In 2020, our economy had a roller-coaster ride, with all real estate markets impacted to varying degrees, by the global pandemic. Lockdowns, tier systems, restrictions on household mixing, government incentives and international travel quarantines took their toll and the first quarter of 2021 looks likely to follow suit.
The healthcare sector has been under the spotlight constantly; from the super-fast implementation of the Nightingale Hospitals and the rallying of retired NHS staff to return to work, the leadership, logistical capabilities and operational expertise of the care sector across all services has been tested every day.
The multi-faceted sector provides a significant and wide-ranging choice of assets and investment opportunities, from GP surgeries, medical centres and diagnostic centres in Primary Care and hospitals, specialist mental health and educational facilities, elderly care and senior living in Secondary Care
As a result, the healthcare space remains a key focus for large corporate investors, private equity companies and institutional funds already active in the market and a new opportunity for those attracted by the resilience and the robust characteristics evident across every part of the sector today.
Primary Care
With an ageing population and a growing number of people suffering from long term chronic illness, there is an increasing demand for new and future proof primary care services.
A survey by The British Medical Association found 70 per cent of GPs consider their premises to be too small to expand services, 60 per cent were too small for training and education and 52 per cent had seen no investment in the preceding 10-year period. Only approximately 20 per cent of premises are under 10 years old and almost two thirds of the existing stock do not meet NHS guidelines. This is a problem the public sector purse cannot fix alone.
A new large purpose-designed primary care premises, with the benefit of a lease with 15+ years unexpired, a strong covenant and landlord friendly rent review provisions (i.e. upwards only, fixed or index linked), can attract relatively low yields at 4.25% to 5.25%. Compared to these “best in class” assets, good secondary stock can be priced from 5.5% to 6.5% and remaining stock priced anywhere upwards of 6.5%. However, with overall limited stock availability and positive political will, the demand for both primary care and good secondary care assets remains highly competitive and in some cases, we are seeing yields being driven much lower.
Long Term Care
There is an increasing demand for adult and elderly residential care and nursing care services across a variety of settings in the UK. Since 2019, for every new home opened, two have closed their doors. Smaller, older, converted care homes are dropping out of the market at a significant rate as market expectations rise and new purpose-built facilities are making only marginal gains on net bed capacity. The current development pipelines are still not enough to meet demand and this creates opportunity at a number of levels.
Typical leases for modern purpose-built care facilities are secured on 25+ years at attractive rack rents. Investment yields for the top tier, best in class stock in high value, high fee locations with strong supporting demographics held on such leases to secure and established covenants can be as strong as 3.75% to 4.50% (super prime). Strong mid-market facilities comprising modern purpose-built homes, fully compliant with the Care Quality Commission and located in good areas can attract yields of between 4.75% to 6.00% (prime) and older purpose-built stock, still offering single en suite accommodation, can offer yields between 6.00% to 8.50% (secondary). Converted and extended properties with limited or no en suite facilities, where physical and economic obsolescence may be a concern, will typically see yields in excess of 9.00%.
Looking Ahead
With the end now in sight of the unprecedented turmoil we have all had to negotiate our way through since March last year and the roll out of the vaccine programme gaining momentum, there is a glimmer of light at the end of the tunnel for everyone in the sector and beyond.
New investors are already targeting the space and we will undoubtedly see increased levels of acquisitions and disposals, site developments and operator partnerships being formed. In addition, those operators who have had to pause growth plans over the last 12 months, can now look to re-start their refinancing and investment plans.
It is an exciting time to have a stake in the market and play a part in improving the supply of future proof facilities for our growing elderly population and we’re available to assist and guide you through the sector’s opportunities.
It is my hope that the intense focus on the healthcare sector will help bring about a newfound respect for care providers in the private sector as well as the NHS and a better understanding of the pivotal part it will continue to play going forward.
About the Author
Liam Prickett is a Chartered Valuation Surveyor and RICS Registered Valuer within Colliers Healthcare Team, specialising in Valuation and Agency advice to operators, investors and lenders for loan security, acquisitions and disposals across the Healthcare Sector in England, Scotland and Wales. To get in touch, contact Liam.Prickett@colliers.com.
