Care business buyer & investor confidence rises says Christie & Co in latest market report
Specialist business property adviser, Christie & Co, has launched its Care Market Review 2024 report, which analyses a range of topics relating to the UK healthcare business market, including capital markets, land and development, the transactional market, shifts in local authority fee rates, operator sentiment, the finance landscape, and a Q&A with Matt Lowe (CEO at LNT Care Developments), along with a spotlight feature on the German market.
Capital Markets
Due to the strong needs-driven underpin and defensive characteristics of the sector, healthcare remains a highly attractive asset class to investors, says Christie & Co. However, the higher cost of capital has been a key issue for investors. This is illustrated at a macro level by the increase in the Bank of England base rate from 3.5 % at the start of 2023 to 5.25 % at the end of the year. This increase was driven by wider inflationary pressures with other important metrics like 10-year UK government gilt yields increasing to a high of 4.6 % in August 2023.
As we move into the second half of 2024, there are clear signs that yields have stabilised with market activity picking up – with a steady increase in the volume of investment activity, a number of major processes being launched, and more funds looking to actively participate as buyers. This reflects a combination of new capital entering the market and existing funds becoming more acquisitive. It is illustrated well by both real estate investment activity and wider corporate/private equity transactions.
Land and Development
The UK planning system continues to be unpredictable and protracted, with refusals occurring at a local level often for political reasons or simply poor processing of applications due to under-resourced planning departments. Market participants are also now having to navigate recent planning policies such as Biodiversity Net Gain (BNG) and Nitrate Neutrality which can be both challenging and costly to adhere to. In addition, a recent update to Part L Building regulations is placing more onerous standards relating to the energy performance of new buildings which has also increased construction costs. However, Christie & Co notes a general stabilisation of construction costs following a period of significant inflation, and recent tender pricing has pointed to a settling down of this key component which is allowing confidence to return.
Despite a correction in land values across many property sectors, land values for care home development sites are faring better, with operators increasingly recognising the value in the certainty that consented sites provide, and the supply continues to be constrained by the planning system. Additional value creation continues to take place in the UK by way of Opco multiples being achieved by high-quality leasehold platforms, and Christie & Co anticipates seeing more evidence of transactions to support this over the coming 12 months.
The supply of purpose-built senior housing is significantly behind that of other developed countries but delivery volumes and planning activity are now steadily increasing in the UK. Recent schemes in the UK have generally catered for either the luxury or affordable ends of the market, but newer entrants are targeting the mid-market where there is the attraction of mass demand. Established retirement living providers have continued to bring forward schemes of 50 to 80 units in urban areas close to high street amenities. However, Christie & Co is increasingly seeing successful applications for larger Integrated Retirement Communities (IRC) products.
Transactional Analysis
An analysis of Christie & Co’s transactional data revealed an increase in the proportion of larger care home sales in the first half of 2024, with the sale of assets over 40 beds comprising 58 % of its total volume, compared with 52 % in 2023. Meanwhile, the percentage of sales of homes with under 20 beds dropped to 11 % of its volume, broadly similar to 2022 figures.
The proportion of transactions concluded to new entrants in the first half of 2024 was over double that of 2023, at 9 %. The number of first-time buyers was at an all-time low in 2023, reflecting a tough lending environment in 2022 together with a sector that was still recovering from the pandemic. Small and medium groups were the most active buyer group in the first half of 2024, representing 33 % of Christie & Co’s completions. However, the number of deals concluded to larger groups declined, shifting from 36 % in 2023 to 29 % in the first half of 2024. This is likely to be due to the softening of yields in 2023, reducing activity in the sale and leaseback market.
An analysis of the vacant possession deals transacted in 2023 shows that 58 % were sold to care-related buyers. 24 % of the transactions were to buyers seeking to convert the property to a specialist care facility, and 20 % of buyers sought to reconfigure the property and re-open as an elderly care facility. 27 % of closed care homes sold through the broker went to residential developers.
Local Authority Fee Rates
Christie & Co analysed a Freedom of Information Act survey, covering all 174 local authorities across England, Wales, and Scotland. It found an average residential fee increase in England of 9 % compared with 9.5 % in 2023/24. Fee rate levels remain a challenge in some areas, with the increases being insufficient to offset inflationary cost pressures, and Christie & Co expects that the burden on the self-funded client base is likely to rise, with the majority of providers achieving private fee increases of between 5 % and 10 % or more.
Operator Sentiment Survey
Christie & Co interviewed a cross-section of local and regional care providers throughout the UK to gather their sentiments on the sector. The survey revealed:
60 % of operators in the UK have a reduction in agency usage over the last 12 months, whereas only 13 % stated agency usage had increased. 75 % of providers in Wales reported a reduction in agency usage with only 50 % of Scottish providers reporting a decline
59 % of operators reported an increase in local authority fee rates
In Wales, 88 % of providers reported local authority fee increases of between 5 % and 10 %. As in England, there is a huge disparity in baseline local authority fees, with a 29 % difference between the highest-paying authority in Wales to the lowest
Private fee rates increased across all country regions, with 63 % of operators reporting a 5 % to 10 % increase. 18 % of respondents reported increases of over 10 % compared with 36 % with local authority fees, suggesting that there has been some improvement on the LA side to align fees
62 % of surveyed operators from England reported a 5 % to 10 % increase in private fee rates and 27 % of Welsh-based providers surveyed increased their private fee rates by over 10 %.
In England and Scotland, over 40 % of respondents are looking to expand their portfolios, whilst sentiment is stronger in Wales where 67 % of respondents are looking to acquire in the next 12 months
Given the uncertainty around interest rates, there remained some degree of caution from operators, with a quarter still unsure over their appetite going forward
Finance Landscape
In a section on the finance landscape, Christie Finance notes a positive sentiment from funders lending into the sector and an increase in demand for finance, with the broker having completed 23 % more transactions in the first half of 2024 against the 49 % increase in offers of finance.
There has been an increase in operators seeking unsecured business loans and asset finance to support refurbishment, upgrade and improvement projects which, in some cases, have been put off due to external pressures and a perceived lack of access to finance of this nature. These types of projects made up 40 % of lending within the sector in H1 2024.
Additionally, in a survey of lenders, when asked about the key challenges they face when underwriting a transaction, 18 % said regulation and 22 % said client income/turnover. When asked about their bank’s opinion of the UK economy over the next 12 months, 65 % of lenders said they expect to see growth.
Richard Lunn, managing director – care at Christie & Co, comments, “We’re seeing a renewed appetite from both buyers and investors in the market which has resulted in a strong level of transactional activity across the whole of our team, with a big emphasis on trying to conclude deals ahead of the Budget in late October. Our average deal time from acceptance of an offer to completion of the transaction has materially increased from five and a half months to nearly eight months, the reasons for this are numerous including greater diligence, insurance cover challenges, and regulatory registration implications. Clearly, changes in the Budget such as important tax regimes including IHT and CGT could materially impact both deal times and the seller’s desire to transact.”
To read the full Care Market Review 2024 report, which also includes an overview of the German healthcare market and a Q&A from CEO of LNT Care Developments, Matt Lowe. visit: https://www.christie.com/care-market-review-2024/
