Europe’s ageing population means capacity in both the hospital and nursing home sectors needs to be expanded over the coming years. But unsupportive regulatory and policy environments and unfavourable economics currently present major barriers to new developments, especially for hospitals. One alternative discussed by speakers at the ‘Investing in health care property’ panel at HBI 2024 is to get more out of existing facilities through ‘intensification’.

Interest in the healthcare sector amongst real estate investors has grown over the past decade. Healthcare facilities now comprise about 5% of commercial real estate investment in EMEA, according to data presented by Sophie Cooper, Associate Director at real estate advisor CBRE, at the ‘Investing in healthcare property’ session at HBI 2024.    

Real estate investors are attracted by the strong fundamentals underpinning healthcare, notably rising demand for quality healthcare infrastructure as populations age.

Rising demand means most countries will need more bed capacity in both their hospital and nursing home sectors.

Andreu Huguet Llull, Co-CEO of Spain-based REIT Healthcare Activos, set out the challenge in stark terms:

“Today there are around 2.8 million nursing home beds across the 10 biggest continental European countries. Our estimation is that in 10 years there will be a need for around 3.5 million nursing home beds. That means 700,000 more beds are needed because of the demographics. And this is without taking into account that some of the facilities are not future-proofed. So we might need around a million more beds in Europe over the next 10 years. That’s around 1,000 new facilities per year. So maybe €150 billion of investment is required over the next 10 years. Will we, as economies, be able to create these beds? I am a bit doubtful.”

Simon Betty, Head of Europe at Northwest Healthcare (NWHC) Reit, a hospital-focused REIT, agreed that this is a major challenge, and one that is quite a big problem for society. 

“If I take the UK as an example, 7.5 million people are on NHS waiting lists, average length of wait is increasing and there just isn’t sufficient clinical and surgical capacity in the UK to deal with the demand,” Betty said. 

Construction costs have significantly increased in the past few years, at a faster rate than reimbursement in the sector. This has made new developments economically unviable.

“The challenge is capital value per square metre of a private hospital is only about £6,000–7,000, which is about the same as the cost to deliver. So whether you’re a private sector developer or a public sector developer, the economics of building new hospitals just doesn’t stack up currently. And that’s why we’ve seen very few new hospitals built in the UK really since the PFI days. Boris didn’t do a very good job of his 40 new hospitals. So whilst it’s good for asset values as the risk of substitution is low, it’s not great for getting the population well,” Betty said.

Because of this, NWHC Reit has shifted its focus to helping its tenants to get more out of their existing facilities. 

“Conceptually, development is a huge opportunity when you think about the limited supply and excess demand, but actually converting that into a viable real estate opportunity is very difficult. So we think development is going to play out with intensification of existing facilities,” Betty said.

“We’re on a campaign with all of our private hospital operators across Europe to intensify the use of their existing properties. Maybe we can take out back-of-house, maybe we can take out booking departments, maybe we can take out physiotherapy and replace it with more operating theatres, more clinical space, more consulting rooms, more imaging, which are higher acuity, higher value departments for our operators. Intensification of use is a big, big positive. 

“We’ve just opened a new operating theatre in Sheffield, where we took out a ward and replaced it with an operating theatre. In the Netherlands we’ve been quite successful in developing ambulant day clinics, with an office-to-medical conversion strategy. But the economics and the way the operators are reimbursed makes that more viable in the Netherlands than we’ve been able to see in the UK.”

Betty said that technology-assisted productivity improvements in hospitals can help with intensification:

“In hospitals you see these amazing pieces of technology like robotics that have really reduced the length of stay. Ten years ago for a classic orthopaedic procedure you’d maybe have been in for three or four nights. Now it’s one to two nights. That is technology-enabled intensification of the hospital, as it means you need less beds and can have more surgical facilities. You can really increase the throughput through technology.”

Another factor which could help reduce the need for additional hospital capacity is shifting more care to outpatient, community and home settings, with the help of digital and remote monitoring technologies. 

However, alluding to this, Betty said: “I don’t think hospitals get replaced by technology in the way that shopping centres or offices have, or in the way that Airbnb is really impacting hospitality. But I see technology as an enabler of higher profitability for the operators.”

Betty reiterated that additional hospital capacity is unlikely to be built any time soon: “It’s great to deliver a new hospital and it can be very profitable and it’s good for the community. But I wonder how long it’s going to take for all of the necessary forces to come back into alignment to make this happen.”

Steve Nitschke, Managing Director – Head of European Acquisitions, at US REIT Medical Properties Trust, offered a contrasting view, saying: “Necessity will drive additional development. If the stars don’t align now for a period of time, that will just create a force that will have the stars align in the future.”

Click here to watch a recording of the session.