_Booming healthcare scene shows no signs of slowing down

For the first time since records began, occupancy rates in healthcare facilities have hit an all-time high of 89.4%, surpassing the 89.3% previous peak back in 2006. 

Healthcare property development continues at a pace. As does investor interest in the sector. From care homes to day nurseries, retirement villages to specialist schools – operational healthcare property currently outperforms all the other specialist sectors in terms of returns.  

The primary care and acute hospital care markets are gaining particularly high interest from investors looking to capitalise on the inherent need for such assets across the UK − as stated in the NHS five-year forward view.

Western European countries including the UK, France, Germany, Spain, The Netherlands and Scandinavia are expected to lead the way in terms of attracting capital into healthcare in 2019. 

Along with all this demand for healthcare, hand-in-hand comes a demand for experts in valuing healthcare assets. Becky Gaughan has been appointed by Knight Frank Newcastle to work in the Valuation and Advisory team dealing with all types of commercial property, but she also meets a growing demand for valuers in the North East region who know the healthcare sector inside out.

“It’s such a niche area and there are only a handful of firms offering healthcare valuation as a service”, says Becky.

“The North East has a well-established care home industry and we have seen diversification in the types of healthcare assets being developed, particularly where the private sector can work alongside the NHS and create facilities that the NHS struggles to provide. 

“For example, services such as residential rehabilitation units can support individuals who are undergoing a long period of recovery and cannot be accommodated in hospital long term. Specialist centres for young adults can offer respite care and additional support with learning disabilities. Care operators are moving with changing demand and creating more and more specialist facilities.”  

“We need to monitor all of these changes as knowing the market is the key to a reliable valuation.  We are valuing healthcare assets as trading businesses, so factors such as the demographics of an area and where potential demand will come from have a significant impact on potential trading performance going forward.” 

State of the Market 

The UK healthcare market continued to experience some headwinds in 2018. 

Unfortunately, the social care funding crisis continues to impact many local authority funded homes. Almost 7,000 beds were deregistered in 2017/18, while increases in the National Living Wage and a shortage of nurses presented many operators with higher staffing costs and a shortage of skilled labour. 

In response, new development tends to be focused on the private pay personal care home market. 

As mentioned earlier, our ageing population means occupancy rates are at an all-time high. 

At the same time, average fees have outstripped inflation for the fifth year running. Operators are trying to limit the impact of rising staff costs and generate the additional income they need to invest in and improve the quality of care they provide. 

Elderly care home profitability fell marginally during the 2017/18 financial year as the market endured increased costs. 

However, it is worth noting the differing financial performance of local authority funded homes verses the independent private pay segment. 

While margins for public funded homes were down to 15.9% - the private pay market is reporting profitability as high as 39.4%. This is a notable jump and a source of encouragement for operators and investors alike. 

The adult specialist care home sector has faced a similar set of operating issues, but with around 90% of fees being paid from the public purse, this sub-sector remains heavily influenced by restricted council budgets. 

Knight Frank sees the lack of available stock as the biggest barrier, as opposed to a lack of investor appetite. Much like other healthcare asset classes, long-term income streams and secure yields below 5% continue to look favourable in these uncertain economic times. 

Debt markets arguably remain cheap, and cap rates are seemingly at record pricing, but as open-ended funds and institutions move away from retail to focus on ‘alternative’ sectors - combined with overseas capital - UK healthcare remains a very competitive sector to invest in.

Becky Gaughan works at Knight Frank in Newcastle. She can be contacted at becky.gaughan@knightfrank.com; 0191 349 8625.