Deal momentum to continue, Knight Frank predicts

Julian Evans, head of healthcare, Knight Frank

Transaction volumes across the healthcare property market are expected to maintain momentum this year following a strong performance in 2021.

Investment volumes totalled £2.34bn last year, with growing interest from overseas and private investors, according to research by property adviser Knight Frank.

Deals were above the five-year average of £1.5bn, while positive occupancy data from care operators in the final quarter of 2021 demonstrated a return to pre-pandemic patterns, its Healthcare Capital Markets report said. Volume was aided by the transaction of Medical Properties Trust’s acquisition of a portfolio of Priory homes by way of sale and leaseback.

The report said investors were attracted to healthcare’s long-term secure income and more stable higher returns than other property sectors, offering an average annualised return of 9.5%.

In 2021 overseas capital accounted for just over half of all healthcare real estate transactions, followed by REITS and private property companies each accounting for 19% and 18% respectively. ‘Overseas capital was once again a factor, accounting for 51% of transaction volume with a mix of European operators and REITs such as the likes of Korian and Cofinimmo entering the market with acquisitions within the elderly care space,’ the report said.

However, investment in older people’s care was mostly from REITS, prop-cos and occupiers, while overseas capital showed a heavier focus on private hospitals.

Investment by sector showed a strong 2021 for older people’s care with 82% of volume, on the back of a five-year trend of 48%.

With portfolio deals accounting for over two-thirds of transactions in 2021, Knight Frank predicts an active market this year with business reaching £115m by mid-February including PGIM’s acquisition of six care homes for £70m and Allegra Care’s acquisition of two homes with a combined 133 beds.

‘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,’ said Julian Evans, head of healthcare at Knight Frank. ‘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.’

As part of the 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, REITs, private property companies and overseas investors, those surveyed revealed they had over £6bn in capital available and committed to deploy into healthcare.

Adult care and older people’s care assets were identified as investments with the most potential.

Evans said: ‘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.’

Despite healthy investment flows, the sector is still facing challenges of inflation and supply-chain issues, the report said. The national living wage of £9.50 from this month is set to apply further upward pressure, while 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 issues in relation to the delivery of quality care facilities.

Evans said the industry would be ‘watching closely’ to see how much support the health and social care levy provides.