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NHC cut has huge impact on healthcare real estate

Healthcare institutions will have to invest heavily in their real estate in the coming years. Due to an aging population and population growth, the demand for care is increasing. There is a growing need for all forms of care, including care for the elderly, the disabled, mental health care and youth care. 
More space must be found and created for healthcare real estate. At the same time, healthcare organizations are faced with high construction costs, rising interest rates and now also declining revenues due to a reduction in the housing allowance (NHC). It is therefore logical that new investments are viewed critically, even though they are so necessary. The result is less maintenance of existing buildings and fewer new developments. 

The Normative Housing Compound (NHC)
For institutions in long-term care, mental health care and forensic care, the Normative Housing Component (NHC) is an important part of the integral care tariff since 2018. This NHC is a fee per resident per day and is intended to cover the real estate of healthcare institutions. 
The level of this rate is determined by the Dutch Healthcare Authority (NZa) on the basis of a number of different variables and starting points. Important elements are the interest rate, an annual indexation of 2.5% and the construction costs. Subsequently, all costs are spread over the theoretical life span of a building (30 years), which ultimately results in the NHC.

Adjustments to the NHC (2018).

When the NHC was introduced in 2011, it was stipulated that a review would take place every five years, during which the interest rate and indexation would be reassessed and the NHC adjusted as necessary. In the first revision in 2018, the actuarial interest rate was reduced from 5% to 4.65%. Otherwise, all variables remained unchanged. However, a sustainability surcharge was introduced with effect from 2019 in order to also meet the higher sustainability requirements, but at 0.18% it is a drop in the ocean.

High costs remain for now
Due to the corona pandemic, construction costs have risen significantly. It was expected that prices would stabilize once the corona pandemic was under control, but then the war in Ukraine broke out. The economic sanctions against Russia reduced the supply of construction materials again, and energy prices also rose rapidly. Therefore, spending is expected to remain high in 2022 and 2023, resulting in more expensive real estate, delays and construction bankruptcies.

Unfortunate change in NHC.
Back to the NHC. In the new recalibration for 2023, the NZa again looked at the different variables. Because the interest rates in recent years were lower than those on which the NHC is based, this percentage is reduced from 4.65% to 4.03%. This has the effect of lowering the overall rate by approximately 8%, which means that healthcare institutions will receive less income. 

The decrease comes at an unfortunate time and is diametrically opposed to the economic situation. Now that the interest rate is rising again but the NHC is falling, the financing of (new construction) projects is under great pressure. Income is falling, while construction and energy costs are rising. The payback period is getting longer. Care organizations must therefore look again at their property portfolio and at the feasibility of investment plans. This may show that the payback period is insurmountable. 

Possible payment problems for tenants
Not only does the NHC play an important role for a property owner, but also for the tenant. The question is whether they will still be able to pay the rent. The annual indexation of 2.5% is not enough in the current financial climate. In many existing rental contracts, the rent is in fact linked to inflation, which certainly this year is many times higher than 2.5%. Landlords do not always want to engage in talks about a rent reduction or limitation. Several healthcare institutions have actively approached their landlords. Often, the request was not acted upon. 

The reduced NHC allowance also has consequences for new leases. The combination of decreasing income and increasing costs makes it more difficult to arrive at a rent that is affordable for care organizations. And thus more difficult for an owner to achieve an attractive return. Even if the healthcare organization itself is the owner of the property. 

Cutting back on real estate not recommended

Care organizations will have to pay more for their housing than they receive from the NHC and will therefore have less money left over for their primary task: care. On the other hand, cutting back on real estate - such as regular maintenance - is not wise either. The risk is that the quality of the real estate goes down or that it is not built at all anymore. 

The consequences are different for each region. Rental prices are lower outside the Randstad, but the NHC does not take into account regional differences. While the availability of suitable social real estate also differs by region. In an overheated market, commercial real estate such as offices is chosen more readily, leaving no room for social real estate such as healthcare complexes.
 
Valuation at market value
The value of healthcare real estate may also change due to the reduction of the NHC. As of July 1, 2021, there is an obligation to value healthcare real estate at market value. This involves looking at the rental flow and the tenant, among other things. Both are under pressure due to the decreasing NHC. Assessing the building quality is also part of the market value. Cutting back on maintenance leads to a lower assessment. So there is a combination of factors that affect the market value, which in turn has far-reaching consequences for the property owner. 

Investments are needed
It is clear that the way the NHC is composed has major consequences. Healthcare institutions are already having problems due to high inflation and associated rent increases, while the indexation of the NHC remains at 2.5%. The result is that they have less money for care and real estate - and the necessary investments in that real estate, such as sustainability. New building developments are also under pressure. With rising construction and interest costs, healthcare institutions will have to carefully consider which investments they are still willing or able to make, even though these are so desperately needed. For everyone who needs care, and there will only be more of them in the coming years.

Finally, we note that in the draft Integrated Care Agreement (IZA) of August 12, 2022, there is not a single word about the reduction of the NHC or the funding of housing. There is also no mention of the necessary increase in sustainability. The pain is already being felt in this regard in abundance due to the high energy costs. With the exception of housing aimed at primary care, there is no discussion at all of the housing of the care institutions. A missed opportunity, because an integrated approach to care - including future-proof and sustainable real estate - leads to even better quality and accessibility of care. 

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