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Overseas and Private Investors Eye UK Healthcare Market

The UK healthcare property market saw significant investment volumes in 2021 totalling £2.34 billion, with particular interest from overseas and private investors attracted by the underlying demographic shift resulting in higher demand and opportunities for development, according to global property adviser Knight Frank.

The outlook for the UK healthcare property sector remains positive according to Knight Frank’s latest Healthcare Capital Markets report. Strong transaction volumes totalling £2.34bn were significantly above the five-year average of £1.5bn whilst positive occupancy data from operators in the final quarter of 2021 demonstrate a return to pre-pandemic patterns.

The UK healthcare sector is increasingly being targeted by a wide range of investors, attracted by long-term secure income and more stable higher returns than in many core property sectors with healthcare offering an average annualised return of 9.5%. Overseas capital has significantly increased over the past five years, in 2021 accounting for 51% of all healthcare property transactions, followed by REITS and private property companies each accounting for 19% and 18%.

With portfolio deals accounting for over two thirds of transactions in 2021, the year ahead is set to see an active transactional market with transactions totalling approximately £115m by mid-February including PGIM’s acquisition of six care homes for circa £70m and Allegra Care’s acquisition of two homes with a combined 133 beds.

Though there have been healthy investment flows, the sector is still facing the challenges of inflation and supply-chain issues. The new National Living Wage of £9.50 from April 2022 is set to apply further upward pressure on these averages, especially in the hourly rate of carers whilst the increase in the price of raw materials such as aggregates, timber, and steel as well as rising food and utility costs will also be major talking points in relation to the delivery of quality care facilities. With labour shortages and Brexit also contributing factors, investors will need to focus on inflationary pressures despite the attractive pull factors of the sector.

Julian Evans, Head of Healthcare at Knight Frank, commented:

“We are seeing great growth potential for the UK healthcare property investment market, with the demand for best-in-class properties only set to increase as the population continues to age. As is typical across most sectors now, the properties with viable ESG credentials will be the ones which are most appealing to investors and sustainable in terms of the returns they can deliver.

“However, there are a number of headwinds around inflationary costs and supply chain issues in addition to staffing shortages and the industry is watching closely at how much support the imminent social care levy will provide. Development remains essential to meeting future demand levels and currently quality stock availability is a significant barrier to this, so it is through further development that astute investors can enter the market and capitalise on the sector.”

As part of the Healthcare Capital Markets report Knight Frank surveyed a pool of investors with approximately £50bn of healthcare assets globally under management on their view on the state of the market. Comprising institutional, REIT, private property companies and overseas investors, those surveyed revealed that they have over £6bn in capital available and committed to deploy into healthcare strategies. Adult care and elderly care assets were signposted as the investments with the most potential and the demographic shift emerged as the key driver behind these investment decisions.

Knight Frank expects that the investment momentum into the sector will likely continue as overseas capital and REITs remain active in searching for assets to balance a diversified portfolio along with institutional investors chasing social impact.

Investors will continue to pursue ESG based strategies, therefore Knight Frank predicts that due to growing understanding of the social aspect alongside the emergence of the proposition of sustainable finance from lenders, it is likely that healthcare assets will emerge as strong contenders in this space.