Amid the post-Brexit uncertainty, the specialist property sector has stood firm, particularly the retirement and health care sectors, which are not just weathering the storm, they are prospering.
Big operators in healthcare such as Assura, Primary Health Properties and Target Healthcare REIT have all seen share price rises since the 23 June EU referendum. Today one of the big London agents talks privately of £3bn of health-and-care valuations in progress, most of which will lead to deals. Compare that with the £2.8bn transactions in the UK private healthcare sector during the whole of 2015 and it’s clear to see the direction the sector is moving in.
Alternatives of all kinds – but particularly retirement and health – depend much less on economics than they do on demographics. Demand is predictable – or growing – and although the sector is not impervious to economic ups and downs, it is resilient. Strong results from PHP – net rental income up by 5.2% to £32.2m in the six months to 30 June – prove the point.
With interest rates on the floor, and negative real returns on bonds, the health and retirement sector’s appeal to investors has rarely been stronger. Combine steady returns (while others falter) with a wall of money (thanks to sterling devaluation) and you have in a nutshell the soaring summer 2016 appeal of health and retirement care alternatives.
Neil Meredith, head of UK business space at Schroders, says it is increasingly pointing its firepower at specialist property.
“Income is the holy grail for investors at the moment and alternatives offer income,” he says. “It’s too soon after the 23 June Brexit vote to say more deals are being done, but yes, more funds are looking at alternatives.”
Worth the risk
Meredith is clear this is not a risk-free option, but it is worth exploring, he says.
“We’re looking carefully at the demographics behind alternative investments. We’re looking in much more detail because there are some issues here. For instance, if EU citizens can’t live and work here easily, that would change the dynamics for the NHS, where these people are an important part of the workforce,” he says.
Matthew Hodgkins, AMP Capital’s head of European listed real estate, also sees an opportunity for alternatives after the referendum and the accompanying devaluation of sterling. But he too warns against overexcitement.
“Alternative property has been emerging for the past few years, and it will speed up from here. UK transactional data is limited, although what we’ve seen is okay, and the depreciation of the pound has led to an influx of money looking for a cheap deal. Hong Kong investors are acting like vultures and looking at health care along with much else.”
Whatever the money men think, operators know a good opportunity when they see one.
Retirement home specialist LifeCare’s chief executive, Richard Davis, says the post-Brexit influx of potential investors and a fall-off in residential prices have encouraged its growth plans. It has a second London site in planning, but talks are in progress on acquiring four more, each capable of providing 100 apartments and a 30-bed care home.
“If you are targeting customers in their 70s or 80s, then their decisions are often driven by needs, not by lifestyle choices. Decisions can’t be postponed because the economy looks uncertain. They have to be dealt with regardless,” he says.
“We see opportunities for further growth, particularly to acquire land while residential developers are sitting on their hands.”
Knight Frank data showing prime central London land prices down by 9.4% for the year is encouraging Davis to get moving.
Brexit breakthrough
PHP managing director Harry Hyman says: “Demographics are driving the agenda in both the health and education sectors.
“After the Brexit vote we are beginning to feel an opportunity because the froth has gone out of the residential sector. That has been the breakthrough for the kind of primary care property we’re interested in.”
And capital is not a problem. Hyman says: “The banks are very keen to lend. They see us as safe because 91% of our rental income comes from the government. And bond holders are looking at us because interest rates are so low. There is a lot of potential in the sector right now, enormous opportunities.”
PHP’s recent £150m fund-raising has given the company the firepower for further buys and has reduced its LTV. The firm has already acquired 19 new primary care premises, adding to a £1.2bn portfolio. It looks unstoppable.
Julian Evans, head of healthcare at Knight Frank, says Asian and Australasian investors are joining Chinese investors in sniffing out new alternative property opportunities in the UK.
And because health and retirement care are sharia-compliant, many Arab investors are following.
“I suspect we’ll see stellar performance over the next 12 months,” he says. “The health and retirement care sector are ripe for consolidation, but for now the stock of institutional-grade investment is massively outstripped by demand from investors.”
With the NHS pushing ahead with a five-year plan for more local medical centres – and the national living wage expected to knock 6,000-plus older, less-efficient care homes out of business – the opportunities for new providers have never been clearer, he says.
