The Medical Office Building (MOB)

MOBs are specialized healthcare real estate premises that are predominantly used for delivering ambulant medical care for patients as well as for accommodating additional medical and non-medical facilities, including healthcare retail premises, e.g. pharmacies, medical supply stores, opticians, laboratories and restaurants.

These modern facilities are an emerging core asset class within the German healthcare real estate landscape – soon to become an institutionalized sector similar to that in the United States, the United Kingdom and Australia.

The German healthcare market is the largest in Europe with a very positive economic outlook due to demographic developments, an ageing population and rising healthcare expenditure.

Market challenges are resulting in new forms of healthcare services operating platforms, with MOBs becoming the real estate vehicles that meet the stringent quality requirements of physicians and patients in relation to modern accommodation facilities.

CORPUS SIREO Real Estate S.à.r.L. (“CSRE), through its healthcare team which is the leader in this particular market, is taking the initiative in institutionalizing this asset class and in doing so is offering an investment opportunity for international and national institutional investors to invest within the German MOB segment.

By acting as a “first mover” in this emerging real estate sector within the institutional marketplace, an investor is able to:

  • Generate attractive returns from long-term lease terms and a stable tenant structure,
  • Capture strong annuity income with capital value growth,
  • Establish a modern portfolio with excellent locations, with assets located on health campuses as well as in CBD locations.

MOB Characteristics

Properties of this kind typically accommodate specialist medical practices as well as medical service providers such as opticians or physiotherapists. MOBs are a further phased progression of traditional medical practices, other examples of which are combined medical practices and health centres.

An MOB tends on average to occupy between 2,000 and 15,000 square meters of NLA, with 10 - 30 tenants, including healthcare retail premises on the ground floor. Most medical office buildings are located in cities with populations of more than 30,000, either as a stand-alone building or adjacent to a hospital campus.

Long lease terms of 10 years and more make investment in this real estate segment highly interesting for safety-conscious, income-driven investors. Sufficient parking facilities, excellent transport connections, no interference of magnetic fields as well as good and barrier-free access complete the profile of a modern MOB.

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Investment Opportunity

This investment opportunity has arisen with the deregulation of the German healthcare sector – which is the largest healthcare market in Europe – with the shift from in-patient to ambulatory care, together with the growing emergence of the private sector role in the provision of healthcare services to a demanding consumer population.

With the German MOB segment still in its infancy, now is the right time to establish an investment portfolio of MOB assets and act as a “first mover” in this emerging real estate sector within the institutional marketplace. The targeted assets have demonstrable positive characteristics; they are modern, flexible medical office buildings with a spread of healthcare tenants providing long-term leases with favorable indexation clauses.

Growth prospects are positive across Germany’s entire healthcare market, and specifically the segment of MOBs will keep expanding.

  • Current number of MOBs is rising but not sufficient for demand.
  • Development of further facilities is required in order to satisfy current demand.
  • MOBs are communal healthcare destinations and an integral element of German healthcare delivery.
  • MOBs are becoming an institutionalised asset class as in the USA, Australia and UK.

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Market Trends

Germany’s healthcare real estate market has positive long-term perspectives, driven by the country's ageing, yet wealthy population as well as by strong government financial support backed up by the country’s compulsory health insurance program.

The recent changes within the regulatory framework for the provision of medical services have further enhanced opportunities within the sector for the growth of independent medical service platforms. The higher demand for professionally managed properties will present opportunities for real estate investors.

The provision of German healthcare services is seeing a market shift from in-patient care to ambulatory care. Advancing technological change and the increasing number of ambulatory care professionals are further encouraging the establishment of new service platforms that focus on care delivery, creating the new tenant base for the emerging medical office building segment.

Investors can be reassured by the regulatory protection afforded to statutory health insurance professionals, which limits tenant competition. Further, the established referral pattern between tenants creates synergies as well as dependencies, with patient demand remaining local.

Evolving German healthcare system harnessing investment opportunities in the MOB segment.

  • Increasing healthcare expenditure (per capita and as a percentage of GDP)
  • Shift from in-patient care to ambulatory care (faster sector growth (expenditure/employees), merging of services, advancing technology)
  • Political reforms (new forms of care delivery, focus on cost control)
Source: Destatis 2013, Deutsche Apotheker und Ärztebank, German Federal Statistical Office 2010

Health Care Expenditures

  • Visible trends albeit latest market information is missing (public sources)
  • Cost pressure due to:
    • Ageing population, Permanent technical progress, Appearance of complex diseases, Multimorbidity and increasing patients’ demands

Number of hospitals and hospital beds

  • German health care system with inherent inefficiencies
  • Cost-cutting measures and regulatory changes undertaken since 2003
  • Rationale: ambulatory before stationary (due to higher costs of stationary therapy)
  • Increase of ambulatory therapy cases of 20% since 2004
  • Increase of ambulatory health care expenditures summing up to 49% of total expenditures
     

