RESEARCH
HEALTHCARE
CAPITAL MARKETS 2015
HIGHLIGHTS
UK healthcare has established itself
as a mainstream asset class as the
market continues to mature and
attract a broad variety of investors,
both domestic and overseas.
UK institutions have dominated
recent activity, closely followed by
US REITs which have been active
in the private pay care market for
a number of years.
Improved availability of
funding has helped UK
pension funds and institutions
increase their exposure to the
healthcare sector.
KEY FINDINGS
The structural rise in user demand
for elderly care is a key driver
for investment into the sector.
Key trends which will impact the
sector in the future include not
only the expansion of the elderly
population but also changes in
health and dependency levels of
the very elderly.
There has been a resurgence
of demand for specialist care
homes and independent hospitals.
Specialist sectors such as
mental health establishments
and specialist schools are now
also attracting interest from both
domestic and overseas capital,
partly driven by the lack of
available elderly care platforms.
Around £2 billion of private
equity is being earmarked for
healthcare assets in the coming
year and UK pension funds and
institutions are both actively
buying and lending in the sector
with a plethora of funding
opportunities available for
best in class operators with
sizeable platforms.
Further yield compression is
expected on the back of strong
demand for modern, purpose-built
healthcare properties from both
UK institutions and international
investors as debt financing is
readily available.
A growing number of investors, notably UK institutions
and US REITs, are including healthcare assets in their
portfolios. Low inflation and low interest rates are
making investors seek opportunities with good rental
prospects and the healthcare sector is particularly
benefitting from favourable demographics and stable
and very long term index-linked income.
Key drivers
The first quarter of 2015 has seen a flurry
of major transactions and more than
£1.5 billion worth of healthcare facilities
have changed hands in the past 12
months. Investment yields moved in
further over the past year with care
homes selling for yields of 5.0% and
below, predominantly to UK institutional
buyers. The prime covenant market has
compressed and is being hotly pursued by
mid-cap group operators and charitable
covenants at 5.5%.
In contrast to previous years when
overseas investors, and in particular
US REITs,
have been the most
active
UK INSTITUTIONS
PUBLIC PROPERTY
COMPANIES
US in healthcare
buyers,OVERSEAS
investment
properties
PRIVATE PROPERTY
OVERSEAS FAR EAST
is now dominated
by
UK
Institutions
COMPANIES such
OVERSEAS OTHER
PRIVATE INVESTORS
as pension funds and insurance
companies
which have accounted for circa 40% of the
2014-15
market
in the past year; overseas investors
made up around a third of all transactions.
However, there has also been increased
activity from public property companies
while private property companies along
with occupiers have been the main sellers
of healthcare assets (Figures 1 and 2).
more than £100 million, US REIT Ventas’s
purchase (sale & leaseback) of five care
homes from Canford Healthcare, the sale
of Care UK’s Manor Lodge in Chelmsford
to AXA REIM at an initial yield of 4.75%
and TH Real Estate’s purchase of 3 Care
UK care homes for just under £50 million.
Around £2 billion of private equity is being
earmarked for healthcare assets in 2015
and UK pension funds and institutions
are both actively buying and lending in
the sector, with a plethora of funding
opportunities available for best in class
operators with sizeable platforms.
Key transactions include the acquisition
of Meridian Healthcare by HC-One for
UK healthcare property continues to
attract investors because of the sector’s
characteristically long 25-35 year leases
with RPI-linked annual rental uplifts.
Contrastingly, average lease lengths in
the core commercial property sectors in
2014 stood at just 6.8 years for UK All
Property, according to IPD’s Lease Events
Review. Additional benefits can be gained
from increased diversification which has
led investors to raise their allocations
to the sector, evidenced by the number
and value of healthcare properties in the
IPD sample which has doubled over the
past 8 years. The implementation of the
Care Act which in part came into effect in
FIGURE 1
FIGURE 2
Investors 2009-2015
Vendors 2009-2015
2009-15
100
PUBLIC PROPERTY
COMPANIES
PRIVATE PROPERTY
COMPANIES
UK INSTITUTIONS
PUBLIC PROPERTY
COMPANIES
PRIVATE PROPERTY
COMPANIES
UK INSTITUTIONS
PRIVATE INVESTORS
OTHER OVERSEAS
US
FAR EAST
100
80
80
60
60
%
%
40
40
20
0
20
2009-15
2014/15
Source: PropertyData / Knight Frank Research
2
PRIVATE INVESTORS
US
OTHER OVERSEAS
OCCUPIERS
N/A
0
2009-15
2014/15
Source: PropertyData / Knight Frank Research
Total returns 2007 to 2014
35
25
15
5
-5
-15
BEST ANNUAL
RETURN
ANNUAL
AVERAGE
Gilts
Equities
-35
Residential
market-lets
-25
Office
Performance between the main Healthcare
sub-sectors varied slightly in 2014, with
primary care (doctors surgeries, dentists
etc.) delivering the best returns of 10.2%,
compared with 6.3% for secondary care
Specialist nursing homes and
independent hospitals meanwhile
command yields of between 5.50% and
7.00%, a compression of around 100bps
since last year, reflecting the more
challenging nature of the client base
and the danger of reputational damage
following reports of mistreatment at a
number of care homes in the UK.
