realessenz Rising Demand for Care Where does it pay to invest? Research Newsletter of PATRIZIA Immobilien AG Preface June 2013

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1 June 2013 realessenz Research Newsletter of PATRIZIA Immobilien AG Content Nearly One in Ten Germans will be over 80 Years Old by 2030 Vast Differences among Germany s States Taking Stock: Germany already lacks Two Million Senior-Living Apartments Today Investment opportunities in North Rhine-Westphalia and Mecklenburg-Western Pomerania EXECUTIVE Summary Rising Demand for Care Homes and Senior-Living Apartments: Where does it pay to invest? The ongoing demographic shift in Germany will present one of the most daunting challenges for the country in the years ahead. Germany s population keeps getting older. While the share of those aged over 60 equalled 26 percent in 2010, the figure will have risen to more than 36 percent by Even today, senior-oriented housing is in short supply in many places, and demand will continue to grow at a brisk pace. On a brighter note, the trend presents opportunities for investments in care homes and senior-living apartments. For this issue of REALESSENZ by PATRIZIA Immobilien AG, we identified places where the evolving demand has created particularly auspicious opportunities, and places of limited potential. Overall, it is safe to say that there are enormous regional differences in Germany. The survey findings suggest that investment opportunities are particularly promising in North Rhine-Westphalia and Mecklenburg-Western Pomerania, among other areas. Preface A population will age whenever a rise in life-expectancy coincides with a declining birth rate. This situation applies to Germany more than to other countries, as the relative share of older residents in the overall population will start to soar by Today, one of the consequences of Germany s aging society is an already keen demand for care services and housing forms suitable for senior living. This demand will keep growing over the coming years and decades. Current projections and demand estimates provide no more than a coarse overview on the national or state level, as regional drilldowns are unavailable. 1 Berlin Institute for Population and Development

2 02 Similarly, there is a lack of verifiable data regarding the existing stock of, and the demand for, barrier-free apartments meaning the type of housing that people with impaired mobility require before they relocate to a care home. In late 2011, a survey was initiated for the purpose of studying the available stock in suitable housing for senior citizens along with the anticipated demand. Verifiable results are not yet in. This explains why it has been impossible so far to link the demand estimates for in-patient and pre-inpatient accommodations for seniors in need of long-term care. Then again: Some information is available in sufficient depth and variety, as are sample calculations that take different demand scenarios into account. This publication collates extant facts and forecasts from various sources in order to close the existing knowledge gap and to derive recommendations as to which regions in Germany offer particularly sound investment opportunities. Nearly One in Ten Germans will be over 80 Years Old by 2030 The aging of Germany s population takes various forms. Germany s old-age dependency ratio, which expresses the proportion of pensioners (people above the age of 64) to those in the labour force (people between the ages of 15 and 64), equals 33.7 at the moment. This means every 100 Germans of working age are matched by 33.7 pensioners. The ratio will have gone up to 52.2 by 2030, and will nearly have doubled at 64.4 by The core target group for special care and housing needs are those aged over 80. Their number is about to skyrocket. In terms of the national average, the population share of those over 80 years of age will increase from 5 percent today to 9 percent by This ratio has actually not been registered in any region yet. Looking forward, the pace of the aging process will strongly differ from one region to the next: As early as 2030, one in eight residents will be over 80 years old in certain communities and counties in Thuringia and Saxony, including Suhl, Dessau-Rosslau or Vogtland County. Other places, including campus towns, will keep their share of residents who are older than 80 at 6 percent or less over the next 20 years at least. Notwithstanding the uncertainty that is the bane of any forecast, one thing is safe to say: The increasing share of the elderly in our society necessitates a shift in the way houses and apartments are planned and fitted out. The nature of care, too, will (have to) change. Statistically speaking, the number of care-dependant individuals entitled to benefits assuming that long-term care incidence remains stable will increase by more than a third before 2020 and by more than half before The hope that healthier lifestyles and improved medical care will reduce the prevalence of age-related long-term care incidence has so far not fulfilled itself on the ground. 2 To carry the stats forward while assuming that the present conditions will continue to apply therefore provides a rather realistic assessment of the future. The care statistics for the year 2011 that were published by the Federal Statistical Office in February 2013 carry the trend of the past decade forward: The number of care-dependant individuals will keep growing at a rate of around four percent since the last survey in In purely arithmetic terms, one in seven people over the age of 70 represents a long-term care case today. With advancing age, the number of care benefit recipients rises from roughly 5 percent among the 70- to 75-year-olds to nearly 60 percent among people aged 90 and older. Adding up to a total of around 2.5 million, these patients are mostly cared for at home. After all, the bulk of long-term care continues to be provided by the next of kin: Two out of three care-dependant individuals still living at home are cared for by family members, the remaining third being looked after by outpatient services. 2 Barmer GEK Pflegereport, 2012

