– Prime healthcare yields compressed to 4% driven by the supply shortage –
Knight Frank, the global property adviser, has reported a strong year for real estate healthcare investments with £1.32 billion of transactions in 2017, an increase of 88% when compared with the 10-year average, in their latest research Healthcare Capital Markets 2018.
Domestic purchasers of the healthcare market continued to dominate with 64% of investment from REITs and quoted UK property companies, followed by 12% UK institutions and 12% private UK property companies with just 2% from overseas investors.
Julian Evans, Head of Healthcare Hotels & Leisure, Knight Frank, commented: “Last year was a strong year for healthcare investments. Investors, both domestic and international, sought defensive sectors to invest in, attracted by the long-dated income, typically comprising 30-year lease terms, with either Retail Price Index linked or fixed uplifts the care home sector remains an attractive target for investors. The sector’s institutional appeal is broadened by low yield conditions in both the bond markets and broader commercial property markets. The fundamentals of the care home sector remain robust.”
Prime healthcare yields range from 4% to 6% dependent on factors such as tenant covenant, location and the level of acuity. Prime healthcare yields have compressed further for elderly care homes to 4% driven by the current supply shortage in the market. With the entrenched crisis in UK care home bed provision showing no sign of abating this will inevitably increase investor appetite, supporting further new entrants into the market and subsequently drive up prices to maintain the downward pressure on yields.
Julian Evans, continued: “The healthcare sector is one that is least affected by Brexit volatility, as demand for healthcare services is typically driven by domestic factors. Just weeks into 2018, healthcare transaction volumes have already reached £75 million and Octopus Healthcare has completed a fund raise of £85 million to focus exclusively on the UK care home market.
“There will be further investment from infrastructure funds and the emergence of new UK REITs and Asia Pacific funds. There is circa £3.5 billion of UK private equity and circa £20 billion of overseas private equity looking to enter the UK care home market.
“Attracted by the UK’s ageing population, an under provision of care home beds, the attractiveness of long-dated income and a weakened sterling, overseas investors will re-enter the buoyed market in the coming year. Furthermore, pension funds and institutions are increasingly diversifying portfolios into the healthcare sector, as they remain under pressure to match their liabilities against long-dated income.”