Private property investment could be the key to solving the UK’s health infrastructure crisis. So says the British Property Federation, which took the opportunity of this autumn’s political conference season to set out a new vision for the country’s healthcare estate.
Its intervention was timely. Over the summer, a survey of GPs by the British Medical Association highlighted the growing crisis in the quality of primary care premises. Some 40% of practices said their current facilities were inadequate to deliver services, and almost 70% said their facilities were too small to deliver extra or additional services. It has also been estimated that more than two-thirds of care homes are unable to deal with the complex medical needs of their residents.
Today, the UK’s healthcare property investment business is believed to be worth more than £5bn (institutional investment is around £3.4bn, according to IPD). But can it grow fast enough to provide the capital that is needed to fund a surge in healthcare development as the UK’s ageing population demands more from the NHS?
Ropemaker Properties’ £21m purchase of Birmingham’s Soho Road primary care centre comes as big names move, tentatively, into the healthcare sector. The 49,000 sq ft centre, with 19 years of lease to NHS Property Services left to run, changed hands at a yield of 4.75% – keen by any standards.
Richard Taylor, senior director at GVA and a long-time observer of the healthcare property sector, says healthcare real estate is attracting new buyers in what is becoming a tighter market.
“We are seeing consolidation among existing specialist investors – so Matrix sold out to Assura, and Apollo to PHP – at the same time as non-specialist funds are moving into the sector,” he says. “Ropemaker’s buy in Birmingham is following the guaranteed income flow of healthcare property. Meanwhile, traditional healthcare buyers are sweeping up the more standard stock attracted by inflation-linked rent reviews.”
The Ropemaker deal also pointed to sharply falling yields. “Prices are improving, and yields have moved in by about a point, from 6% down to 5% or less, because good primary care property is still scarce,” says Taylor.
“Opportunities to buy in the primary health sector have slowed, but not dried up. There is still a weight of money out there, and investors buy where they can, so prices go up. It’s very competitive.”
Alex Crawley, healthcare specialist at Savills, agrees that healthcare property is becoming a mainstream investment. “It’s taken off in the last two or three years, but low interest rates have helped create a weight of money, which arrives at a time when there is a lack of stock to buy,” he says. “The result is a champagne-bottle effect, with pent-up demand finding a way out.
“If you can find the right product in the right places – perhaps a 40-year lease, with inflation-linked rental uplifts – then buyers get very excited. But, of course, it can come unstuck if they buy, for instance, a care home with the wrong operators.”
According to Crawley, the exceedingly long leases that come as standard in the healthcare sector are doing more than anything to attract new investors. Leases that died long ago in the retail, office and industrial sectors – where, these days, 10 years might get an investor quite excited, and 20 feels positively luxurious. But in the healthcare world, long leases remain the norm.
“Tenants are happy to sign long leases because they find it hard to raise the borrowing to fund development themselves, and the alternative would be to spend equity, so a long lease rescues them from this,” says Crawley.
The danger for investors is that a 30- or 40-year lease might possibly outlast the useful life of the property. “Look back 30 years and the healthcare properties of the 1980s look outdated today, especially in the care home sector,” he adds. “The motto used to be to stack the residents high on low block-fee contracts, and the calculation might have been 10-12m2 per person.
“Today that model just doesn’t work and you need 22m2 per person or more to allow for the en-suite bathroom. So there is a risk of obsolescence – although the upside is that buildings today are more flexible.”
This means buildings can be adapted to suit changing care needs, regulatory regimes, or the requirement for more high-dependency beds. Crawley concludes that long leases do not pose much risk – and have many obvious advantages – for investors.
No wonder a host of big names, including M&G and Legal & General, are looking closely at healthcare property investments. Thanks to the way they calculate their returns, the yield gap between the investing funds and other healthcare buyers is now widening – and can be up to 0.5% – as the healthcare sector sucks in property money.
Nimble, smaller funds are now also moving into this expanding sector. Henry Harris, head of healthcare at ES Group, says: “While much headline space has gone to investments by Health Care REIT, Griffin, Apache and other US-based investors, UK investors have not been missing out. For instance, Target Healthcare has been active,” (see below).
But will this be enough to help plug the growing funding gap in UK healthcare real estate? With many NHS trusts already under pressure, and NHS capital spending likely to be curtailed after 2015, hopes are high that private investment can do some of the heavy lifting.
Graham Roberts, chief executive of Assura Group and chair of the BPF’s new healthcare committee, says: “There is a real appetite from UK and overseas investors. A lot can be achieved, but this is a long-term issue. We have a looming crisis in healthcare facilities, both primary care and care homes, and the private sector has a lot to offer on focus, on value for money and on expertise, areas where the public sector hasn’t got a strong track record. We are already getting some recognition of this, particularly in the primary care sector.”
Today, a conjectured total of about £5bn worth of private sector investment in health property is put into perspective by the £96bn NHS England budget. But it could help pay for the NHS England capital budget of roughly £5bn. In the years after the May 2015 general election, we will find out how much medication private money can really bring to NHS property.
It’s getting better
Incentives for investment are growing, say Knight Frank, especially in the care home sector.
Data from the agent suggests average weekly fee levels are £660 per week for 2013/14 – considerably higher than last year’s figure of £622. However, rising staff costs offset some, though not all, of the increase.
Knight Frank says the challenge will be the replacement of poor-quality stock to meet care demand in areas outside the South East.
Julian Evans, head of healthcare, says: “The last 18 months have seen the refinancing of some of the major care providers, and the entry of new investors to the UK healthcare sector from all corners of the globe. Notwithstanding the political uncertainty, this demonstrates just how UK healthcare is widely seen as a defensive, growing and sustainable asset class.”
Consumer investment
An £8m care home in Hastings is the latest buy for Target Healthcare REIT.
The investor, now 18 months old, is typical of the new names finding a role in the UK’s healthcare property sector. The new 80-bed Sussex home is a sale and 30-year leaseback with the Hastings Court company, showing a new initial yield close to 7%.
It brings to £116m the total invested by the REIT using equity and finance from the Royal Bank of Scotland.
The Hastings deal came soon after another in Hinckley, Leicestershire, where a care home was let on completion to Care Concern Group for a 35-year term, giving a net initial yield of more than 7%. ES group advised.
Target managing partner Kenneth MacKenzie says: “We purchase modern, purpose-built care homes which are leased to well-established, quality care operators on 30-plus-year leases. Due to the long-term leases, the funds can deliver 6% plus RPI-linked income to investors, plus the potential for capital growth. In return for offering investors a long-term moderate return, the UK’s healthcare sector benefits from a reliable, engaged and long-term source of capital.”
General election
With the general election a matter of months away, are investors becoming cautious about investing in healthcare?
Despite a long tradition of new governments launching ambitious NHS rethinks – even if they promised not to during the election campaign – investors appear relaxed.
GVA’s Richard Taylor says: “I’m not picking up any concerns. I don’t think investors are put off by political factors.”
