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Connell C - LB Mar 2022

Investors highly attracted to healthcare real estate

Healthcare Real Estate

Investment activity in the healthcare real estate market continues to be one of “particular interest” to many investors, Caryn Donahue, head of senior housing transactions– operational capital markets at Savills tells us in a HealthInvestor interview with the real estate firm’s team. They talk us through market trends, challenges and opportunities.

The firm sees interest in private hospitals, care homes and senior living – also known as independent living.

Speaking about the private hospitals sector, Donahue says that given the NHS backlog – sitting at 6.6 million today – it remains very attractive to investors. “We’ve seen more transactions in the last 18 to 24 months than ever before, driven by that pent-up demand element, also driven by the long-dated income caused by top-quality covenants and the rents that are guaranteed through those covenants.”

And the amount of investment targeting the independent hospitals market stands at nearly £2.1billion since 2020, according to a recent Savills report.

Donahue continues that another interesting sub-sector is senior living where a large amount of capital has been committed but a lot of it hasn’t necessarily been deployed. “It is a tricky market to deploy in,” she says. “However, major groups and institutions have entered that space – the likes of AXA, NatWest Group Pension Fund and Goldman Sachs. The demand here is largely driven by the lower acuity environment. Some investors that are quite comfortable in the residential sectors, build-to-rent or student accommodation can get quite comfortable with senior living as there is no CQC registration needed for delivering hospitality and non-regulated services.”

The issue here, she explains, is finding platforms or scalable platforms in terms of deploying capital. “We often get calls looking for opportunities across that space. The investor base is there. It’s just finding scalable opportunities in the current market is not the easiest thing.”

Likewise, in the care homes market, the busiest sector for Savills, the issue is around scalability because the market is quite fragmented with the top 5 providers only accounting for 15% of the market, according to Donahue.

Speaking about returns and yields, Craig Woollam, head of healthcare – operational capital markets at Savills says that a lot of care home operators – corporate or mid-market operators – whose businesses are geared towards local authority funding, are facing more challenges than those that are reliant on private sector feeds. He also comments on the recent news that 111 Four Seasons Health Care Group care homes are on the market saying that it is going to be interesting to see how the portfolio plays out.

“It is all about adding value to meet these opportunities. The question for me is around the breakdown of the locations – you’ve got some in the northeast, you’ve got some in Scotland, and the south. It’s really a case of whether there’s much that you can do add value. And it depends on local authority fees, even though we’ve seen some local authorities put the up fees to  10%.”

Savills is also busy in the land and development space within the care sector. “But, we just can’t get enough land. Looking at the land deals that we’re concluding in the south of England, which is where we’re doing most of our work right now, typically people are building between 64 and 80-bed models and the average price that we’re achieving ranges from about 38,000 the bed up to 50,000 a bed, for development land outside London. Clearly, there are huge pressures on material costs, and build costs and getting contractors on board,” he says.

Woollam continues stressing the need to move away from traditional heating systems, such as gas, and to bring in electric for water and heating, ground and air source heat pumps, etc. “We’ve had a couple of deals in the extra care sector where the additional cost on some older planning consents that had allowed for gas-fired boilers in apartments had caused the deals to fail due to the additional cost of having to install an electrical substation on top of increased build costs”

Donahue adds that investors are highly focused on their strategies around future-proofing assets, because, over time, they can’t be buying anything that isn’t going to meet those ESG criteria for their investment funds in the future. “So ESG is definitely top of mind at the moment. Although slightly more expensive to build, it can create additional energy cost savings.”

Donahue also points to the staffing challenge and the fact that a lot of operators want to think about ways in which they can have programmes internally to give people some level of upward mobility or a way to progress in their roles. “But equally, some of the operators are also overstaffing, because they might be recruiting for 20% above what they actually need to reduce some of the agency staff which can be quite expensive over time

“Managing the cost of agency staff is harder from a mom-and-pop point of view. But actually, smaller operators are sometimes better at retaining their staff being a family-run business,” she adds.

For Woollam, another trend is the increasing tender requirements from local authorities in the UK, for partners to create new, affordable social extra care schemes. “Local authorities are looking at commissioning extra care progression. Typically, a local authority gives a piece of land to the Housing Association for a nominal value. Now the Housing Association builds an extra care facility, and it gets a contract from the local authority. The benefit to the local authority is that it receives money from two separate budgets; housing for rent and social services for care.”

Woollam says Savills does not tend to get involved in extra care schemes because they do not add value.

He adds that the mixed tenure in extra care housing is one to watch as well – shared ownership, rental, and sale. “But of course, to do that you need big scale. Some of the conversations we’re having are around extra facilities of 250 units plus where you can offer these different tenure models. A lot of the development has been targeting higher value areas where people can afford to pay £600 for a flat, or bungalow.”

Looking at care markets in Europe and the UK, Donahue says that Europe sees the UK as the more mature market from the nursing home side, adding that Germany and France are probably the most relevant in terms of the investment market and quality of operators that exist there.

She says: “Germany has a highly developed nursing home market but doesn’t really have a senior living or independent living market. There’s definitely an opportunity within that space within Germany. In countries like Portugal, Spain or Italy populations are ageing very rapidly, so there’s a massive demand and there’s also a huge undersupply, across both the care home and the senior living space.”

“Those are interesting markets to look at in terms of opportunities. And the UK is looking to other global destinations like Australia, New Zealand, the US for how they’ve done it, to try to replicate and drive growth,” she concludes.

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