FIGURE 3
Retail
Moreover, Healthcare’s robust returns are
supported by the lowest level of volatility
in comparison with the other property
sectors, presenting an outstanding
risk-reward profile since the index was
launched in 2007.
In terms of pricing, healthcare assets
offer relatively high yields compared with
the core commercial property sectors.
At around 4.75%, surgeries and clinics
command the lowest yields in the
healthcare sector, as they are typically
backed by robust NHS covenants. Prime
care home assets, at 5.50%, command
the second lowest yields in the market
as demand for high quality purposebuilt care homes and new development
opportunities continues to outstrip supply.
All Property
The Healthcare sector recorded
total returns of 9.0% in 2014 and
underperformed All Property (17.8%) in
2014, following buoyant investor interest
for the core property sectors, according to
IPD’s Healthcare Index (Figure 3). However,
Healthcare assets continue to outperform
the commercial property market over
the longer term, recording average total
returns of 5.9% p.a. between 2007 and
2014, compared with only 3.4% p.a. for All
UK Property. The only segment achieving
higher returns than Healthcare over the
period were residential market-lets which
recorded returns of 8.6% p.a. on average.
Healthcare
Investment performance
and yields
(care homes, hospitals etc.), which was
impacted by a 1.4% fall in capital values.
Primary care has performed well with
average annual total returns of 6.9%
since 2007 and continues to outperform
secondary care, which has seen average
annual returns of 4.3% over the longer
term, although the IPD Index currently
includes only a small number of modern
purpose-built care homes.
Annual total return (%)
April 2015, does not seem to have dented
operator and investor sentiment.
WORST ANNUAL
RETURN
Source: IPD / Knight Frank Research
FIGURE 4
Maximum deal size in the UK healthcare market
UK &
SPECIALIST
DOCTORS
FUNDS
SURGERIES
ASIA
PACIFIC
DOCTORS
FUNDS
SURGERIES
up to
£250m
CARE HOMES
US REITS
DOCTORS
up to
SURGERIES
£1.5bn
DOCTORS SURGERIES
HOSPITALS
up to
£1bn
PRIVATE
EQUITY FROM
DOCTORS
ALL
AREAS
SURGERIES
up to
£500m
MIDDLE
EASTERN
DOCTORS
FUNDS
SURGERIES
up to
£150m
Source: Knight Frank Research
3
Prime healthcare yields
10.0
Other
sectors
Care acuity
8.0
6.0
4.0
2.0
West End Offices
Student Accommodation
PRIME ASSETS
SECONDARY QUALITY ASSETS
Hight Street Retail
Specialist
Care Homes
0.0
Specialist Schools
Specialist sectors such as mental
health facilities and specialist schools
are attracting interest from both
domestic and overseas capital, in part
driven by the dearth of available elderly
care platforms. REITs are also moving
up the acuity curve and are keen to
acquire “post-acute care” assets.
There has been a resurgence of
demand for specialist care homes
and independent hospitals and a
number of deals have seen increasing
multiples including Duke Street Capital’s
acquisition of Voyage, Cambian’s
purchase of Woodleigh Care and
Cygnet’s acquisition of Orchard Portman.
The structural rise in user demand for
elderly care is a key driver for investment
into the sector. The main trends to
impact the sector in the future include
not only the expansion of the elderly
population (the OECD has forecast that
the proportion of over-65s globally will
almost double from 15% in 2010 to 27%
in 2050, while the over-80s in the UK will
rise from currently 5% to 10%), but also
changes in health and dependency levels
of the very elderly. This, and the fact that
up to 80% of the UK’s care home stock
is arguably below ‘institutional’ quality,
provides a clear case for investment in
future-proof care facilities.
FIGURE 5
Private Acute
Hospitals
With UK healthcare becoming an
established property asset class, it is
important to recognise the different
features of its component sub-sectors.
