_Healthcare sector performance continues to attract investors, both domestic and overseas

Those involved in the healthcare sector will understand that there are a number of challenges facing the sector as a whole, many of which are being further antagonised by continued political and economic uncertainty as we approach 2019. Operators of care homes in particular are having to endure:

• An endemic lack of centralised funding for social care which has been the catalyst for the de-registration of almost 7,000 beds in the last year;

• Increases in the National Living Wage (NLW) which has fuelled increasing staff costs in the personal care segment;

• A shortfall of skilled nurses, fuelled by the removal of the NHS student bursary in 2016;

• More stringent regulatory standards set by the CQC, while helping to elevate the overall quality of care, have added to the pressure on care homes catering to the lower end of the market.

The UK’s current political climate, namely the ongoing question marks surrounding Brexit, are not helping matters with many operators waiting for clarity on what will happen to EU nurses and carers employed within the healthcare sector into 2019 and beyond. 

Despite the challenges, looking broadly at the property fundamentals of the sector we can see a very different story. The UK’s ageing population remains an unrelenting source of demand for the care home sector.

Occupancy rates have now hit a high of 89.4%, surpassing the 89.3% recorded in 2006 when records began. At the same time, average fees outstripped inflation for the fifth consecutive year as operators looked to limit the impact of rising staff costs and generate the additional income required to invest in and improve the quality of care they provide.

Strong occupancy rates have not gone unnoticed by property investors looking at alternative sectors. In fact, the uncertainty surrounding the UK economy has conversely driven investors to search for more certain levels of long-term income.

With strong covenants and 30-year lease terms linked to RPI, the healthcare property sector looks very attractive against other commercial classes. Investor demand has been particularly strong at the prime end of the care home sector, driving yields to as low as 3.5 to 4%, down from 5.00% in 2015.

More specialist healthcare property classes are also receiving attention. This is the case for the primary care and acute hospital care markets where specialist property investors are looking to capitalise on the inherent need for such assets across the UK - as expressed in the NHS five-year forward view.

International investors have also been active buyers in the UK healthcare sector, and we have observed a clear change of investor profile. Between 2013 and 2015, US REITs accounted for 46% of Knight Frank transactions compared to only 6% of transactions since 2015. APAC and infrastructure funds have replaced this capital and are now firmly the new money in town. 

Looking ahead, while problems within the healthcare and social care sector will continue to grab the headlines, from a property perspective the sector looks incredibly buoyant.

Debt markets remain historically cheap, cap rates are at record pricing, and a range of investors, domestic and overseas, continue to focus on ‘alternative’ sectors – We expect that UK healthcare will remain a very competitive sector to invest in through 2019. 

Joe Brame is a Senior Analyst in Knight Frank's Healthcare Team. Download the latest Autumn-Winter Healthcare Market Overview or find out more about the service we provide.