Rules of thumb
So what do newcomers wanting to buy this summer need to do? The answer from most old hands is to forget, to some extent, real estate’s usual rules of thumb. Focus on the operator and not the property; and on the business and not the geographic location.
“The operator is the key to alternatives, not the real estate. If you go in thinking that it’s all about property, then you risk making a real mistake,” says Schroders’ Meredith. His advice is to back tried-and-trusted operators.
Investors should not get hung up on locations, and should think about business models instead. “The healthcare market is geographically agnostic, really. What matters is how the operator is working, how good it is,” says Shaun Skidmore, senior director at CBRE.
The healthcare sector is busier than ever. Two months after the Brexit vote, big deals – such as the £100m acquisition of Exemplar’s mixed-care portfolio by Agilitas – are being digested. But if insiders are right, that deal could begin to feel small fry as investors make their big-time debut.
Close-up: Ryman Healthcare
Jeremy Porteus has been advising the UK government on capital spending into retirement homes for over a decade. He estimates that, since 2011, between £3bn and £4bn of private funding has been thrown at the sector.
The UK’s biggest retirement homes builder, McCarthy & Stone, raised over £330m when it floated on the stock market last November before reporting a 20% jump in sales over the whole year in its latest half year results to February 2016.
But the UK still trails behind other countries when it comes to delivering housing for its elderly. So is this crucial growth set to continue rapidly enough to bring it up to speed?
New Zealand, known for having one of the world’s most advanced retirement sectors in the world, along with the US, is evidence of just how far we have to go.
An advanced retirement village model, rather than a build-and-sell system more common here in the UK, means the sector there is far more mature. And, as a result, investors in New Zealand are more familiar and comfortable with the retirement housing model.
The good news is that with retirement villages now being mooted as the new PRS here in the UK, the sector might finally be on a significant growth trajectory. “Give this five years and it will be mainstream,” says David Batchelor, executive director at CBRE.
So what should UK firms operating in this space be aiming for? They could do much worse than looking Ryman Healthcare as a benchmark.
The New Zealand-based retirement developer has a market capitalisation of NZ$4.2bn (£2.3bn), is now the country’s fourth-largest company, and could be on a path for worldwide growth. According to one industry expert, “it is the biggest company success no one has heard of”.
Founded in 1984 in Christchurch, the business has not had to go to the market for capital since 1990. Earnings growth is around 15% a year.
LifeCare’s chief executive Richard Davis knows the business well – not least because his mother lives in a Ryman retirement village in New Zealand. He has also worked with equally large – but equally unknown – fellow Kiwi healthcare provider Metlife.
“The New Zealand market is a vision of how the UK could look in the future. We’ve got about 5% of the target population in New Zealand living in retirement villages – compared with 0.5% in the UK. There is no reason why the UK couldn’t get to the New Zealand position,” he says.
“The space the villages offer is fantastic. They combine bungalows, apartments and a nursing home on site, so you have the full spectrum of care, and you stay in the village, moving as your needs change. That makes it less disruptive. In addition, Ryman is both the developer and the operator, which means it gets profit from both sides.”
CBRE executive director David Batchelor also knows the New Zealand market well.
“It’s an interesting model they have out there, and one that has evolved over the past 30 years,” he says. “Retirement living is not a niche in New Zealand. It’s mainstream, and there are three or four successful operations with mature development programmes and proper institutional investments.”
New thinking
The groundbreaking sale of a ground rent portfolio suggests new ways to invest in the healthcare sector.
Knight Frank Healthcare team has sold a portfolio of 41 care homes to Alpha Real Capital for £30m at a net initial yield of 3.4%, on behalf of CareTech Holdings, one of the UK’s leading providers of specialist social care services.
The package of 150-year FRI ground leases, mainly in London and the South East, offered security by way of the operational businesses on long leases to CareTech, but also the comfort of underlying asset values. Ground rent transactions are new to the care sector – unlike the hotel and leisure sectors – and there is hope for more.
Michael Hill, CareTech’s finance director, says: “Moving away from traditional bank-type lending is appealing. Other providers could replicate what we’ve done or come up with variants. It’s something we all want to explore. There’s no reason not to do other deals – we put only 25% of our portfolio into this deal, so there is plenty of scope for more.”
For more on the alternative sector, be sure to pick up Estates Gazette’s specialist property supplement next month
