UK Healthcare Market Shows Resilience as Sector Recovers from the Pandemic

The UK healthcare property market showed resilience against the impacts of the pandemic, with operators reporting recovering occupancy levels and stronger than expected margins, according to global property adviser Knight Frank.

Knight Frank’s latest UK Healthcare Property Market Overview shows that occupancy rates in the elderly care market were down 9.7% year-on-year in 2021, averaging 79.4%. Despite this fall, which was expected by experts given the pandemic’s effects on the sector, operators are now reporting improving occupancy, with all signs pointing toward continued growth toward occupancy rates in the high eighties looking to 2022 and beyond. This would see the sector’s average occupancy return to pre-pandemic levels.

All care EBITDARM1 as a percentage of income averaged 26.2% in 2021. This is a fall of 0.6% against 2020’s figure, a less significant drop than expected given the pandemic’s impact on occupancy. Notably, EBITDARM for the nursing care sector improved slightly by 0.1% on the previous year. The resilience of all care EBITDARM in 2021 points to strong trading in the sector in light of significant headwinds.

Transaction volumes provide further evidence of the healthcare property sector’s emergence from the impacts of the pandemic. Whilst 2020’s record transaction volumes were not replicated in 2021, more than £1.4 billion of transactions were completed in 2021, just 5.7% shy of the ten-year average. Driven in large part by strong interest from international investors, the early investor caution seen at the outset of the pandemic seems to be fading as the sector slowly moves towards normality.

Despite short-term challenges facing the healthcare sector due to the pandemic, its long-term prospects remain attractive to investors. The next 30 years will see demand for elderly care beds grow in line with the UK’s demographic shifts, and the availability of 20-30-year lease terms will continue to offer prospects for strong long-term secure income returns. Those investors looking to diversify their portfolio allocations and re-weight away from more conventional asset classes will also be drawn to healthcare, among other alternative assets. Institutional investors will also be attracted to the sector for its positive ESG credentials.

Julian Evans, Head of Healthcare at Knight Frank, commented: “While 2020 was a record-breaking year for investment into the UK healthcare market, 2021 is a story of consolidation and normalisation. We have seen continued demand from a broad church of both domestic and international investors capitalising on the UK’s demographic trends and the sector’s favourable supply/ demand dynamics to generate stable long-term returns, whilst occupancy rates continue to recover from the impact of Covid-19.”

Current projections indicate that the growth in the UK’s elderly population will potentially lead to a near doubling of demand for care beds by 2050, increasing by 350,000 beds against current levels of demand. Care home closures and this growing elderly population mean that supply is failing to keep pace with demand despite a healthy new development pipeline. The UK elderly care market is at risk of reaching capacity by the end of the decade, heightening the need for new homes to be built and for existing homes to be futureproofed and modernised.