Update 26 May 2020

More good news from the Netherlands. When the cafes are opened on June 1 and you decide to go out for a beer with friend (or on a first date, as may be the case with my daughters) you are now allowed to sit together at the same table and closer than 1.5 meters from each other. Even more good news is that it is possible to write this update and only indirectly touch on corona-related issues:

• Consolidation continues in nursing home sector. Which company will be acquired next?
• Cofinimmo investment will lead to high rental costs. Is there a trend away from direct government financing of housing costs for nursing home clients?
• Corona not expected to have a long-term effect on Dutch nursing home sector. Is the Dutch market more attractive than other countries?

Consolidation in Dutch nursing home sector

The overall Dutch nursing home sector (both traditional and commercial) consists of a large number of small regional organizations. The traditional operators still need to start a consolidation process. In the commercial part of the sector Orpea and Korian have started buying up smaller operators in order to develop scale, but their current market share is still small.

In a recent move two relatively small commercial operators of nursing homes have merged through an acquisition. The acquiring party is Valuas Zorggroep which currently has four locations with a total of 91 apartments and another three locations in various stages of development. In the recently announced deal Valuas is acquiring Nova Zembla Zorg with four locations and 72 apartments.

Nova Zembla has been on the market for some time, and it is surprising that it has not been snapped up by either Korian or Orpea. Scale will become increasingly important the Dutch nursing home market so the acquisition certainly makes sense for Valuas whether it is planning to develop a national chain or just wants to “bulk-up” to increase value in a sales process to a larger party.

Trend away from direct government financing of housing costs for nursing home clients

Cofinimmo (the large Belgian REIT focused on healthcare real estate) recently announced that they have acquired a nursing home in the Hague from HWW Zorg (a local provider of a wide range of elderly care services). The location has been acquired for €4 million and will be refurbished for €10 million given a total investment of €14 million. The refurbished location will have room for 87 residents.

The planned investments will total more than €160.000 per potential client. Assuming 5% capital costs and 20 years depreciation monthly rental will need to be more than €1.300. This is considerably more than the housing cost component of the traditional Dutch nursing home financing (ZIN). It will be interesting to see whether the upgraded location will continue to be used by HWW Zorg. If so, HWW Zorg will need to ask future clients to pay housing costs themselves (different from what they do today).

This move away from direct government financing of housing costs appears to be a general trend in the Dutch market. This is highlighted in the Actiz analysis (see next subject) that shows that incumbent operators are planning to grow capacity with government financing (approximately €950 per month per client) by 11% in the next five years while capacity where rental costs will be financed directly by the clients will grow by 64%. This trend is understandable as charging clients for housing costs gives the operator more flexibility in defining services to be offered and the ability to finance higher development and building costs.

Corona not expected to have a long-term effect on the Dutch nursing home sector

As mentioned in the update of 29 April 2020 Dutch nursing home operators are facing financial challenges due to the corona-crisis as costs have increased and occupancy rates have decreased due to a combination of higher mortality rates and a strong drop in the intake of new clients. The good news is that two recent reports strongly suggest that the long-term effects for the sector will be limited.

Actiz (the trade organization of the incumbent healthcare organizations) has recently analyzed the development plans of its member organizations. The main conclusion is that two thirds of the nursing home operators plan to increase capacity in the next five years but that this will be nowhere near covering the needed growth in capacity. The Actiz analysis (carried out before the corona-crisis) suggests that the incumbent operators will build 22.000 new nursing home beds between now and 2025. Unfortunately, the current nation-wide waiting lists for a place at a nursing home total 20.000 potential clients. In addition, TNO (the Dutch Organization for Applied Science Research) has in a recent report  highlighted the need for nursing home capacity to double in the next 10-20 years.

Given these limited plans and the weak balance sheets of the traditional operators it is unclear how the required growth can be financed. Fortunately, CBRE in a recent report is quite optimistic about the healthcare related real estate market. Their data  show that the level of healthcare real estate investments halved in Q1 2020 in comparison to Q1 2019, but they are seeing movement again (see also investment by Cofinimmo). Their expectation is that the financial support provided by insurance companies and the Dutch government will keep the operators relatively healthy and that the weakened balance sheets will make a choice of external financing for (new) nursing home locations more attractive.

 Based on this the Dutch nursing home market should remain attractive for both investors in operators and real estate investors. Given the more precarious state of comparable sectors in other countries, this should be a good time to consider (further) investments in the Netherlands.