What is the diagnosis for the healthcare market in 2018? Savills examines the sector

23 February 2018

The healthcare sector was propelled to the forefront of the political agenda again in 2017 with the NHS, care home closures and social care a particular focus. However, international real estate advisor Savills highlights that the sector is far more diverse than these areas alone and has outlined the key themes to watch in 2018 as the healthcare market continues to draw attention on a global platform.

Craig Woollam, head of healthcare at Savills, comments: “There are a number factors, particularly political, that will have a significant impact on the UK healthcare market in 2018.  We have already read about operations being cancelled as a result of a critically under resourced NHS, which has been exacerbated by the winter crisis placing extra pressure on existing resources. Furthermore, the delay to the release of the Green Paper outlining reforms regarding a more joined up health and social care approach, as well as the call for cross party agreement on this moving forward, has generated further uncertainty in the market.”

“However, we have also seen some exciting new trends in the sector with the demographic shift in the retirement living market making it very current and relevant as well as the healthcare market in general really making its mark in the mainstream investment sector.”

New rental model expected as Retirement Living gains traction

The rapid growth in demand for quality retirement products has created opportunities in the sector and lead to a number of new entrants into this area of the market in 2017 with AXA-IM acquiring Retirement Villages Group and L&G investing into Inspired Villages and Renaissance. Savills notes that, given the significance of these new entrants, there will be a greater focus on introducing an established rental model and tenure in the UK for the retirement living sector. As a result of this, the firm expects further acquisitions, mergers and direct investments in the retirement living sector in 2018. 

Healthcare becomes mainstream as investor appetite increases

Over the last few years, the healthcare market has positioned itself as a more mainstream asset class offering, in many cases, a secure income against a strong operator covenant. Savills notes that the sector has seen renewed interest from overseas investors, particularly from China and the Middle East, whilst also remaining popular with UK pension funds and insurers who have helped to drive the market forward.  In 2017 Savills advised Aviva Investors on the acquisition of four developments pre-let to One Housing Group for in excess of £70 million, evidence that there is incredibly strong investor demand for the best covenants  Given the stable returns on offer compared to other asset classes, Savills anticipates that investment appetite for healthcare will remain strong in 2018, with yields continuing to harden and prime yields likely to drop below 4% for the strongest covenants and stand out locations.

Care home closures continue but often remain in the sector

A reported 224 care homes closed between March 2016 and March 2017 across the UK. Whilst many of these were mainly as a result of Local Authorities struggling to find funding for these facilities, Four Seasons, formerly the largest operator in the UK, also closed circa 30 homes. Savills notes that while there is likely to be further closures throughout 2018, particularly in areas of high alternative use values such as private housing, these are also the general locations where new care home developments are being sought.  Furthermore, many of the homes that have been closed to date have remained in the sector through acquisition and then been upgraded, repositioned and reopened. The firm observes that some have also been converted to provide specialist care or redeveloped to focus on retirement or assisted living facilities. However, Savills does expect to witness a continued net loss of beds as new home developments struggle to keep pace with the closure of older, non compliamt and unprofitable homes.

Brexit uncertainty places pressure on resources

With the National Audit Office reporting that 6.6% of posts across the care sector remain unfulfilled as well as there being 8,000 fewer social care nurses than four years ago, this sector is already feeling the burden, which Savills highlights will be placing pressure on operating costs and care services. This strain is likely to increase further in 2018 as the uncertainty surrounding the passporting implications of Brexit substantially impacts overseas staff  working in the UK’s care sector. How this is managed moving forward both in terms of resource and finance is vital to securing the future of these services.  

Primary Care gets a make over

2018 is likely to see the health and social care budgets combined, which Savills says will have a significant impact on primary care in terms of how it is run and provided. The firm notes that it is likely that the Foundation Trusts (FT) and Clinical Commissioning Groups (CCG) will have more influence to determine where money is spent and their main focus is expected to be on the provision of more services and care out of hospitals. This in turn will lead to more outpatient services, community based practice and higher acute cases being treated in primary care centres.

In 2018 Savills foresees a significant increase in spending for new primary care centres by the NHS, FTs and CCG’s and as a result there will be more institutional investors entering the market. Due to the global uncertainty and the safe strong returns available in the sector, the firm foresees increased investor demand for NHS and Government backed income and expects to see in excess of £2 billion of capital entering the market in 2018.

 
 

General Enquiries

Head Office London

 

Key Contacts

Craig Woollam

Craig Woollam

Head of Healthcare
Healthcare

Head Office London

+44 (0) 20 7409 9966

 

Colin Rees Smith

Colin Rees Smith

Director
Healthcare

Head Office London

+44 (0) 20 7409 5996