Strong fundamentals combined with an ageing demographic in the UK have made healthcare – and, in particular, care homes – increasingly attractive to investors, according to Savills.
The long-indexed income, with either RPI-linked or fixed uplifts, have made an appealing proposition for investors struggling to find similar opportunities in the mainstream markets.
In addition, care home yields have moved in significantly over the past five years and now fall in line with many other traditional commercial asset classes. Savills Prime Care Home Yield Index currently stands at 4.25%, down from 4.75% in 2016.
These fundamentals are supported by strong demand for good-quality care homes, fuelled by a growing over-75 population and an imbalance between the number of care homes opened and those closed since 2011. Savills Healthcare team has recorded that 9,000 beds were lost in 2016, compared with only 6,000 beds that were built.
Chris Wishart, director in the Savills healthcare team, said: “Over the past 18 months we have seen care homes achieve unprecedented yields, with those let to annuity-grade tenants and in excess of 30 years unexpired attracting interest of levels below 4%. We expect this trend to continue, with the care home market being put under further pressure in the next three to five years due to an increase in the population and a limited amount of new homes coming out of the ground, which will ultimately drive prices higher and sharpen yields.
“As a result, we have seen care homes emerge into the investment arena, with interest coming from a variety of buyers including REITs, institutions, pension funds and insurance companies seeking to diversify their portfolios. In addition, we expect the increase in activity from overseas investors, already witnessed in the mainstream markets, to become a reality in the healthcare sector, with buyers from the US, central Europe and Asia re-entering the market, buoyed by the weakened sterling.”
While care home investment was down in 2016 compared with previous years, at between £750m and £800m, this was, in part, because of general market uncertainty in the real estate sector combined with a paucity of opportunities, rather than reduced investor appetite.
Investment volumes for the first half of 2017 have shown a significant year-on-year increase, with levels expected to rise by 25%. This augmented figure is particularly relevant, given that the average lot size for a single care home investment ranges from £10m to £12m.
Alex Crawley, associate director in the Savills healthcare team, said: “The relatively low average investment lot size for care homes, compared with the expected half-year transaction figure, underlines the increased activity in the sector.
“The biggest opportunity for investors entering the care home market will be to create a secure income stream. It is therefore vital that buyers consider the rent payable through the term of the lease for each asset against any potential fluctuations in the profit from a home.”
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