HBI recently had a conversation with Stephane Pichon, Managing Partner, Your Care Consult, in preparation for the Investing in Health Care Property panel at HBI 2023. Pichon shared insights on the significant changes that have occurred in the past year and their impact on health care real estate investment, as well as his long-term outlook for the health care sector.

Joining Pichon on the panel will be Steven Hammer, Executive Vice President and Chief Financial Officer, Medical Properties Trust, Andre Schmidt, CEO, Median, Xavier Cheval, Director General, ICADE Sante and will be moderated by Hugh Risebrow, CEO at Latchmore Healthcare Associates. The discussion will focus on investing in health care property. Pichon’s expertise as a managing partner at Your Care Consult provides valuable perspectives on the topic.

The Changing Landscape: Impact of Market Conditions on Health Care Real Estate

Pichon emphasized that changing macroeconomic and market conditions have resulted in a significant decline in deal activity within the health care real estate sector over the past year. He explained: “We are observing a decrease in deals across all types of health care real estate. For over a decade, valuations were on the rise, driven by decreasing interest rates and extensive market consolidation in different health care segments, largely supported by private equity firms seeking refinancing through sale-and-leaseback arrangements. Everything seemed promising. However, in less than a year, the situation has completely transformed. Interest rates have risen, valuations have dropped, and although market consolidation continues, many aspects have changed.”

Decline in Deal Activity: Effects of Changing Macroeconomic and Market Conditions

The decline in valuations has created concerns that they may further decrease, causing investors to delay their purchases. This lack of demand then leads to further price drops – a self-fulfilling prophecy. Pichon noted: “Previously, it made more sense to buy now rather than in six months, but now the situation may be the opposite. Investors now demand higher capitalization rates due to high-interest rates. Sometimes, the new rates don’t align with the prices we were accustomed to and don’t meet sellers’ expectations.”

He further explained that higher interest rates provide an alternative to real estate investment, such as buying low-risk bonds with high yields, which hadn’t been feasible for over a decade. Consequently, investors now require risk-adjusted returns to justify investing in real estate. This has created challenges for institutional investors to raise funds, particularly in countries where valuations have adjusted downward due to this shift, like the UK and the Netherlands. In contrast, Southern European countries have been slower to adjust their prices. Pichon highlighted the considerable obstacles faced by institutional investors in the current scenario.

Nursing Home Sector: Scandals, Insolvencies, and Real Estate Risks

Pichon discussed the substantial impact of the events of the past year on the nursing home sector. In addition to changing macroeconomic conditions, the sector has been affected by a major scandal involving France’s largest provider, Orpea, accused of mistreatment of residents. 

“The nursing home scandal in France has reverberated beyond its borders. Orpea has reported an occupancy rate of only 80%. It remains uncertain if they can sustain profitability at that level. In Germany, five nursing home operators have filed for insolvency due to cost inflation not matched by tariff increases. Real estate investors with these operators as tenants are now seeking new tenants, posing significant risks. Investing in properties with the wrong operators is no longer viable. The market has witnessed considerable changes.”

On the other hand, hospitals have fared better, particularly in countries where subsidy schemes from the Covid era still exist, such as France. Overall, health care properties are viewed as a healthier investment compared to other property categories, notably office real estate due to the shift toward remote work after Covid. Residential housing, however, is facing challenges in countries like France due to a lack of buyers caused by high interest rates.

Nevertheless, both property sales and M&A activities in REITs focused on health care have experienced a decline. Pichon highlighted the recent acquisition of Icade Sante by Primonial as the largest ongoing deal in the sector, standing out from the prevailing trend. Finding innovative ways to revitalize the market is essential, but Pichon noted that the final decision lies with the European Central Bank (ECB) and the Federal Reserve (Fed) due to their control over interest rates.

Long-Term Outlook: Aging Population and the Sustainability of Health Care

Looking at the long-term outlook, Pichon expressed a more positive perspective. He anticipated continued growth in demand due to the aging population, although he acknowledged the negative impact of declining birth rates on maternity care. However, he highlighted the potential positive impact on fertility clinics. Pichon also pointed out that the supply of health care facilities is limited in most countries, except for the UK.

Financial Challenges: Collective Financing and Government Tariffs

Nonetheless, Pichon raised serious concerns about the long-term financial sustainability of health care. He questioned how the collective financing of health care, which is inherently costly, can be achieved as it ranks as one of the top expenditures in most countries, surpassing education and defense. With an aging population and an increasing disease burden, the long-term financing of health care poses significant challenges.

While some countries like the Netherlands are taking measures to address the predicted spiraling of health care spending in the long run, most European countries have neglected to seriously consider the long-term sustainability of health care financing. This has implications for real estate investors, as tenants may struggle to pay rent if governments fail to increase tariffs.

Shifting Dynamics: Outpatient Sector and the Impact of Covid-19

One potential solution that has been suggested is to shift more activity to the outpatient sector. However, Pichon pointed out that the viability of this option has been undermined by the Covid pandemic. Before the pandemic, there was a trend toward reducing hospital beds and emphasizing home care, but the crisis highlighted the benefits of maintaining a high level of hospital capacity.

Another avenue being explored is prevention through promoting healthier lifestyles, including nutrition, exercise, and stress reduction. By achieving better health outcomes at a lower cost, the financing of health care could become more sustainable.

Pichon also expressed concerns about the workforce crisis, particularly in France and Germany, where many municipalities have a shortage of clinicians. In addition, young doctors are working fewer hours compared to previous generations, necessitating increased productivity. The challenge lies in leveraging software, technology, and robotics to alleviate administrative burdens on health care professionals, enabling them to dedicate more time to patient care. Delegating more tasks from doctors to nurses and pharmacists is also part of the solution.

Pichon identified “medical office buildings” as one of the significant opportunities in the sector. These buildings cater to new, larger networks of primary care or multidisciplinary outpatient clinics, replacing the traditional model of individual practices for GPs or specialists. The UK appears to be leading the way in this trend, with benefits for doctors working as part of a team, such as reduced working days and increased convenience for patients. Sharing expensive equipment or technology among multiple professionals also gives them a competitive advantage.

In summary, Pichon’s insights shed light on the dramatic changes in health care real estate investment over the past year and provide a long-term perspective on the sector. While challenges persist, the demand for health care is expected to continue growing due to the aging population. However, the financial sustainability of health care poses a significant concern, and the workforce crisis requires innovative solutions. Exploring new avenues, such as prevention and multidisciplinary clinics, offers potential opportunities for the future.