment levels in the Eurozone are Germany, France and the Netherlands.
EXHIBIT 13: PRIME YIELDS AND INVESTMENT LEVELS IN EUROPE
€ 2.0bn 4.25 - 5.50% € 9.9bn 5.00 - 6.00%
Healthcare investment € 6bn volume 11 years 4.00 - 5.25% Prime yield in 2017 € 374m 5.50 - 6.50%
€ 665m 5.50 - 6.50%
Source: BNP Paribas Real Estate, Cushman & Wakefield
13 6 Our analysis is limited to the euro zone.