     

MVZ as upcoming tenant class - steadily increasing number and size

  • Number of MVZ‘s almost quadrupled between 2006 and 2016
  • Number of MVZ‘s in hospital ownership almost increased five times, increasing  from 30% to 40% within 6 years
  • Number of doctors in MVZ‘s increased from 1.696 (2006) to 14.560 (2016), almost ten times.
  • Average size (number of doctors per facility) increases from 3.9 to 6.4 (total) and from 3.6 to 7.6 (Hospitals)
  • Most important legal form is limited company, overtaking private partnerships (together 80%)

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Trends in the German MOB-Market

  • Physicians and medical practices most important tenant group (60%)
  • Tenant structure: MVZ with low market share, but steadily increasing (<60% single practices; <35% joint practices; >5% MVZ)
  • Steadily increasing number of employed doctors, generally younger than in single practices (70% of doctors >50 years of age) 
  • Trend: consolidation of operators at a low level
     

Requirement profile

The CORPUS SIREO fund invests in health care real estate for providing ambulant care (combined medical centers and practices, medical care centers, health centers) in major city locations in Germany.

Between 70 and 80% of the properties are established existing properties, and the other 20 to 30% are expected to comprise project developments with a minimum letting ratio of 60 to 70%. 

The volume of each individual property is expected to be between € 10 and 35 million. 

Micro-/macro-location

  • Germany
  • Western and Eastern Germany
  • Positive demand and competition situation (catchment area, demographic development, supply of in-patient and out-patient health care services and facilities, purchasing power, comparison of competitive facilities (location, building quality, range of medical services))
  • Appropriate surrounding area (e.g. existing buildings especially hospitals and nursing homes, infrastructure including short-range transit & train stations, parking spaces, essential goods, pharmacies etc.)
  • Metropolitan areas with a very central nature and sustainable population development and / or access to hospital
  • Catchment area > 50,000 inhabitants
 

Tenants and Tenancy agreements

  • Sensible mix of tenants
  • Double-net agreements
  • Indexation in line with overall market
  • Average remaining term of tenancy agreements: minimum 7 to 10 years
  • Appropriate structure of organization and shareholders (e.g. hospitals)
  • Management (executive board and medical head with broad knowledge in strategy, medical care, quality management, expansion, real estate management)
  • Financial and asset situation (sustainable key figures, stable returns and solid annual profit, liquidity situation, equity ratio etc.)
  • Current portfolio (number of facilities, regional allocation, developments / existing buildings etc.)
  • Healthy expansion strategy
  • Positive image (operator’s reputation in the market)
      
 

Property and enterprise

  • Size of facility & building quality with due regard to location, economical aspects and competitive environment
  • Building concept  & service concept (Valuation of building structure in connection with reasonable mix of medical fields)
  • USP / special services: e.g. Integrated Care or Disease Management Programs
  • Sustainability of rent payments (identify market rent to determine identify potential overrent)
  • Economical documents of facility (e.g. profit and loss statement)
  • MOBs: possibility of alternative use
  • Authority and medical care specific documents (requirement plan (“Bedarfsplanung”)
  • Practitioner licences

Property type / year of construction / Property condition

  • Existing properties (construction year < 2000) or modernized old buildings (modernization < 10 years)
  • Project developments with a minimum letting ratio of 60 to 70%
  • No structural vacancy level
  • No backlog of maintenance and repairs

CORPUS SIREO Real Estate S.à r.l.


CORPUS SIREO is Germany’s leading real estate manager with assets under management of € 15.9 billion, a direct result of our client-focused management philosophy. CORPUS SIREO provides a comprehensive and flexible range of services for national and international investors, banks and loan servicers as well as corporate real estate owners.

Within the framework of our investment management platform at CORPUS SIREO Real Estate S.à.r.l. (“CSRE”), we structure bespoke investment strategies and design need-based investment vehicles for German and international investors.

Within CSRE there is a dedicated healthcare team of 10 specialists with many years of market experience and in-house investment management and asset management expertise in the German healthcare sector, currently managing three Health Care Funds with total planned AuM of approx. € 1 bn. on behalf of German institutional investors, and forming the largest healthcare real estate management platform for institutional capital in Germany.

The team has a successful track record in healthcare investments and includes specialists for the acquisition and disposal of assets, as well as commercial and technical asset managers.

Our investment management services on behalf of the funds include the acquisition, optimization and leasing of properties; we also handle commercial and technical property management, ensure optimum timing of property sales and also set appropriate prices to maximize value.

Our specialist fund management teams have extensive knowledge across the areas of project development and asset management, and also have sector-specific experience covering the key commercial, residential and health care real estate sectors.

Click here to access CORPUS SIREO’s homepage: www.corpussireo.com

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