Healthcare property attracts risk-averse investors

Investors are looking at the healthcare sector with renewed interest after the property downturn prompted a flight to secure income producing assets. For those keen to minimise risk in their property portfolios, the sector presents an attractive option since it has continued to report positive rental growth in the course of the economic crisis. The real difficulty over the short term will be a shortage of suitable assets, though so-called super surgeries, community health centres and traditional doctor's surgeries offer opportunities.

Those are some of the principal conclusions reached in a recent report by international property services company Savills, entitled "Healthcare, the remedy for the risk-averse". In its analysis, the firm highlights that rental income returns in the healthcare sector over the last five years have outperformed, averaging 6.7% per annum. Its resilience, in turn, has been mirrored by investor sentiment, with prime yields for nursing and care homes in the region of 7.5% to 8% and 6.25% to 6.75% for medical centres.

The spectrum of healthcare properties includes elderly care homes, hospitals, mental health institutions and GP's surgeries. In its report, Savills notes that the sector's emergence as an "income-secure asset" is based on the basic premise that people will always need medical care - and the population is an ageing one: "Strong occupational performance - occupancy of 90% is common for care/nursing homes - and demographic drivers are all playing a part in attracting investor interest."

In the case of elderly care accommodation, the report continues, western Europe's ageing population indicates that demand for sheltered housing, retirement villages and care/nursing homes is set to increase. The over-80s population in the UK alone is forecast to grow by 30% to 1.5 million by 2016.

Historically, total returns have averaged 10.8% per annum over the last five years across the whole healthcare/medical sector, largely driven by income returns. Capital value falls of 12.6% in 2008 were only half that witnessed in other sectors. Rental growth demonstrates continued growth throughout the end of 2009 and the beginning of 2010.

In 2008, care homes in particular saw significant rental growth of 3.4%. Prime yields are expected to approach 6% on medical centres and between 7% and 7.25% for care/nursing homes.


Where do the opportunities lie?

British Land's recent announcement of a possible investment in new sectors as part of its strategic review - healthcare being one of them -illustrated a renewed focus on income security and the covenant strength offered by medical centres. A lack of product has, however, proved to be a significant barrier for investors. In the care/nursing home sector, owner-occupiers continue to

account for the bulk of operators, with exposure to the sector largely confined to sale and leaseback deals as operators look to release capital from their estate. Southern Cross has sold over 30 care homes since the middle of June 2008, often as part of sale and leaseback deals, to reduce its debt.

These types of opportunities still exist, but operators are becoming increasingly open to straight leasehold as a less expensive alternative to freehold. Development feasibility issues increasingly come into play, however. Operator preference in both the primary care (hospitals, doctors surgeries) and secondary care (care/nursing homes) sectors remains for new, purpose-built stock, while falling land values, operators' value aspirations and restricted debt availability has made it increasingly difficult to bring sites forward.

Even the more secure private-public sector initiatives - NHS-operated hospitals, for example - are facing potential funding difficulties with future public-sector spending cuts on the horizon. Despite these barriers, super surgeries, community health centres and traditional doctor's surgeries are examples of the investment opportunities that still exist. Although primary healthcare offers the greatest level of income security due to covenant strength, past capital growth performance may not attract more "risk-loving" short-term investors. For the less risk-averse, care/nursing homes may present a more attractive alternative, Savills concludes, since covenant strength may have diminished but the sector still offers enhanced levels of income security compared to more mainstream sectors.

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