Overseas property

Turning monastery into a senior home: German renovation project to yield 12% annually for its investor

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German retirement home
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In August 2021, Tranio helped its client to invest €1 million in the construction of a German retirement home with an annual yield of 12%. Retirement homes in Europe are one of the most sought-after assets among investors today. In order to minimise the risks, the sales price of the finished property included in the project profit calculations was below the market price, and the owner of the development company provided personal guarantees for the return of the capital with interest.

Investment in a high-margin project

An expert German developer with more than 40 years of experience has planned a residential complex for people with dementia on the site of a former monastery in the suburbs of Bonn in North Rhine-Westphalia. According to the plan, two of the monastery buildings will be reconstructed by the third quarter of 2023, and a new building will be erected on the vacant site. The total usable area will be 2,870 m².

As soon as the sales contract for the building plot was signed, the developer offered Tranio and an Austrian crowdfunding investment platform to each raise €1 million in private capital for the project. The investor's loan and €500,000 of its own capital were to be spent on paying for the land, obtaining permits and starting excavation work. On obtaining the permit, the developer plans to take a bank loan of €6.5 million for the construction works. The project has a budget of €9 million.

A private client of Tranio Dan got interested in the project. He is the lender for the project for 24 months with an option to extend the loan period to 33 months.

Graph - Structure of the project capital
Tranio’s client Dan and an Austrian company invested in the project 1 million euros each.

During construction, the developer plans to sign a rental contract with a local operator. The rental income at an average market rate of €13.6 per m², which is typical for senior home housing, will be €469,000 per year. Eight operators confirmed their willingness to rent the facility at this rate in the project planning phase.

Before construction is completed, the developer plans to sell the complex together with the rental contract under a forward deal. It is a form of sale where the buyer does not participate in the risks of the development and pays for the purchase after commissioning. The sales price of €10.8 million has been conservatively calculated: the German market offered similar sites with a gross rental yield of 4.1% per annum in 2021, compared to 4.34% for our project with the same rental rates.

A projected profit of €1.8 million is enough to pay interest to investors with a margin over the estimated costs.

Graph - Distribution of profit

Tranio’s client got favourable conditions in the deal

The project developer has been our partner since 2020. Our clients have already invested in his construction projects five times. The trustful regular cooperation with the developer gives us a priority in transactions: despite the equal loan size by the Austrian investor and Dan, the conditions for the lenders differ both in terms of profitability and guarantees. Dan yield after deducting our management fee will be 12% p.a.; the Austrian company's yield will be 11% p.a.

Dan has a record in the property's land register and his loan is only subordinated to the bank loan. This gives our investor priority in the project’s profit distribution priority after its sale: first, the developer will pay off the loan to the bank, then he will pay back Dan’s loan with interest, then the Austrian crowdfunding investment platform will exit the deal, and the developer will take the rest of the profit.

Graph - Transaction structure
Capital is raised in the developer’s project company, SPV, which is set up for the project realisation

Tranio protects investors from development risks

The investor made an investment in the project when the main development risks were still ahead: no building permit had been obtained, no bank loan had been granted, no construction prices had been fixed with contractors, and no contracts with the tenant and the buyer had been signed.

Graph - Schematic allocation of risks to project phases
Schematic allocation of risks to project phases

Authorities support the project

Agreeing the new site designation with the authorities and obtaining a building permit is the most uncertain phase of the project. However, the company’s architects already have experience in dealing with local authorities and supervisory bodies. The developer has already received preliminary approval from the city administration, but until the documents are ready, there is no guarantee of a positive outcome.

The risks at this stage are minimised for the investor in the loan agreement: if the building permit is not obtained by 31 March 2022, Dan has the right to get the loan repaid with interest for the period of use within 7 days.

Along with the main project, the developer seeks approval to increase the usable area to 3,448 m². If the authorities agree to extra space, the developer will additionally finance the construction and increase the project’s profit margin by an estimated 30% to €2.6 million. In this case, the safety margin of the project would increase and Dimitry’s investment would receive additional protection.

Developer guarantees to cover possible overruns from their own funds

The developer estimates that the reconstruction will cost €2,314 per m². This is cheaper than the average cost of constructing new housing in Germany in 2021, which is €2,500–3,000 per m². However, the prices of building materials in Germany are rising unpredictably during the pandemic crisis: between May 2020 and May 2021, for example, rebar prices rose by 44% and the price of lumber by 83%.

According to our analysis of the project’s sensitivity to construction price increases, the developer’s project company will be able to pay the interest on the loan if the increase in costs does not exceed 23%. The developer guarantees to cover the overrun from their own funds if the construction price in the contract with the contractor is higher than the estimate.

Banks readily finance retirement homes

With the building permit, the developer plans to obtain a loan from a bank. German banks are now eager to finance the construction of retirement homes because of the exceptional demand for such facilities: in North Rhine-Westphalia, the shortage of places in retirement homes is 40 per cent, and the region needs about 500 new buildings.

The project is resilient to falling rents and selling prices

The sale price of a completed retirement home depends on rental rates and the cap rate – the average market rate of return at which similar properties are sold. According to our calculations, the developer’s project company will be able to pay off the profit on Dan's loan even if the rental rate falls to €12 per m² and the property is sold at a 4.45% cap rate, i.e. at €9,3 m. If the project proves to be unprofitable, the investor’s capital is protected by the capital of the Austrian company and that of the developer, as Dan’s loan has priority in the repayment queue.

Graph - Sensitivity of the project to changes
Table of profitability of the project in relation to the rental rate and cap rate

Investor guarantees are not limited by the project

A co-owner of a holding company has given Dan personal guarantees to repay the loan with interest in case the developer’s project company cannot meet its financial obligations for the investment in full.

These personal guarantees are backed up by property and parallel projects: the developer had 35 projects in Germany in 2021. If our project proves unsuccessful, Dan’s capital and interest for the entire loan period will be repaid from the developer’s profits in other projects.

The only way Dan can lose capital and profits is if the director and his company declare bankruptcy. A default would result in the closure of the company’s other construction sites. We are convinced that the experienced director, who has been successfully running the company since 1991, will make every effort to prevent the loss of business and property.

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    Svetlana Larionova
    Svetlana Larionova
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