After a nasty bout of sickness brought on by the economic downturn, the UK healthcare market is beginning to look in better shape.
“The level of new development has really shot forward in the past couple of years,” says Craig Woollam, head of healthcare at Savills. “Things had been very slow, but we are now seeing new developments outpace closures.”
The market is poised for growth, and the type of healthcare facilities to be delivered in the future is up for grabs. In terms of property, both for the elderly and for the wider population, markets overseas could provide clues as to where opportunities lie.
There are around 428,000 private and voluntary beds in the UK’s nursing and private care sectors, with just 14% of care-home stock built since 2000, according to Savills. And, thanks to the demand brought about by an ageing population, the market for senior housing looks sure to grow. “When you look at the underlying quality of those beds, there is an opportunity for providers to come in and develop high-standard new-build,” says Woollam.
Meanwhile, changes to NHS service delivery models are likely to have an effect on primary care facilities. Like much residential care property, many doctors’ surgeries and clinics are outdated, with huge pent-up demand for new buildings.
As plans for these buildings take shape, what can developers and investors in the UK healthcare sector learn from markets overseas?
Flexible approach in US
The US spends more per capita on healthcare than any other country in the world. With an ageing population, its approach to senior living is well developed. Continuing care is already a firm principle. This allows the elderly to enjoy increasing levels of care on a single site, as and when required.
For example, The Clare at Watertower in Chicago is a 57-storey tower containing luxury apartments that have been lightly adapted for use by the elderly. The lower floors contain a mixture of assisted living, nursing and memory-support facilities.
“This means that, rather than separating couples by moving one into a nursing home, care can be delivered in the place where they live,” says Jeremy Tasker, head of healthcare at Colliers International.
Such facilities can also be arranged in retirement communities at ground level. Tasker believes this sort of facility has the potential to grow in the UK. “People will be keen to do this, rather than struggle in their own home and then move into a nursing home,” he says.
Senior housing in the US tends to be more flexible in layout than that in the UK. A forecast increase in people aged 85 and over, and an associated rise in dementia cases, means the UK could usefully look to the USA for guidance on more adaptable living spaces.
“Flexibility of space is a key issue,” says Dr Mike Shillingford, head of healthcare at specialist developer MedicX, who has worked in the US. “Supported living is different from dementia care, and most developments are being designed more flexibly.”
Senior housing is popular among specialist healthcare REITs in the US, leading to big transactions. Ventas, a REIT, recently acquired Nationwide Health Properties for $5.8bn, which included 300 senior living projects.
“Senior living is in great demand because it’s seen as a solid, defensive asset class,” says Jeff Cooper, senior managing director and healthcare specialist at Savills in New York. “There is a lot of capital chasing the product and yields have fallen to between 6.25% and 7.25% for the best buildings, whereas 10 years ago we were in double digits.”
Assisted living, where a mix of basic support is available for residents, is generally popular with investors. Cooper says this is partly because it follows a private pay model and fees tend to be high, favouring a strong return.
Another popular investment class is the medical office building, which usually includes a mix of doctors’ offices and ambulatory (outpatient) care facilities. The 10-storey, 460,000 sq ft cancer centre at Baylor University in Dallas (pictured right)- developed by a jv between Duke Realty and Northwestern Mutual Life Insurance, with finance arranged by Savills – is an example.
The growth of the MOB market is linked partly to US health policy. “The US government is squeezing providers on fees for service and moving towards a fixed-cost model,” says Phil Hall, head of healthcare at Jones Lang LaSalle. “This is putting pressure on hospitals and causing them to move as much as they can to less-expensive outpatient facilities. We are seeing a big increase in demand for primary care and outpatient facilities.”
Cooper adds: “They are recession-resistant and are especially attractive because they are leased to the hospitals, so there is a regularity of income stream with a very strong credit background.”
Although MOB development in the UK on the scale seen in the US remains a pipe dream for now, the outcome of NHS reform could lead to the growth of multi-purpose ambulatory care centres, which could be equally popular with investors.
MOB rule in Germany
The German structure of medical office buildings, or Gesundheit centres, provides another example of the direction the UK could be heading as NHS reform takes shape.
These are typically 30,000-50,000 sq ft in size, with between 10 and 20 tenants. “At their heart is a specialist medical practice,” says Allan Weiner, European managing director of developer MedicX. “There could be healthcare retail on the ground floor, with perhaps a gym or a spa.
“On the upper floors would be a number of consultants who are able to refer patients between themselves and make use of each other’s services.”
Weiner’s colleague, Dr Mike Shillingford, says a combined facility such as this could be the future product of “service integration” in the UK health service. The company is already a leading developer of medical property, such as the Lytham Primary Care Centre in Lancashire (pictured).
Shillingford says: “It’s about working out the best way for a patient to pass through the system with the lowest cost and the maximum benefit. The right building is simply a tool – an enabler for healthcare.”
Village people in New Zealand
The New Zealand model of senior housing is more focused on the continuing care retirement community model than that of the UK. While some UK operators are developing this model – which allows older people to move progressively through increased levels of care on the same site, according to their changing needs – specialists believe the market could grow hugely.
Ryman, a major operator in New Zealand, has 23 CCRC villages. Typically, they contain 100-150 cottages and a 100-bed care home with a range of care provision, as well as small serviced apartments with care facilities. In contrast, the largest provider of such space in the UK is Retirement Villages, which has just 11 such facilities.
“Investors from New Zealand and Australia can see the UK has a massive population and few villages, so they are sensing the opportunities,” says Ben Rosewall, senior surveyor in CB Richard Ellis’ alternative investments team, who has worked in New Zealand.
Rosewall says the development of CCRCs needs to be focused around care delivery, rather than a straight property play. “Operators are not looking for a quick turnaround development profit, but rather the long-term cashflow derived from resale of units,” he says.
Typically, a resident does not buy a property outright but enters an agreement to occupy a unit and pays an upfront sum equivalent to the sale price. The agreement sets out both the landlord’s and the resident’s obligations as well as a deferred management fee, charged for provision of facilities.
DMFs are typically 20-30% of the sale price and accrue annually, which means a 30% DMF would equate to 6% pa for the first five years. On a sale price of NZ$200,000 (£97,000), for example, a 30% DMF would be NZ$60,000, assuming the resident had occupied the unit for five or more years.
When the resident leaves the property, the agreement is terminated and the sum paid at the outset is refunded to the resident, minus the accrued management fee. In this example, the resident would be repaid $140,000 and the landlord is then able to resell the property, banking the likely uplift in capital value during the five years the unit was occupied.
Although lifestyle, social attitudes and limited availability of land mean the development of large-scale retirement villages in the UK could prove challenging, Rosewall believes New Zealand could provide clues about where the UK senior housing sector is headed.
