Healthy returns for the healthcare sector

5 Jul 2016

Policy area: Healthcare

In one of eight articles for the BPF Annual Review 2015-16, Imogen Ebbs, member of the BPF Healthcare Committee, reviews the trends that have dominated the sector in the past twelve months, as well as what lies ahead.

The healthcare real estate sector encompasses GP surgeries to care homes, hospitals and more.

As an investment class, it can provide long term, stable returns for investors and make an important contribution towards the social infrastructure of the UK. In the past year, the sector’s appeal as an asset class has continued to grow. MSCI IPD data showed that average returns reached double digits in 2015, with the performance gap narrowing between GP surgeries and care homes.

However, investment into healthcare real estate faces many challenges. Bank lending criteria remain tight for many commercial and non-commercial property sectors, which makes it difficult or expensive to fund new development from traditional sources of finance. Alongside this, there are many other cost headwinds faced by operators.

The care home sector immediately felt the impact of the introduction of the National Living Wage this year, due to the increased payrolls needed to run a care business. For those homes largely reliant on private pay residents, the option to raise weekly fees will help absorb some of this, but fees cannot be raised in perpetuity. The announcement in the 2015 Autumn Statement that local authorities will be able to levy a 2% rise in council tax to exclusively fund adult social care was helpful, but is not a complete solution to relieving cost pressures on operators, particularly for homes with many publicly-funded residents.

There are signs, though, that positive change in the sector may be coming down the tracks. In April, NHS England published the GP Forward View, which recognised the essential of role of buildings in providing excellent care and supported the modernisation of future primary care delivery, including premises.

In addition, the Law Commission has been working closely with DCLG and stakeholders to ensure leases purchased in a retirement community are transparent and fair – particularly in regard to exit fees. This should go some way to providing the clarity and certainty required to encourage more lenders and investors into the sector, and this should deliver wide ranging benefits, from improved housing choices for older people to freeing up existing residential stock.

In the coming year, we will work with government to improve transparency in the rental reimbursement scheme that allows GPs to claim back rental costs from the state. This should give GPs the confidence to take out new leases and correspondingly buoy investor confidence.

There are also exciting initiatives around health and social care integration, and devolution in the regions, which should encourage a wave of property developments out of the ground, from step-down care to expanded primary care hubs. The BPF Healthcare Committee looks forward to being at the forefront of delivering these opportunities to investors and the public alike.

- Imogen Ebbs is a member of the BPF Healthcare Committee and Senior Asset Manager at Legal & General Real Assets