3 03 Those for whom geriatric care at home ceases to be an option are admitted to care homes. In 2011, this was the case for around 743,000 people in Germany, an increase by 26,000 since The number of elderly aged 70 or older and living in care homes the core target group for special care and housing requirements rose by 4.3 percent to a total of around 660,000 persons between 2009 and 2011, thus matching the growth rate of those who are cared for at home. It needs to be remembered, though, that the national average figures are misleading: There are municipalities and counties where the number of long-term care cases is relatively low or high, as the case may be, and this despite a high share of elderly residents in the population. The types of long-term care provided is just as evenly spread in the counties, as Image 1 suggests: Image 1: Upper and lower outliers in inpatient care Suedwestpfalz County Freyung-Grafenau County Soemmerda County Emsland County Offenbach am Main Bremerhaven long-term care cases in % Germany Fuerth Rosenheim Segeberg Speyer Baden-Baden Landshut inpatient care in % share of inpatient care home occupants share of long-term care cases on the population Source: Federal Statistics Office There are also severe regional differences as far as the utilisation rate of inpatient care home places is concerned, which mirrors the demand for full-time inpatient care. Care homes in the eastern German states, for instance, predominantly have an utilisation rate of more than 90 percent, some of them even drawing on their fluctuation reserve of 5 percent. The same is true for homes in the western Rhine-Ruhr metro area. For these cities and counties we can safely assume a demand back-log in the inpatient sector even now. By contrast, there is a belt of counties running down the length of Germany from the North Sea to the Alps where care homes have utilisation rates of less than 80 percent. Extreme outliers in terms of under-utilisation are also reported from southern Rhineland-Palatinate, in northern Hesse, and in lower Franconia. Here, the utilisation rate is frequently lower than 70 percent even. Such counties currently report an excess supply in care homes places as a result (see image 2).

4 04 Image 2: Utilisation rate of care homes in 2009, in percent Image 3: Increase in the number of care-individuals through 2030, absolute figures Source: Federal Statistics Office, Wegweiser Kommune ; map compiled using RegioGraph. Copyright GfK GeoMarketing Vast Differences among Germany s States There is nothing to suggest that the current imbalance in the way the demand for inpatient care places is distributed among the regions will level out in the future. In late 2012, the Bertelsmann Foundation published projections on the level of counties and corporate cities in this context. Based on a scenario that presupposes a continuation of the trend toward formal care, which demonstrably emerged after the introduction of the public long-term care insurance in Germany, there will be an estimated 1.6 million elderly people by 2030 who will have to be hospitalised for full-time inpatient care. 3 This equals a share of around 34 percent of all care-dependant individuals. There are considerable deviations on the level of the German states: While barely 30 percent of the care-dependant individuals in the state of Hesse live, or should live, in care homes, the rate exceeds 40 percent in Schleswig Holstein. The fastest absolute growth in the number of care-dependent persons was registered in a belt extending from West-Pomerania to Berlin, in the western part of Lower Saxony, in parts of the Ruhr, and in the metro areas of Hamburg, Hanover and Munich. Over the next 15 years, each of these counties is expected to see an increase between 2,000 and more than 20,000 (Berlin) new long-term care cases requiring inpatient care. Reasons to explain the phenomenon include, for one thing, the absolute size of the cities, and, on the other hand, the different stages to which the demographic aging process has advanced as well as the decreasing availability of family-provided care. In the counties of Mecklenburg-Western Pomerania and in northern Brandenburg, for instance, the population is declining and simultaneously subject to a rising age average. This will result in a hefty absolute increase in the number of care-dependant individuals (see image 3). 4 Bertelsmann Stiftung (Foundation), Themenreport Pflege 2030

