Christie & Co launches 2023 review of UK healthcare market
Specialist business property adviser, Christie & Co, launched its Care Market Review 2023 report, which analyses a range of topics relating to the UK healthcare business market, including healthcare capital markets, land and development, the transactional market, operational costs, shifts in local authority fee rates, operator sentiment, the German healthcare market, and the finance and insurance landscapes.
HEALTHCARE CAPITAL MARKETS
The first half of 2022 reflected the peak of the market, with the economy in an optimum low interest rate environment and average UK Bank of England base rates at 1.75 %. UK government gilt yields were tracking at 2.2 %, and super-prime yields within the UK care home sector had compressed to record low levels for best-in-class assets.
Entering 2023, the market began to adapt, with buyers returning albeit with yields adjusting to reflect higher costs of capital and the changing market environment. Positively, despite the macro-market challenges, there is good demand for care home opportunities, with investors attracted by the strong needs-driven underpin of the sector coupled with long-term index-linked cashflows.
LAND AND DEVELOPMENT
The underlying business case for purpose-built care homes remains robust, with a continued need for future-proof market-standard beds in many locations across the UK. Despite operators continuing to face significant headwinds – in particular, construction cost inflation and the cost and availability of capital – the care home development market remains active, says Christie & Co, which continues to transact a high volume of new-to-market beds within the UK. Sentiment remains good, with more operators prepared to take leases on new build assets as a way of achieving growth, resulting in an upward movement in rental levels over the 12 months to June 2023.
Christie & Co is starting to see more domestic and international capital entering the market, attracted by the defensive characteristics of needs-driven Operational Real Estate and the excellent ESG credentials new care homes offer to investors. This additional liquidity, accompanied by the continued imbalance between demand and supply of market-standard beds to cater for the rapidly ageing demographic, will support sustainable levels of transactional activity for consented care home development sites in both the short and long-term.
TRANSACTIONAL ANALYSIS
Key transactional trends in H1 2023:
Instruction volumes rebounded, sitting 70 % ahead of where they were in H2 2022
There was a rise in the number of larger care homes (60 beds or more) going up for sale
Only 3 % of our transactions were to first-time buyers, around a third of the proportion in 2022
There was an increasing number of transactions concluded by the larger companies and corporates
Independent buyers remain the broker’s most active buyer group, accounting for 34 % of its deals in 2022 and 36 % in 2023
In 2022,13 % of Christie & Co completions were on a closed basis, this increased to 18 % in H1 2023.
In H1 2023, 45 % of closed care home deals were sold to care providers for ongoing care use and 55 % were purchased for residential conversion.
OPERATIONAL COSTS
Christie & Co data shows that registered managers’ salaries, on average, increased by 13 % between 2021 and 2023. There are even greater wage pressures on kitchen staff, with head cook wages increasing by 14 %, on average. The situation with maintenance staff is also acute, with wages rising by 18 %. An analysis of utility costs shows that heat and light costs have also increased by an average of 19 % on a per-occupied bed basis.
LOCAL AUTHORITY FEE RATES
When conducting and analysing a Freedom of Information Act survey – covering all local authorities across England, Wales, and Scotland – Christie & Co found:
An average residential fee increase in England of 9.5 % compared with 5.4 % in 2022/23
An average nursing fee increase in England of 8.1 % compared with 6.8 % in 2022/23
Fee rate levels remain a challenge in some areas, with the increases being insufficient to offset inflationary cost pressures
The burden on the self-funded client base is likely to rise, with the majority of providers achieving private fee increases of 10 % or more
OPERATOR SENTIMENT
For its 2023 operator survey, Christie & Co interviewed a cross-section of local and regional providers in the UK. Results show:
46 % of operators have achieved a reduction in agency usage over the last 12 months, whereas 28 % stated agency usage had increased
Private fee rates increased across all country regions, with 43 % of operators reporting a 10 % or above increase in private fee rates. Only 9 % of respondents reported increases of under 5 %, compared with 31 % with local authority fees
38 % of operators said that occupancy has increased, and 70 % stated it had returned to pre-pandemic levels
THE FINANCE LANDSCAPE
Historically, whilst in low interest rate margins, lenders have applied a higher interest rate or a ‘stressed margin’ to calculate affordability. However, we are now operating in a new stressed rate environment, which has made lenders look in greater detail at a business’s ability to service their current levels of debt, as well as any potential increases.
Results of a survey of a section of local and regional providers conducted by Christie Finance in July 2023, found that 38 % of respondents are looking to buy a care business in the next 12 months, 30 % of which will seek finance to do so. When asked about the confidence they have in lenders to support their plans, 46 % said they are very confident, 18 % said not confident, and 36 % remained neutral.
The report also includes a view of the German care market from Christie & Co’s new head of healthcare in German, analysis of the healthcare insurance market from Christie Insurance, Christie & Co’s key market activity, and a feature section on Care Home Open Week 2023.
Michael Hodges, managing director – Healthcare Consultancy, comments, “Despite the more challenging macro-economic environment, the healthcare property market continues to perform well. Operators have benefitted from encouraging fee rate rises whilst there are signs that agency challenges are easing. Transactionally, the market remains active with there being good demand for appropriately priced stock.”
To read the full Care Market Review 2023 report, visit: https://www.christie.com/care-market-review-2023/
