Europe’s healthcare real estate sector has been one of the best performers in the region over the pandemic, outperforming almost all other real-estate sectors and delivering positive returns. That kind of performance is attracting interest from a variety of new investors. Aedifica’s Chief Investment Officer, Charles-Antoine van Aelst, met with HMi to discuss the current market dynamic and how Aedifica is measuring up to the increased level of competition.
One of Europe’s most-established players in the sector, Aedifica, the Belgium-based pure-play healthcare REIT focusing on housing for seniors with care needs, has been notably busy in 2021. It has continued expanding its European footprint, with acquisitions in territories where it already had a presence, and pushing into the new frontiers of Ireland and Sweden.
In pursuit of its growth strategy, it completed a €285.6m (US$333.5m) capital increase in June through a private placement and, in September, visited the bond market with its first sustainability bond. Aedifica’s €500m ten year notes, which pay a fixed annual coupon of just 0.75%, followed it gaining an investment-grade credit rating from Standard & Poor’s.
The following transcript of HMi’s interview with Charles-Antoine van Aelst has been edited for brevity and clarity.
HMi Why is healthcare real estate attracting more investor interest at the moment?
Charles-Antoine van Aelst There are several reasons but it’s partially a consequence of the sector’s performance over the Covid crisis. Investors in sectors such as retail or leisure have seen that healthcare real estate has been quite resilient and stable through the pandemic even with the difficulties experienced by the operators themselves. The sector has been attracting a lot of money for some time and its only accelerated during Covid. Healthcare real estate is becoming an asset class in its own right.
HMi Where is the money going?
CA Some parts of the European markets are bigger and more consolidated, and these tend to attract more investors than others. The Belgian market is very consolidated, at least the private part of the market, as is the market in Germany. The German market is attracting a lot of interest because it’s a large country, it’s a safe country for investment, and there are large operators. It’s a more straightforward investment.
On the other hand, we also start investing in the Irish market this year, which is relatively fragmented but is consolidating very quickly. Indeed, faster than countries used to consolidate. A lot of the big international players have established a presence there.
The UK market is also quite fragmented, but I sense there are more local operators interested in expanding in that market and that’s leading to consolidation.
But we still manage to find our way in the market, and to find good, interesting, transactions and partnerships. I think that’s a function of the quality of our experience in the markets, the quality of the networks we’ve established and our track record. Being an operator and a developer, we can offer something more to our partners than just money.
We are currently active in seven markets, and we aim to have country teams in all the countries in which we invest. We really want to be seen as a local player in every market, a local actor that brings added value to the markets.
HMi How would you describe the quality of supply?
CA There is a big difference in quality across the different countries. In the most consolidated markets, such as Belgium, there has already been a big change in the quality of stock from what everybody used to know as ‘old’ care homes: smaller rooms in unkempt buildings where you wouldn’t really want to live, to new, purpose-built assets with larger rooms, with their own bath and shower and some nice common spaces for activities.
In the UK, that evolution is still in play. A lot of refurbishment is still needed but there is also a lot of Greenfield development going on and it looks like that will continue.
In our experience across the different countries in which we have invested, markets tend to develop in a pattern. They usually start with sale and leaseback transactions on the better existing buildings, then operators might look to grow their business by adding Greenfield developments, which improves their footprint and the quality of the real estate, and then they might turn to less suited existing stock with a view to improving it through redevelopment, renovation or extension.
HMi What about Aedifica’s approach?
CA In very basic terms we’ve always looked at different markets from the perspective of three main drivers: demographics, operator consolidation, and financing of the local care market.
It’s clear that we have a rapidly aging population throughout Europe, the elderly care market is evolving and consolidating, and financing of the care elements – although different across countries and sometimes within countries, is supporting the growth in the market.
Responding to the needs of elderly care is different across countries and regions depending on the regulatory environment and the local financing system. We must be flexible.
In one country buildings of 100 rooms might work but in another, it might need buildings of 30 rooms.
The fundamental questions are the same, but the answers may be slightly different.
We are a pure play healthcare real estate investor, and, for us, healthcare real estate is much more than elderly care, but I think that the elderly segment of the care markets will probably always remain the largest part of the portfolio because of the drivers I just mentioned.
HMi What impact has the additional investor interest had on yields?
CA Yields have been pressured lower for at least the last ten years, I would say. Again, the story is slightly different across geographies and across different markets because consolidation is not going on at the same rate in every country.
The impact on yields is most notable in everything that I would call the plain vanilla sector: say, a brand-new property that is an existing home, leased to a good operator, with full occupancy and very good rental cover to the operator.
That’s probably where there’s the most competition, where investors would probably need less in-depth knowledge of the market. Something with many of the risks already removed.
We are still interested in the ‘plain vanilla’ end of the market as it is a very nice product. It’s just that it is attracting a lot of investment money, so yields tend to be compressed most in this sector. We still feel we have an advantage over the competition here, thanks to our reputation and our network of partners. We can bring something to the seller, particularly if the seller is the operator and they are looking for a real long-term partner like Aedifica.
So, we do work on these kinds of transactions, but we’re also capable to work on more complicated transactions where there’s less competition.
For more complex transactions, that’s where you really need to know the markets well to make the opportunity work.
HMi How important has ESG become to your business?
CA ESG is already playing a big role for us, and that role is increasing not only in terms of sustainability of the assets but also because it has become more important for our investor base, on both the equity and debt side.
We are quite active on the development side of the markets, that’s mainly in the Nordics through our Hoivatilat subsidiary, but we are also active in developing Greenfield sites in other countries like Germany and Belgium and the Netherlands.
All these developments are built to a high standard of sustainability with good energy efficiency in mind.
The sustainable bond we just issued is an acknowledgement of our ESG strategy, and the Triple B investment grade rating we obtained prior to launch is recognition of Aedifica’s strength as a business and the quality of its risk management.
An important factor for us of our sustainability bond was the diversification it gave us in terms of investor base and duration – it was a ten-year deal.
HMi What’s next for Aedifica?
CA We continue to see potential in the seven markets in which we are active today. We have country teams in place so they should be able to source new opportunities. But we’re also looking at other countries across Europe, in the Nordics and in southern Europe. How quickly we establish a presence there will depend on finding the right quality of product and the right quality of partnerships that can be found with local operators.
When we look at new countries, it’s not our intention to just plant a flag in the ground, we want to be convinced that there is potential there.
We want to become a local player, so we look to, fairly quickly, build a portfolio of somewhere between €250m and €300m. That’s the size of portfolio we think is necessary in order to establish a local team that can manage things from there.
We were convinced about Ireland last year and it’s going quite well, so hopefully we’ll be able to establish a local team there quite soon.
HMi And for the market in general?
CA The market is evolving as the population demographics evolve.
Together, with the operators, we need to find the right concepts to satisfy the increasing levels of demand, because care home residents of 20 years ago didn’t have the same expectations of residential care homes now, let alone in, ten or 20 years from now.
So, concepts will have to evolve, and we must be able to adapt the buildings to accommodate that as well. And that’s also where ESG is important, not only with energy efficiency but also in terms of making the buildings sustainable from an operating perspective.
They need to be flexible and adaptable over time.
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