Activity in the care homes sector remains
buoyant with the sale of NHP, the owner
of HC-One, for £477 million late last
year and the acquisition of Gracewell
Healthcare by US specialist Health Care
REIT for £156 million last summer. The
most significant movement in the sector,
however, has been increased activity by
UK institutions which has led to yields
moving in significantly, particularly on
Care UK and charitable covenants which
are now trading between 5.0% and 6.0%.
less volatile than commercial property in
terms of rental growth due to the use of
index-linked leases, traditionally 15 years,
and the fact that covenant strength is
supported by government and the NHS.
Surgeries
& Clinics
Sub-sector activity
RESEARCH
Care Homes
HEALTHCARE CAPITAL MARKETS 2015
Source: Knight Frank Research
Rent cover (EBITDARM profit over
rent) is perhaps the most important
consideration for prospective investors
in care home facilities, as it needs to
realistically reflect an operator’s ability to
pay the rent, given prevailing occupancy
rates and fee pressures. Recent evidence
Trading hospitals let to good quality
operators are being snapped up due
to the shortage of healthcare assets
generally, despite the private acute
sector being regarded as more risky.
The funded development pipeline in
the primary care sector is extremely
low and due to increasing demand for
services, yields have reached record
lows of 4.25%-4.75% for the very best
assets. Primary healthcare remains far
Berkeley House, Hull; Hadrian Healthcare Group
Key healthcare transactions in the last 12 months
Address
Purchaser
Covenant
Price
NIY
6 hospitals
M&G Real Estate
11 senior housing communities (767 units)
Health Care REIT Inc
28 medical centres
New Hall Hospital in Salisbury
Date
The Priory Group Ltd
£223.0m
5.50%
Oct-14
Patron Capital Partners
£153.0m
8.00%
Sep-14
Assura Group Ltd
MP Realty Holdings Group
£107.0m
5.80%
Jun-14
LaSalle Investment Management
Ramsay Health Care
£49.8m
5.30%
Apr-15
3 care homes (264 beds) in
Edinburgh, Orpington and Hailsham
Henderson
Care UK
£48.9m
NA
Feb-15
3 care homes (187 beds)
Legal & General
Care UK
£25.2m
5.50%
Nov-14
4
HEALTHCARE CAPITAL MARKETS 2015
FIGURE 6
RESEARCH
KNIGHT
FRANK VIEW
Healthcare transactions by deal size 2009 to 2015
Yield %
8.50
Investor demand for UK healthcare
property is expected to remain
strong, particularly from UK
institutions and overseas investors
for larger lot-sizes and portfolios.
However, further government cuts
and funding pressures will mean
that investors will focus on the best
quality assets and prime covenants.
7.50
6.50
5.50
4.50
HOSPITAL
CARE HOME
MEDICAL CENTRE
SPECIALIST
3.50
2009
2010
2011
2012
2013
2014
2015
Source: PropertyData / Knight Frank Research
suggests that rent cover between 1.6x
to 2.0x is viewed as an acceptable
requirement level for a new build facility,
depending on operator covenant and
location, including an allowance for
capital expenditure and head office
costs (Figure 7).
Investor opportunities
Availability of good quality care homes
remains limited, creating unprecedented
levels of demand for profitable, fit-forpurpose facilities. The inadequate number
of high quality homes continues to push
up prices for assets of a lower standard,
although buyers generally seek to acquire
homes with full en-suite provision and
an established trading history. The small
number of new homes being built has
heightened demand further.
Generally, London and the South East
are the most attractive areas due to a
growing number of wealthy self-paying
residents, with Kent emerging as a
“hotbed” for new developments. However,
the competition for land, particularly from
the residential development market is
reducing the number of readily available
opportunities, especially along the M4
corridor. Operators and investors are
now seeking sites and homes in strong
regional locations.
Although care homes have attracted most
attention recently, the sector also includes
surgeries, private hospitals and facilities
for mentally or physically disabled people
as well as health centres. These, like
care homes, often operate from outdated
properties which are unsuited to modern
needs. Specialist funds like Octopus
invest in modern, purpose-built primary
healthcare properties let to GPs and the
NHS which provide long term secure
income. Surgeries are attracting interest
from a wide range of potential buyers
from pension funds to high net worth
individuals, as it is easier to secure debt
against their relatively small lot-sizes.
Furthermore there is a growing trend for
more affluent older people with time on
their hands to move back into the city.
This is creating opportunities for a new
market segment catering specifically for
the well-off elderly through the provision
of luxury accommodation coupled with
facilities for care, such as Roseberry
Mansions at London’s Kings Cross.
FIGURE 7
Indicative rent cover for care homes
Residential
Care homes continue to provide
the bulk of investment opportunities
for investors, although hospitals
attract the majority share of
investment into UK healthcare in
terms of value due to their large
lot-sizes. New healthcare housing
models in urban settings which
bridge the gap between care villages
and new operators are likely to
emerge, increasing brand awareness
and supporting new entrants to
the sector.
