KEY HEALTHCARE THEMES FOR 2016 DIAGNOSED BY SAVILL
Healthcare continued to be under the spotlight in 2015 with corporate news such as Four Seasons’ ongoing issues closely being watched, the impact of the living wage being debated, and NHS and social care budgets under scrutiny. Looking ahead Savills has indentified five key themes for the industry that will be making an impact on this specialist property sector over the next 12 months.
The rise in appetite from overseas investors in the healthcare sector, particularly for nursing and care homes, is expected to remain strong in 2016. Savills notes that buyers from the US, Asia and Europe have all been active in the sector, attracted by the variety of assets available and the long-tem prospect to add value. The most notable recent examples include the acquisition of The Priory Group by US-based Acadia Healthcare (which already owns 54 mental health hospitals in the UK through Partnerships in Care which it acquired in 2014) for approximately £1.5 billion. Savills predicts that, despite the Fed’s increased base rate, the opportunity to invest in UK healthcare assets at yields between 5% and 7% will still appeal to US buyers such as Ventas, HCP and Health Care REIT, who can make a compelling return at these levels.
While global dynamics may see Asian investment in the sector fluctuate given the apparent fall in economic growth, Savills believes there will be continued interest from overseas money seeking healthcare opportunities in the UK. This may reduce the opportunities for UK investors and institutions who remain keen on the sector.
Growing polarisation between private and public funding of care
The growing polarisation in the healthcare sector between private and publicly funded care is an issue that is not expected to be resolved until the Government’s delayed Care Act funding reform is reviewed in April 2020. The policy, which was due to take effect in April 2016, is set to introduce a cap on the amount self-funders have to contribute to their care costs. However, Savills highlights that with wage inflation now a key factor with recent increases to the National Minimum Wage and the National Living Wage (from April 2016); this presents a further factor that could widen the gap between public and private sector fees.
NHS Property Portfolio Rationalisation
Recently Lord Carter’s review was published, which found that the NHS could make up to £1 billion of savings with better use of its estate. With this continued pressure, further rationalisation of the NHS property portfolio is expected. However, it should not be a case of multiple For Sale signs, but a careful and strategic process that will assess its current estate in order to utilise existing space and formalise leases in place of historic occupational agreements within GP surgeries and medical centres.
In the first instance, Savills expects that there will be continued disposals of the more obvious surplus assets and land, creating opportunities for new developments. The firm notes that so far the NHS Property Strategy is reported to have disposed of approximately 180 properties and realised circa £125 million. The self-professed intention for the NHS PS moving forward is to focus on 2016 to 2018 as the key period for further rationalisation of its estate.
The need to house the UK’s ageing population will be one of the key opportunities for investors and developers in the coming years. Savills research highlights that retirement accommodation in the UK represents just 2.4% of the total housing stock and, at present, 18% of the population is over 65 years old, a figure that is expected to increase. Obviously, retirement does not signal an immediate shift to a more supported living environment, but lifestyle changes, demographics, social policy and wealth distribution are all impacting the market and will continue to do so.
Whilst Savills observes that retirement property is a comparatively young concept in the UK, there is a notable desire to move on from the old fashioned perception of third sector sheltered housing with both ‘for profit’ and charitable groups now looking to develop a more innovative range of concepts. The understanding of what care support is required has progressed, which is reflected in the variety of care levels now available from light touch settings and downsizing products to full service care villages and complete support environments. Savills predicts that growth and innovation will be a key trend of 2016, in terms of the product being built, volume of new schemes and the mixture of tenure options.
Race For Land
Savills final trend for 2016 is centred on the competition for land to develop new sites for care homes, retirement property and medical centres, which is expected to intensify this year. The previous dynamic, which saw healthcare buyers swoop in if there was no demand from residential investors for the land, does not seem to be the case today. Retirement property developers such as McCarthy & Stone and Churchill are bidding competitively and also appear to be able to sell their product at a premium above the mainstream market. In addition, care providers are frequently looking to prime products that can be sold on at investment grade levels or are keen to work jointly with residential developers to build a care or retirement provision in place of social housing obligations or as part of a regeneration project.
For all of these reasons, Savills has found that funders and investors are generally supportive of developers and operators and for the right land in the right locations, where the specific demographics for the product are strong, competition is driving premiums to new levels.
Craig Woollam, head of healthcare at Savills, comments: “2016 is anticipated to be a very promising year for the healthcare sector. Each of these themes will have a significant impact on respective areas of the sector and will generate some positive activity in terms of putting healthcare on the agenda as an asset class for overseas investors as well as opportunities for future development.”