The German nursing homes market looks ripe for consolidation – 15,000 homes are run by 6,000 providers, but the market is heavily regulated. This is what every investor or operator looking at the market ought know according to Hermann Thiel, CEO of healthcare real estate consultancy Terranus.

There is huge scope for consolidation

Public providers cover 5% of the market, 35-40% is covered by private providers, and the sizeable remainder, 55-60%, is provided by charity-based and religious non-profit organisations. All draw their revenues from a mixture of a mandatory national care insurance, and depending on means of the resident, either personal contributions or social welfare support.

Its historically non-commercial structure and high levels of regulation at one point meant that the largest provider controlled only a 2% market share, which made it ripe for a swathe of mergers in recent years leading to a slew of larger operatives, with French operator Korian the largest player now holding a 4% market share.

Profits are regulated

Thiel says: “The German market is consolidating. Investment from abroad is quite complicated because the German market is highly political, there is a lot of political influence.”

“A lot of people are saying ‘people from abroad are trying to take money from our elderly, and trying to earn money from social welfare’, so it is quite difficult to earn money. You are doing quite well if you earn a modest profit.”

Previous governments that have likened foreign investment in this market to a heuschreckenplage – a ‘plague of locusts’, but this has not resulted in any specific protectionist legislation. Regulation to prevent excessive profiteering from care home operation is set out in Pflegestärkungsgesetz III, Germany’s Long Term Care Strengthening Acts.

And so is pricing 

An inflexible pricing system also often takes new entrants to the market by surprise, he adds. Thiel explains: ‘We cannot simply put prices up in Germany. There is no chance. The processes are state-controlled and state driven.”

Different areas have different regulations

The regulations differ depending on where in Germany you are based. Thiel says: “We have a complicated situation because we have federal law and we have the state law. What was federal law regarding nursing homes is now state law. We now have about ten definitions of ‘nursing home’. All these things make it really complicated.”

There are substantial opportunities, but growth requires careful integration

In recent years one of the major growing players in the nursing home industry has been Alloheim, which went from being the eighth largest provider to the second largest in less than five years, and were then purchased by Nordic Capital for €1bn last year.

It was a large portfolio, that came at quite a steep price. Thiel says: “It grew in the last few years really quickly, it did a lot of mergers, but if you grow so fast, you have to do also the post-merger business and this is really risky for entrants. You have to integrate all of the companies you have bought. It’s a work in progress at Alloheim.”

The new owner inherits risks when it buys operators that have not fully standardised care practices across all of the homes it runs. The costs associated with standardising smaller care homes are sometimes unwisely ignored during these transactions, while operators concentrate on simply increasing the number of residents for which they provide care. Nordic Capital made a bold purchase of Alloheim, considering the ongoing integration work it with which it was already engaged, says Thiel. The high price tags reflect the increase in value to the individual assets by including them in the larger whole. Nordic Capital would be in a good position if it chose to sell in the future, whether it completes integration or not.