The care homes segment is
expected to outperform the wider
healthcare market due to a structural
undersupply of future-proof assets
and annuity grade covenants
coupled with increasing demand
for such assets. Sub-sectors such
as facilities specialising in mental
health and learning disabilities are
still undervalued and offer potential
gains through yield compression.
Furthermore we anticipate increased
appetite for ground rents on
healthcare assets.
The weight of money from both UK
institutions and overseas investors
drives demand for modern, purposebuilt healthcare property and is
likely to contribute to further yield
compression as debt financing is
readily available.
Nursing
Mental Health
Acute
1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4
Ratio of profit to rent
US REITs
UK INSTITUTIONS
Source: Knight Frank Research
5
COMMERCIAL BRIEFING
For the latest news, views and analysis
of the commercial property market, visit
knightfrankblog.com/commercial-briefing/
HEALTHCARE
Julian Evans FRICS
Head of Healthcare
+44 20 7861 1147
julian.evans@knightfrank.com
COMMERCIAL RESEARCH
Louisa Rickard
Associate
+44 20 7861 1592
louisa.rickard@knightfrank.com
Maria Grubmueller
Senior Research Analyst
+44 20 7861 5495
maria.grubmueller@knightfrank.com
Front cover image: Ridley Park, Blyth; Hadrian Healthcare Group
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RESEARCH
RESEARCH
GLOBAL CITIES
GLOBAL
CITIES
SKYSCRAPERS
2015 REPORT
SHOPPING CENTRES
INVESTMENT QUARTERLY Q1 2015
Outlook
• Analysts have been increasingly
optimistic on the prospects for the UK
economy. The consensus forecast in
March was for 2.7% GDP growth in
2015, up from 2.6% in February.
THE 2015 REPORT
FIGURE 1
FIGURE 2
Q1 2015
Retail & shopping centre
equivalent yields Q2 2008 - Q1 2015
Who’s selling?
10%
8%
• According to the ONS, retail sales
rose by 4.2% year-on-year in March,
the 24th consecutive month of
annual growth.
• There are some concerns that the
uncertainty of the general election
may impact adversely on sentiment,
but consumers are now familiar with
coalition politics and should adopt a
“business as usual” approach.
CENTRAL
LONDON
C
Prime Global Cities
The 2015 Report
TAKE-UP MARGINALLY BELOW
LONG-TERM AVERAGE
SUPPLY CONTINUES
TO BE ERODED
6.00
5.00
4.50
4.25
4%
2%
1.42
0%
Q2-Q4 Q1-Q4 Q1-Q4 Q1-Q4 Q1-Q4 Q1-Q4 Q1-Q4 Q1
2008 2009 2010 2011 2012 2013 2014 2015
PROPERTY COMPANY/REIT
INSTITUTION
FINANCIAL BANKS
FUND/INSTITUTION
Source: Knight Frank LLP
PRIME RETAIL
REGIONAL S/CENTRE
DOMINANT PRIME
S/CENTRE
GOOD SECONDARY S/CENTRE
SECONDARY TOWN S/CENTRE
5 YEAR SWAP RATES
Source: Knight Frank LLP
Q1 2015 shopping centres transactions
Shopping centre
Status
Purchaser
Vendor
Hammersmith Broadway & Fulham
Broadway, London
Sold
CBRE Investors
William Ewart
Sold
Orion
The Telford, Telford
QUARTERLY – OFFICES Q1 2015
THE FUTURE OF REAL ESTATE IN
THE WORLD’S LEADING CITIES
8.00
6%
• Consumers will benefit directly from
rising employment, lower inflation
(including lower fuel prices) and real
wage growth. All these factors will
boost confidence and spending.
Bentall Centre, Kingston (50%)
YIELDS HARDEN ACROSS
CENTRAL LONDON
Central London
Quarterly Q1 2015
Sold
Gingko
Price (£m)
NIY %
270.5
5.00
Ares
200.0
6.25
Meyer Bergman
190.0
4.40
The Ashley Centre, Epsom
Sold
CBRE Investors
Carlyle
78.0
6.00
Williow Place & Corby Town, Corby
Sold
Europa / Soverign Land
Helical Bar
75.0
7.00
The Mall St George, Preston
Sold
InfraRed
Aviva
74.0
6.45
Clyde, Glasgow
Sold
Cerberus / Edinburgh House
Helical Bar
70.0
7.25
Nicholsons Centre, Maidenhead
Sold
Vixcroft
Irish Life
37.0
6.25
Source: Knight Frank LLP
Global Cities
Skyscrapers 2015
Shopping Centre
Investment Q1 2015
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