5 05 Unfortunately, the human resource shortage in the long-term care sector is developing almost in reverse proportion to the rising demand for care home places. There is reason to expect Berlin and the city s northern periphery to see a considerable shortage in qualified staff soon. Specifically, the short supply can be quantified as being anywhere between 2,000 and 2,500 full-time equivalent (FTE) jobs on the county level, a number that is far exceeded by a shortage of 13,400 nursing staff in Berlin. In addition to Germany s major metro regions, other areas that will be undersupplied with human resources include the western part of Lower Saxony, the counties around Chemnitz, Dresden and Leipzig, and the Rhine-Neckar region. Potential investors in the long-term care market sector are therefore well advised not to limit their scrutiny to the present supply and demand situation, but to identify those operators that stand a good chance to sustain their reputation as attractive employers. After all, the human resource bottleneck poses a much greater risk than the accommodation issue. Taking Stock: Germany already Lacks Two Million Senior-Living Apartments Today There exist no verifiable data on the regional level regarding the available stock of outpatient senior-living residences whether serviced, assisted living, or barrier-free housing. Despite the urgency underlying this macro-societal issue, available statistics limit themselves to the national level. According to a survey by the Federal Ministry of Transport, Building and urban Development, the number of apartments that satisfied the criterion suitable for senior living totalled around 560,000 in Projected on the basis of 2013 figures, short term demand alone calls for another 2 million housing units, according to the Ministry. The calculation is based on the assumption that around 23 percent or 2.7 million out of a total of 11.8 million senior households limit the mobility of their residents, though it should be added that around 230,000 of the residents see no need to upgrade their apartments accordingly. Based on estimates by the Ministry, the projected investment backlog equals nearly 38.2 billion euros. Only a fraction thereof will be accommodated by new construction, whereas the bulk of the demand will be covered by the conversion of existing housing stock to meet senior living requirements. This estimate is based on the assumption that every other apartment features domestic barriers that need to be removed, while around 5 percent of the apartments need barrier-free external access, and 45 percent of the apartments require the removal of interior and exterior barriers. The growth in the number of apartments suitable for senior living is likely to develop in sync with the number of inpatient care places. Based on the scenario upward trend toward formal care, the number of people in need of outpatient care provided either by family members or by professional nursing services is expected to increase by another 660,000 between now and Add to this the number of elderly who contract no nursing services but are already limited in their mobility. What the two groups have in common is the obvious need for a specific housing type. As a result, the shortage in barrier-free housing will rise to nearly 3.2 million apartments nationwide by Based on the estimates by the Ministry of Transport, Building and Urban Development, and by the Bertelsmann Foundation, we identified the country s metropolises and the populous counties in the Ruhr and in the Rhineland as the regions with the highest demand for barrier-free apartments. These also show the fastest growth in demand in absolute figures. By contrast, demand in the sparsely populated small counties of Bavaria and Saarland has been, and continues to be, low (see image 4).

6 06 Image 4: Counties and cities with the highest or lowest demand for barrier-free/senior-living apartments Berlin Hamburg +19.1% +30.8% 125,635 96,083 Munich +19.7% Hanover County +16.2% Cologne +19.4% Recklinghausen +29.0% Rhein-Sieg County +41.2% Rhein-Neckar County +41.2% Aachen County +36.6% Frankfurt am Main +23.7% Suhl Kaufbeuren +16.7% +23.6% Amberg Pirmasens Weiden i.d.opf % +12.3% +25.2% Memmingen +26.4% Ansbach +29.3% Coburg +18.8% Schwabach Zweibruecken +33.1% +22.5% 0 10,000 20,000 30,000 40,000 50,000 60, Today Apartment units Source: PATRIZIA Since absolute shifts in demand for barrier-free housing depend mainly on the demographic growth of a given region, metropolises and urban agglomeration areas register the steepest increase in demand (see image 5).

7 07 Image 5: Barrier-free apartments: Absolute shift in regional demand Current demand Demand in 2030 Source: PATRIZIA; map compiled using RegioGraph. Copyright GfK GeoMarketing If you look at the relative shift in demand, however, the growth in the number of senior households emerges as the decisive criterion for changing demand. Percentage-wise, the shifts in demand are most conspicuous wherever the number of senior households is growing at a disproportionally brisk rate. While the demographic change correlates to the percentage increase in demand only to a medium extent (r = 0.51), there is a high statistic connection between the increase in senior households and the demand for barrier-free apartments (r = 0.99). While covering a spectrum that ranges from 72 percent in the County of Erding to less than 1 percent in the County of Wolfsburg, the demand shift between now and 2030 on the county level shows a median of 32 percent (see image 6).

