Feature: DAC Beachcroft’s Stan Campbell and Savills’ Lydia Brissy look at healthcare real estate trends in UK and Europe

There have been two major disruptors in UK and European markets in recent years: Brexit and the Covid-19 pandemic have impacted on investment trends and driven investors to look more closely at healthcare real estate as an asset class, an asset class which now rivals only logistics.  Stan Campbell, partner at DAC Beachcroft, and Lydia Brissy, Director European Research at Savills, discuss what is coming next for healthcare real estate in the UK and Europe, and what this means for investors with an eye on the future

A mixed landscape of opportunity

The full spectrum of healthcare real estate is a massively broad one, encompassing buildings and facilities from GP surgeries, hospitals (private and public) to senior housing and care homes – to name a few, and each of these areas will be subject to differing trends as the future unfolds.

A key theme discussed was whether the development of ‘suitable sites’ for healthcare potential could include new city centre schemes to repurpose redundant retail, office and hospitality space. These schemes would require some innovative solutions to maximise space and, as one expert put it, this would require vertical thinking (going higher).

While each aspect of the healthcare market is influenced by its own specific conditions, a consistent theme here, and in many predictions about healthcare real estate, is flexibility: facilities will need to adapt to future ways of working and allow the adoption of any new technologies that may come to fruition.

Government policy presents further areas for growth in the UK

Government seems keen to invest in the health estate as well, with initiatives such as the ‘New Hospitals Programme’ – which was introduced by the Government as a result of its manifesto in light of the Brexit vote in 2016 – designed to deliver new world-class hospital facilities in the UK, setting the tone for the development of healthcare real estate over the coming years.

Alongside this, emerging market conditions such as the recent Government announcement of plans to raise NI tax in the UK by 1.25% to fund health and social care will also drive interest in this sector even further.

On the face of it, this new investment looks promising, and we would certainly say that it is a needed step in the right direction. However, while the funding sounds impressive, it is a drop in the ocean for the NHS and its estate. The ‘New Hospitals Programme’ aims to build 40 new hospitals by 2030, with a budget of £3.7bn (US$5bn). However, the cost of a single new hospital build is likely to exceed £1bn.

Government money, as Naylor mentioned in his 2017 review, is not and cannot be the only answer – to transform the estate, private sector investment will be needed and as an investment proposition the NHS estate, with its steady government backed long-term reliable yields, is a very attractive proposition.

There is no appetite to sell off the NHS, it is one of our national treasures, and should be protected, but perhaps there is interest in the development of more of a short-term investment. Something which allows investors to harness the value of the estate for a period which would release capital for the NHS to use.

Whatever the solution, it will need to be new and collaborative and very different from the failed PFI schemes of the past. If this can be found, both public and private sectors will thrive.

Growth across Europe

When it comes to trends across both the UK and Europe, there is a lot of consideration around ‘pandemic-resistant’ investment choices, which are often pointing away from harder hit sectors such as retail and towards investments in healthcare more generally, as well as supported housing, or housing with care.

A Financial Times article from March this year stated that commercial tenants had paid just one fifth of the rents owed, compared to the supported housing sector, where companies like Civitas have repeatedly announced strong results. At the end of Q1 in 2020 Civitas Social Housing reported that it had collected 99% of its rents, and at the end of November 2020 it was again reported that: ‘Civitas Social Housing’s rental income rose by 6% in the six months ended 30 September and it remains bullish in its outlook for next year, seeing ‘compelling opportunities to invest further’.

Healthcare real estate currently offers similar reliable returns for investors, particularly when it comes to residential care and supported living.

The surprising robustness of the elderly care sector

After the onset of Covid-19, it was assumed that the elderly care sector would be decimated with care homes and retirement living communities losing a significant percentage of service users/occupants over a short period of time.

However, far from highlighting its vulnerability, the sector has bounced back rapidly and, according to Lydia Brissy, Director European Research at Savills’, their latest report, European Senior Housing & Care Home Investment, highlights ‘strong reactions from operators have enabled them to reinstall health and safety amongst residents. With admissions and occupancy fast growing back to pre-pandemic levels’. When it comes to looking ahead, with rapidly aging populations across the UK and Europe, the ‘fundamentals of the senior living sectors are solid, based on long-term demographic changes’.

According to the report, more than €4bn were invested in senior housing and care homes in Europe during the first half of the year 2021, a record level for a six-month period and 38% above the average past five years. Covid-19 has not affected investor interest in the longer term, either in Europe or the UK, and despite the fragility of care homes, operators in the market have reacted quickly, proving their resilience and remaining attractive to investors.

Alongside this, the impending crisis of an aging population across Europe (and the UK) will create ample opportunity for further investment and reliable growth over the coming decades. Although the timing of this will vary from country to country, it will eventually affect all of Europe, making senior housing and care homes an attractive investment prospect with secure and long-term rental incomes.

Cross-border investments will continue to grow

Cross-border investments also continue to rise. In its report, Savills state that ‘cross border investment accounted for nearly 60% of the total volume, a record share’ since the beginning of 2021. The report also cites Belgium, France, Luxembourg, the US and Sweden as the major players in cross-border capital.

Once again, it is the senior living sector that is attracting a growing amount of foreign capital, and countries like Italy and Spain, where the supply of residential care is limited, will have huge potential for growth.

The UK is seeing this trend as well, and the impact of Brexit so far appears to be negligible and has not stymied any interest from Europe, or the US.

Savills’ report on Europe states, ‘we anticipate investor interest for the sector to keep on growing and increased competition from US investors’. The UK’s story will not be dissimilar. In fact, the UK healthcare system has a lot to offer potential investors, especially those looking for ‘pandemic resistant’ options, with publicly funded alternatives looking like more reliable options that provide solid returns.

Disruption will always pave the way for news trends and it is clear that the aging care sector will see a significant amount of long-term development, alongside an increase in cross-border investments.

What is most important is that the sector continues to look strong – particularly for investors who have their eye on growth trends and are ready to grasp the opportunities that will present.