Healthcare gets a medical as Savills provides sector prognosis

28 February 2017

International investment, private and public funded care polarisation, NHS rationalisation, housing the elderly opportunities and a race for development land were the five key themes that Savills correctly predicted would dominate the healthcare market in 2016. With the sector retaining its position under the global spotlight, the firm makes its predictions for the upcoming market trends.

Craig Woollam, head of healthcare at Savills, comments: “While many of the themes we identified in 2016 are still current and continue to impact the market, there are also a number of new influencing factors that are shaping the industry and ensuring that healthcare remains on the real estate agenda. We anticipate that the sector will continue to gain momentum over the next 12 months with the factors outlined below creating some interesting dynamics in the market.”

Cross border growth
An area that Savills expects to see further growth in 2017 is international cross border investment into going concerns and property assets in the healthcare industry. Given the paucity of healthcare investment product in the UK, investors will be considering the wider western European markets for acquisition opportunities. This was highlighted recently where French investor, Eurosic Lagune, acquired 16 Spanish care homes for €116m.

Whilst from a regulatory and operational basis there are nuances for each country across Europe, the underlying fundamentals of the growing need for care facilities remains. For example, Savills notes that the Netherlands is among those countries with the highest growth in 80+ age group households and in France alternative sector investment (which includes healthcare) accounted for 19% of investment transactions during the first three quarters of 2016, compared to 6% during the same period in 2015.

In terms of wider global investor appeal for the healthcare sector, Savills says that, following a surge of activity over the last few years, US REITS have now refocused attention on their domestic market. However, there has been a noticeable increase in activity from US hedge funds who are looking to acquire ‘value-add’ opportunities through debt and / or equity.

Growth in ground rent deals
An area of alternative investment activity that has rapidly come to the attention of many care operators is the option of undertaking a sale & leaseback on a ground rent basis. Extracting value through the sale of the freehold interest in return for a 99+ year lease and a lower rental obligation than a traditional sale and leaseback, has surfaced as an appealing option to some operators, and is a trend that Savills believes will continue to attract interest in 2017.

Mid-market movement
The growth of medium size operators has, in recent years, been a reasonably slow process with many operators expanding gradually, acquiring trading homes often on an asset by asset basis with bank debt funding and limited opportunities for new build development. However, private equity funding is beginning to take hold and Savills expects there to be acceleration in the growth of a number of medium sized groups via bolt on acquisitions and new development. In contrast, Savills notes that this movement could in turn result in some medium-sized groups seeing an opportunity to exit the market by selling to a large company looking to expand or up and coming groups wanting to grow in the market.

Savills predicts that the sale of such medium-sized groups could generate some interesting dynamics, not least due to the buyer profiles, but also in terms of how the sales are structured. In addition, the firm anticipates that 2017 could see investors becoming more comfortable with smaller mid-cap groups which provide more attractive pricing.

Care bed tipping point
Development issues in the healthcare industry are particularly poignant in the care sector with 2016 witnessing the continued trend of restricted new care home development. A reported net loss of over 2,500 care beds highlights the limited construction of new facilities and continued closure of smaller, older homes. However, Savills says that the decrease in elderly care provision does bring positive impact for remaining care providers in the form of increasing occupancy for existing care beds. This is likely to benefit many operators who have seen the increase in the National Living Wage impact on profitability.

The well reported pressures being faced by the NHS, many of which stem from the ageing population and consequent demand for care provision for the elderly is likely to continue, but the underlying need to find a solution to such issues could well benefit care operators. Savills notes that a restricting factor for care provisions in many secondary locations is the low levels of privately funded facilities. Although the need for bed provision to alleviate bed blocking and NHS pressures, which are likely to be exacerbated by increased business rates, could result in greater NHS/CCG (Clinical Commissioning Groups) funding for social care. The firm therefore expects to witness increased levels of appetite for care provision development in secondary locations, which historically haven’t been over developed and where a good mix of private, CCG and Local Authority funded facilities can be achieved.

Specialist care comes to the fore
A sector that showed notable activity in 2016 was specialist care, including mental health and learning disability facilities, and has been attracting increasing levels of investor interest, according to Savills. This has mainly taken the form of the consolidation and acquisition of platforms, with some subsequent spin offs and additional growth. For example, Elysium Healthcare, backed by private equity, was created as a result of the sell off of strategic sites following the merging of Priory Group and Partnerships in Care by US owner Arcadia Healthcare. Elysium has subsequently acquired Raphael Healthcare, demonstrating the recent consolidation within the specialist care space, a trend the firm expects to continue in 2017.

Looking forward, given the fragmented nature of this sub-sector, Savills anticipates an increase in bolt-on acquisitions and organic growth as well as new entrants to the market.

Retirement renaissance
Savills reports that interest in retirement housing is continuing although a number of private equity houses and other funders considering opportunities have faced challenges in identifying an operator that has sufficient scale and a defined model. The outcome of this moving forward is likely to be consolidation within the retirement sector with investors looking to buy two or three operators that have different strengths and advantages and then amalgamating them to create one entity. Savills expects this to be a big growth area in 2017.

The firm has also identified a surge in interest in developing a platform for establishing PRS model (rental is the dominating tenure in the US) for the elderly with Legal & General in particular suggesting they are to develop such facilities. However, Savills suggests that the format may need to be adapted for a UK market with regard to lease lengths and some security of tenure.

 
 

General Enquiries

Savills Margaret Street

 

Key Contacts

Craig Woollam

Craig Woollam

Head of Healthcare

Savills Margaret Street

+44 (0) 20 7409 9966

 

Colin Rees-Smith

Colin Rees-Smith

Director
Healthcare

Savills Margaret Street

+44 (0) 20 7409 5996