Healthcare: Strong long-term demographic trends are helping to drive investment demand
The growing pool of funds looking to gain exposure to the UK real estate sector has pushed returns lower across the traditional core sectors and increased the level of competition for assets. This is encouraging investors to look into other real estate sectors that are supported by longer term demographic trends.
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Growth in the UK’s 65+ population is fuelling investor interest in the healthcare sector. Occupancy rates in 65+ care homes are already reaching record highs at close to 90%, even before the ageing “time-bomb” approaches.
Investor demand is also being shaped by a broader appetite for specialist sectors with pricing of core real estate assets at record highs and investors searching for attractive risk-adjusted returns with a long-term horizon.
Healthcare property fits the mould with long-dated income, typically comprising 30-year lease terms, and increasing liquidity across the UK market as the sector continues to evolve. However, these benefits do however come with unique operational and potential reputational risk for prospective investors.
Furthermore, healthcare property is becoming more diverse as a sector. Elderly care homes have long provided the most accessible and scalable investment of all the healthcare sub-sectors, but we are now seeing growing interest in a number of other sub-sectors. These include adult care homes & supported living residences, primary care facilities, private hospitals and childcare.
Specialist REITs have been the largest buyers in these sub-sectors, with pricing on these assets ranging from 4.0-6.0% initial yield. However traditional real estate investors are increasingly looking at the sector.
Given the strength of investor demand and demographic drivers, it is not surprising that total returns for the healthcare sector have outpaced All UK Property on an annual basis (9.3% vs 4.5%).
While, healthcare has benefited from capital growth on the back of cap rate compression, the stronger income profile of the sector has also provided investors with a stable income return of 5.5% over the 12-months to March 2019.