8 08 Image 6: Counties and cities with the lowest and highest increase in demand, in percent Wolfsburg Hagen Dessau-Roßlau Remscheid Halle (Saale) Osterode am Harz Chemnitz 4,208 6,275 3,573 3,590 7,845 2,874 9,554 Growing demand for barrier-free housing until 2030 (in % and total) Maerkisch-Oderland County Landsberg am Lech County Barnim County Freising County Pfaffenhofen a.d.ilm County Regensburg County Tuebingen County Erding County 5,937 3,026 5,377 3,677 2,922 4,530 5,038 2, Source: PATRIZIA Investment Opportunities in North Rhine-Westphalia and Mecklenburg-Western Pomerania When considering the three dimensions utilisation rate of the care homes, absolute increase in the number of inpatient care home residents and current demand for barrier-free apartments and demand increase through 2030, the market shows different attractiveness clusters across Germany s regions. In the regions most attractive for investors, the number of care home residents will increase by more than 2,000 persons between now and Here, the utilisation rate in the care home sector is very high even today, exceeding 90 percent. Regions in this category include, without being limited to, the cities of Cologne, Recklinghausen, Dortmund and Aachen in North Rhine-Westphalia, but also large parts of Mecklenburg-Western Pomerania and Saxony. This makes care home investments in these counties particularly auspicious. When analysing the barrier-free housing segment in isolation, the German metropolises present particularly favourable site conditions, not least due to the fact that they are subject to a housing shortage of more than 4,000 apartments each, a shortfall that is likely to increase to more than 10,000 apartments by Interesting to note, however, high demand in this segment is also reported from second-tier cities such as Esslingen, Ludwigsburg or Karlsruhe, as well as from some rural counties in Baden- Wuerttemberg (the counties of Ortenau, Rems-Murr, Rhine-Neckar). The counties situated in a belt that extends from the northwest corner of Germany (East Frisia) to the Ruhr, along with areas in the greater metro area of Stuttgart recommend themselves for mixed schemes combining inpatient and pre-inpatient options. In eastern Germany, southeast Saxony and Berlin are highly interesting for mixed schemes.

9 09 Image 7: Market potential for care homes and barrier-free housing Source: PATRIZIA; map compiled using RegioGraph. Copyright GfK GeoMarketing

10 10 About PATRIZIA Immobilien AG With around 600 employees in over ten countries, PATRIZIA Immobilien AG has been active on the real estate market as both an investor and service provider for nearly 30 years. PATRIZIA s range includes the purchase, management, value increase and sale of residential and commercial real estate. As a recognized business partner of large institutional investors, the Company operates in Germany and other countries and covers the entire value chain in the real estate industry. At present, the Company manages real estate assets worth more than EUR 10 billion. A good 90 % of this is on behalf of third parties, primarily as a holder of a real estate portfolio for insurance companies, pension fund institutions, sovereign wealth funds and savings banks. Via its asset management companies, PATRIZIA GewerbeInvest KAG and PATRIZIA WohnInvest KAG, the Company issues special real estate funds in accordance with the German Investment Act, and is now one of Germany s top names in this area. DISCLAIMER Publisher: Responsible for the content: PATRIZIA Immobilien AG PATRIZIA Bürohaus Fuggerstraße Augsburg T F immobilien@patrizia.ag Karin Siebels This publication is purely for general information and not a prospectus. The information contained in this report is based on publicly available sources that we believe to be reliable. We cannot guarantee the correctness or completeness of information. All statements of opinion reflect the current estimations of the author and do not necessarily reflect the opinion of PATRIZIA Immobilien AG or its associated companies. The opinions expressed in this publication may change without prior notice. The research reports and presentations ( analyses ) produced by PATRIZIA Immobilien AG contain selected information and cannot be regarded as complete and correct. The analyses are based on publicly accessible information and data ( information ), which are regarded as reliable. However, PATRIZIA Immobilien AG has not verified the correctness or completeness of the information and does not accept any liability for this. PATRIZIA Immobilien AG will not bear liability for any damage arising from incomplete or incorrect information, and PATRIZIA Immobilien AG will bear no liability for direct and/or indirect damage and/or secondary damage. In particular, PATRIZIA Immobilien AG will bear no liability for statements, projections or other details contained in these analyses relating to the companies examined, their associated companies, strategies, economic, market and/or competitive position, legal conditions etc. Although the analyses are produced with the greatest care, the possibility of errors or incompleteness cannot be eliminated. PATRIZIA Immobilien AG, its shareholders and employees bear no liability for the correctness or completeness of the statements, estimations, recommendations or conclusions derived from information contained in the analyses. If an analysis is provided as part of an existing contractual relationship, e.g. financial consultancy or a similar service, liability of PATRIZIA Immobilien AG is limited to gross negligence and intent. If fundamental information is omitted, PATRIZIA Immobilien AG shall be liable for simple negligence. The liability of PATRIZIA Immobilien AG to compensate for typical and foreseeable damage is limited according to the extent of the damage. The analyses do not represent an offer, or an invitation to submit an offer for the purchase or sale of a property, a property portfolio, a security or any other investment commitment. The opinions contained in the analyses may change without prior notice. All rights reserved. PATRIZIA Immobilien AG has taken internal organisation and regulative precautions to avoid possible conflicts of interest and to disclose these when they arise.