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Valuing at market value not a threat but an opportunity

senior citizens
As of July 1, there is a new requirement for valuing healthcare real estate. This must always be done on the basis of the market value. This change may affect applications for new financing and, in time, will also affect existing financing of healthcare real estate. 

During the credit crisis it became clear that banks had loans outstanding for which the collateral was worth less than the loan amount. This was mainly because the value under the Valuation of Immovable Property Act (WOZ), the book value, the value in use, the replacement value or, in the case of new construction, the investment were leading in the financing of healthcare real estate. The European Banking Authority has decided that from now on valuations must be based on the market value in order to reduce risks. The Dutch regulator DNB will take over this obligation for new applications from July 1; for existing financing, this rule will apply from July 1, 2022.

Healthy care operation
The market value is the estimated amount for which a building would be sold in an arm's length transaction, but for a healthcare institution, real estate is only a limited part of the total operation. That's why you can't really judge a healthcare institution on its real estate alone. We talked to a number of major Dutch banks about this and they indicated that they considered healthy healthcare operations more important than the market value of the real estate. 

The importance of healthy healthcare operations is also emphasized by the WFZ. They said they were in talks with the banks about this issue. For the WFZ itself, the obligation to value a property at market value has little effect, since their assessment is based on the residual value of the land and not of the building. However, WFZ does want to prevent healthcare institutions from having to deal with different appraisals from different parties for the same property. An investigation into the consequences for current loans is underway, but there are no signs that a valuation at market value will be part of the justification for the WFZ.

We have noticed that investors, too, look beyond the value of a healthcare building. They attach great importance to the future stability of the tenant. They want to know whether the rent is sustainable in the long term. Can the care facility continue to pay the rent and does the amount fit the building and services? So not only the building, but also the rental agreements must be in line with the market.

Added value
Our tour shows that the banks, but also the Royal Netherlands Institute of Chartered Accountants (NBA), consider the obligation to be implemented very quickly. They see the importance of further professionalization of healthcare institutions, but also note that healthcare institutions are often not yet sufficiently prepared to meet the information requirements of a valuation. 

Nevertheless, the obligation is coming and now is the time to get it right straight away. Housing corporations have already experienced this change, so they can learn from it. At first there was limited support for market value appraisals, but it led to an enormous professionalization. We see, for example, that the asset managers of corporations are now taking value management and property data more seriously. Recognizing this added value came with age. 

Good vision of real estate
We expect healthcare institutions to take the same step as housing corporations. That starts with a good vision of the real estate. Take the flexibility and future-resilience of the buildings, for example. If the building fits in well and continues to fit in with the wishes of clients, family and employees, this will have a direct impact on the market value. It is simply more marketable: an investor will find it easier to rent out and another healthcare institution will find it easier to find clients.

So attention must be paid to alternative uses of the building, because the market assigns a value to them. In the case of renovation or new construction, it is therefore wise to check beforehand whether the investment is in balance with the market value. After all, this is the collateral for the bank. 

If there were not already enough reasons to make real estate more sustainable, this is another one. It has a positive effect on the market value. It is therefore important to formulate a sustainability ambition aimed at value creation and to work this out with roadmaps for each building. In this way, large-scale investments can be made at logical moments.

Not a threat but an opportunity
The introduction of mandatory valuation based on market value is (unfortunately) not the only challenge facing healthcare institutions. It is a broad palette of actors that determine daily operations. The well-being of residents is paramount and they must (continue to) receive the care they need. Let's not see the introduction of the new value as a threat, but rather as an opportunity. All parties - from care organizations to investors and from developers to financiers - will have to deal with it. Now is the right time for healthcare organizations to cast a broad light on their real estate.