High yields, moderate risk: Case study of a lucrative senior-living facility investment in Dortmund
In 2020, a German developer informed Tranio they were interested in raising funds for the construction of a new senior-living facility. After comprehensive analysis and due diligence, we successfully guided several investors through the investment process, ultimately churning out attractive yields while minimizing risks.
Senior-living facility construction faces unexpected funding needs
The German developer is a trusted partner of Tranio’s with 46 years of experience in the market and more than 250,000 sq.m of commissioned residential and commercial real estate under its belt, so when they contacted us to tell us they were seeking investors for a new senior-living facility in Dortmund, we were optimistic.
The complex was expected to comprise 3,821 sq.m of space, built with accessibility in mind for residents in need of assisted living amenities.
By the end of 2020, at which point the project was in the final stages of construction, our partner had invested 675,000 euros in equity, secured 7,000,000 euros in bank financing, and borrowed 1,650,000 through a crowdfunding platform. The complex had already been rented out for a 15-year term, with the option for extension, and sold along with the lease contract to an institutional investor for 10,900,000 euros, with payment due three months after commissioning.
However, construction came to a halt in mid-2020 due to COVID-19 restrictions, and the developer understood he would not be able to get sale proceeds before the maturity date of the loan. Accordingly, he asked us to assist with raising additional investments.
Three skilled investors
Tranio’s team of analysts began by conducting due diligence, feasibility studies, technical analyses, and tax reviews of the development project. Satisfied with its soundness as an investment, Tranio recommended the property to three clients whose risk appetites appeared to be a good match for the project.
The first was a seasoned finance professional who had previously invested in Tranio development projects and had even teamed up with Tranio’s Managing Partner George Kazhmazov for speaking engagements.
The second was a successful executive in the Russian retail market, who had previously worked with the first investor, and trusted his judgment.
The third was an IT professional who had reached out to Tranio for advice on a separate matter, and inspired by our expertise, decided to make his first transaction of this kind.
Based on our analysis of the project, the investors opted to provide the developer with a subordinated loan of 1,700,000 euros for 12 months at 10% per annum with capitalisation every six months.
Attractive yields, minimal risks
On the current German market, yields of 10% per annum are typically associated with relatively high-risk investments, such as when an investor joins a project at the very start of construction, or when a project does not yet have a buyer or tenants lined up. This investment had minimal risk exposure by the time we brought it to our clients. The few risks that did remain are outlined below, along with details of how we mitigated our clients’ exposure to them.
Risk of budget overrun
The risk of budget overruns can arise from a variety of situations. For instance, if a general contractor were to declare bankruptcy, it may turn out to be the case that only a more expensive option is available to complete the task.
We analysed all factors that we thought could theoretically have contributed to budget overruns, and determined that none of them were likely to pose complications in practice due to the fact that construction was in its final stage.
In order to protect the investors, we asked the developer to add two clauses to the construction contract:
- in the event of a budget overrun, the developer is responsible for covering the budget shortage in full;
- Should the existing general contractor declare bankruptcy, the investors may reclaim their investments until the construction has been completed.
Risk of buyer loss
Senior living facilities in Germany are a protected asset; the state guarantees the reliability of these tenants, and care costs are covered by a combination of the residents’ pensions and state insurance payments. And given that Germany’s elderly population is on the rise, they are also in high demand. According to the Federal Institute for Population Research, by 2030, the German population is expected to comprise some 4,100,000 people over the age of 70, who will require specialized medical care. That figure represents a 17% increase compared to 2017. This means that nearly 700,000 people will need new living facilities in the coming decade. And the problem is already growing; according to the German Property Federation (ZIA), in 2020, 95% of German municipalities complained of a growing supply deficit among senior living facilities.
Accordingly, we were confident that if the existing buyer were to change their mind, the developer would quickly find a new buyer without risking a sale-price reduction. Our analysis showed that the asking price of the residential complex was in line with the market.
Still, we minimized our clients’ risk exposure further by agreeing with the developer that if the transaction fell through, the investors would have the option to either withdraw their funds early, or to wait for a new buyer.
If they opted to wait, they would be entitled to an increased yield of 15% per annum in the event that a new buyer could not be found within 12 months. The yield would be financed by the landlord, and the rental agreement entered into effect after the commissioning of the project. Tranio’s analyses showed that the estimated rental income would cover the costs of loan installments and interest payments to the investors.
Investors seeking new projects
For investors seeking new and unique opportunities, Tranio is a safe bet. Many investors focus solely on square footage and long-term rental yields, and while we have plenty of such options, we also have a knack for finding opportunities like these, which offer relatively beneficial terms for pending construction projects.
The investors described above completed their investment in the project in late 2021, and are already seeking new investment opportunities with Tranio, and we are thrilled to oblige.