Elderly care: when investors discover nursing homes

Due to the aging of society, more and more nursing homes will be needed in the future. This increasingly attracts private investors who pay particular attention to returns. How big is the profit orientation in geriatric care?

During the pandemic, attention in Germany was focused on nursing homes for a long time. According to surveys among the health ministries of the federal states, there were around 30,000 corona deaths in nursing homes. That means: around one in three of the more than 90,000 people who have died of corona or an infection to date were residents of a home.

In the last three months of last year alone, an average of nine out of 1000 nursing home residents in Germany succumbed to the consequences of a Covid 19 infection every week. Since the beginning of the pandemic, a path of suffering and death has been running through the care facilities, complained Eugen Brysch, director of the German Foundation for Patient Protection.

Many old people were reluctant to go to nursing homes during the pandemic. But in the end they often have no choice if their family members can no longer or do not want to look after them. This trend will increase due to demographic development: around four million people in Germany are currently in need of care. It is estimated that there could be nearly six million by 2050.

Great need for new homes

The result: The need for care places and new care homes is growing. According to the Central Real Estate Committee, up to 390 additional facilities will be needed by the end of this decade. This also arouses the interest of private investors. According to the real estate service provider CBRE, never before have so many nursing homes been sold and bought as in Corona year 2020. In Germany, the transaction volume with healthcare properties increased by 61 percent to 3.4 billion euros.

Even private equity companies are now cavorting on the billion-dollar market. In 2017, the largest deal to date, the private equity groups Carlyle and Nordic Capital bought the German home operator Alloheim for 1.2 billion dollars. They paid more than twelve times the profit that Alloheim made in a year.

Three percent return

Nursing homes are a lucrative investment for private financiers. The average net return on sales of a home is three percent, estimates Markus Bienentreu, managing director of the social property operator Terranus. The prerequisite is that the occupancy of the homes is 95 percent.

Nursing facilities are also a sought-after property as a property. “Nursing properties represent a future-proof investment with comparatively high returns,” says Franz-Constantin König from the Drees & Sommer consultancy. They are not dependent on the economy and have the advantage of long-term rental contracts (15 to 30 years).

Privatization is advancing

But not all homes make big money. A good quarter of them made losses in 2017, according to the Nursing Home Rating Report 2020 from the RWI – Leibniz Institute for Economic Research. Publicly owned homes in particular are finding it difficult to cope with the increasing cost pressure. Therefore, the market is becoming more and more privatized.

The French Korian Group is the market leader in Germany with a market share of three percent, followed by Alloheim and Victor’s Group. The non-profit providers Johanniter, Evangelische Heimstiftung and Awo Westfalen are far behind in the top ten nursing home operators in seventh to ninth place.

Private providers can often operate a care facility more economically. You bundle purchasing and have lower construction costs. According to a study by the University of Witten / Herdecke, they rely on price competition and offer care for less. Since they have to finance their investments with loans or equity, they save on structural and process quality.

Criticism of the use of temporary workers

Private providers often employ temporary workers who can be sent from one facility to the next. Did this strategy help the virus spread? In this context, private operators in particular were criticized. The European market leader Korian was targeted by trade unions and politicians in France. In one of his nursing homes near Cannes, almost a third of the residents died. Relatives filed lawsuits. Unions denounced Korian because of its “return orientation”. A representative of the powerful trade union CGT complained that they had saved on material and managed the crisis poorly.

Despite Corona, Korian increased sales last year by seven percent to 3.9 billion euros. The profit shrank to 65 million euros. Nevertheless, the French paid their shareholders a small dividend of 30 cents per share.

“With the payment of the dividend, we would also like to thank our investors for the confidence they have shown in our mission,” Korian explains when asked by tagesschau.de. Because they supported the further development of care and the consolidation of the public health system in order to keep the costs to society under control.

Operators reject allegations

The private operators vehemently reject allegations that nursing homes, as places where the coronavirus spreads, have become a deadly trap for residents. In contrast to the state and non-profit organizations, they published the death rate and were more transparent during the crisis. The focus on returns is also nothing in itself to be reprehensible. It rather relieves the care market and prevents escalating costs, they assert.

“Our ultimate goal is to offer high quality care. But as a commercial company, of course, we make a profit,” says Korian. “As a large and leading provider of long-term care, we invest a lot in training and further education, the further development of care and in innovative new forms of living. In doing so, of course, we orient ourselves to the wishes of the residents. Because only if we are interesting for our residents, we are also interesting for investors. ”

Operators earn through care funds and residents

The operators of the facilities live on the same daily care rate, which is billed to the residents. “This consists formally of the care allowance, the costs for accommodation and meals as well as the investment costs”, explains the expert Bienentreu. The long-term care insurance pays a portion of the care allowance. The rest of the needs are borne by the people in need of care. According to the Association of Substitute Funds, this is currently around 2068 euros per month on average. If the nursing home resident is no longer financially able to pay that much money, the social assistance provider usually pays the share.

Critics accuse the private sector of lowering costs so that profitability remains high. The SPD therefore wanted to cap the profits of nursing home operators. But the resistance was great. The care employers’ association warned politicians that they risked a care emergency because private investors and operators would then withdraw. The debate about returns in nursing homes is likely to continue after Corona.