Last month, the Healthcare Real Estate Conference hosted by Laing Buisson highlighted an improved outlook for investors focussed on healthcare real estate. Increasing investment into UK healthcare infrastructure could help tackle a major challenge currently facing the NHS by providing both the capital and much needed expertise for the provision of specialist housing and medical facilities to meet modern day standards. Some of the key themes from the conference are set out below:
Healthcare infrastructure currently represents £163bn in value of the total built environment and statistics show total returns of 9.1%. Investors are recognising demographics as a key driver of demand, with average portfolio allocation to the sector from institutional investment expected to increase from 6.1% to 9.5% by 2023. In 2018, investment into the healthcare sector placed second only to industrial real estate as one of the fastest growing areas of the market. Coupled with a strong and stable outlook for rental growth across the regions, it’s easy to see why the healthcare sector has recently become the subject of significant domestic and overseas investment.
A recent global survey of investors highlighted the key challenges to be faced in this expanding market. 45% of investors who responded stated ‘a lack of investor skills/capabilities within my organisation’ as a challenge to investing in healthcare infrastructure. This was closely followed governmental/regulatory barriers (44%), a lack of project pipelines and, fundamentally, a lack of quality stock. In the UK, a lack of available land and restrictions on planning reduces the number of opportunities for cost-effective developments, particularly in the urban market, perhaps explaining why this sector is considered underdeveloped compared to other markets (e.g. the US or New Zealand).
Worryingly, the number of 85 year olds in the UK will double in the next 20 years. The surge in population and ageing demographic means the demand for hospital beds, care homes and assisted living and specialist facilities is now rapidly outstripping supply. A review undertaken by Robert Naylor in 2017 pronounced the NHS estate to be overwhelmingly unfit for purpose, predominantly as a result of flagging local investment and a steadily declining capital spend since 2007. 18% of property was found to predate 1948, and the maintenance bill was estimated (conservatively) at £5bn.
As well as encouraging private capital investment into the NHS, Naylor emphasised unlocking value already tied up in the NHS estate in prime locations within London, which could help regenerate sites and convert existing NHS facilities into social housing. A key concern arising is the fact that inappropriate housing in the UK costs the NHS £4.3bn per year (e.g. through treating circulatory and respiratory disease caused by cold/damp housing). With significant challenges surrounding the affordability of housing in London and the South East, there is evidence to suggest that this is causing substantial recruitment problems for the NHS - a particular issue in the face of growing demand and existing staffing shortages. As a significant holder of land, the NHS needs to face up to this challenge.
The introduction of NHS Local Investment Finance Trusts (LIFTs) and extension of the Private Finance Initiative (PFI) have secured significant capital investment for the NHS (though at considerable cost in on-going financing and facilities payments). Given the current risk profile of NHS investments, they are likely to attract significant attention from private investors over the coming years (particularly in a post-Brexit period of uncertainty).
The number of healthcare deals is rising as infrastructure investment funds move into the sector, albeit armed with specialist underwriters and advisors with regulatory expertise to navigate this complex sector. It is no secret that the UK government invests significantly less capital into the healthcare system than their counterparts, and this is already showing through antiquated facilities. It is encouraging to see the private sector rally to meet the needs of such an important sector with the sector drawing increasing attention from a mix of investors both domestic and overseas who are attracted to the longer-term stable income yields. As life expectancies continue to increase, the demand for care homes and assisted / specialist living facilities will no doubt continue to drive growth in this expanding sector and we are excited to be part of this.