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Healthcare property transactionshit a record 2.7 billionOverseas capital targetsthe private hospital sectorStable returns in healthcarelook increasingly attractiveHealthcareCapital MarketsResearch 2021
H E A LT H C A R E C A P I TA L M A R K E T S 2 0 2 1H E A LT H C A R E C A P I TA L M A R K E T S 2 0 2 12020: A HISTORIC YEAR FORTHE HEALTHCARE SECTORface of an unprecedented challenge.The operational impact ofthe pandemicThe way healthcare operatorsEncouragingly, many investors continuehave handled the crisis has helped toto favour the long-term investment casemaintain confidence in the sector, butDespite healthy investment flows, thefor the sector – a view vindicated nowthere is a much broader investmentpandemic has posed an unprecedentedthat the vaccine has been deployed andcase which is driving capital towardoperational challenge to the sector.a recovery is expected.the sector. This is outlined below.Hospitals, care homes, GP practices andother specialist healthcare facilitieshave had to adopt stringent infectioncontrol measures, often at a cost, andprivate sector workforces have beenstretched in many of the same ways asHealthcare propertyAll commerical propertyour NHS.0.5Source: Property opulationsan increasing weight of institutionaltransactions across the healthcarecapital, a strengthening selection ofarena reached 2.7 billion in 2020,real estate investment trusts (REITs),making it a record year. This end-yearand intensifying demand from overseasfigure owes much to some significantinvestors targeting UK healthcare.portfolio deals within traditionalWith a growing pool of investors andhealthcare sectors like privateasset types, healthcare transactionhospitals and care homes, but therevolumes have increased year-on-yearhas also been growing activity insince 2016 and were up 55% in 2020.more specialised subsectors, includingIn contrast, deal volumes in the widerassets supporting mental health,commercial real estate market havedisability housing, childcare andstagnated and fallen in recent yearsspecialist schools.(Figure 2).risk of mortality. This had some impacton transactions in 2020 with the100%of all healthcare property investment,years (Figure 3). The data show that as ofJanuary 2021, UK care home occupancywas just below 80%, reflecting a 9-10%fall since the onset of the pandemic.18%1%2%0%compared to 39% across the last five2020 only ( 2.7 bn)1%50%elderly care sector representing 18%Other medicalLast 5 years32%39%9%-50%12%-100%Increasing mortality levels and aAgeingpopulations20191.0breadth of investor types. This includesshown in Figure 1, recorded propertypopulation base of over 85s at greatest20201.5significant level of investment. Ason the elderly care home sector, with its20182.0healthcare is matched by a growingAdult CareHospital FacilitiesPrimary CareChildcare20172.5the healthcare sector has received aFig 3: Healthcare propertyinvestment, by asset typeElderly Care150%20153.0The greatest concerns were focusedThe breadth of assets within2014Fig 1: Recorded healthcareinvestment volumes, billionsEven in the midst of a global pandemic,2016Healthcare real estate investment reaches a record 2.7 billion, despite the pandemicFig 2: Percentage change inproperty investment volumes15%Ageing69%populationsreduction in admissions have hadan effect but the independent caresector has been hugely resilient in theSource: Property DataSource: Property DataTHE INVESTMENT CASE FOR UK HEALTHCARE PROPERTYHsoldDEMOGRAPHICSHIFTSECUREINCOMEWith the UK over 85 populationOperator revenue and rentalset to increase from 1.7 millionto 3.7 million by 2050, therewill be increasing demand forresidential care, primary careand acute hospital D FORSAFE-HAVENSWeighted average unexpiredTotal returns are historicallyBroader UK real estate typicallyReal estate investors werein a global downturn andtraditional sectors such as retail,social infrastructure investmentsoffers further safety.is expected to accelerateof this agenda.income is reinforced bylease terms (WAULT) are aroundrates as well as a healthy mixcare and hospital sectors.traditionally high occupancy25-30 years in the residentialof self-funded care and public-Leases are commonly indexed-funded care.linked to inflation.2stable, giving investorsprotection and diversification.Returns measured 6.3% in2020, higher than many coreproperty sectors.offers security and liquidityhealthcare’s long-dated incomeSTRUCTURALCHANGE INREAL ESTATEalready de-risking fromprior to Covid-19. The pandemicSOCIALIMPACTMany investors now have ESGrequirements and are targetingwith healthcare very much a partthis trend.3uuWith a growing pool ofinvestors and a diverserange of differentasset types, healthcaretransaction volumes haveincreased year-on-yearsince 2016 and were up55% in 2020uu
H E A LT H C A R E C A P I TA L M A R K E T S 2 0 2 1H E A LT H C A R E C A P I TA L M A R K E T S 2 0 2 1KEY DEALS ANDTRANSACTIONSOverseas capital targets UKhealthcare sectorAcross the healthcare sector, overseascapital was very active in 2020,accounting for 72% of transactionvolumes. As shown in Figure 5, this waswell above the 41% share seen across thelast five years. The most significant dealswere focused on the private hospitalmarket, capital supplied by specialistNorth American REITs. In a mega dealvalued at 1.5 billion, Medical PropertiesTrust acquired 30 BMI operated hospitalfacilities in early 2020. The real estatedeal followed the buy-out of BMI bysector in 2021 as it looks to deal witha huge backlog of non-Covid patients,especially cancer patients.Deals in the elderly care home sectorwere broadly subdued in 2020, butthere have been some hugely significantoverseas entries into the UK and Irelandalready in 2021. Korian, the giant Frenchbased care operator, made its entry intothe UK by acquiring Berkley Care group inQ1 2021. While Belgian REIT, Cofinimmo,purchased seven assets in the Irish marketfor a reported 100 million Euros. Bothtransactions will do much to restoreand four Aspen Healthcare hospitals fora total 358 million. These acquisitionslook well-timed, not just because thedollar has since weakened against thepound, but because the NHS is expectedInvestors moving towardsspecialist healthcare assetsThe pandemic has fuelled greaterinvestor interest in specialist healthcaresectors such as mental health, learningdisability, children’s nurseries andspecialist schools. Not all that surprising,given that these sectors tend to befocused on users below the age of 65,for whom Covid-19 is much less of athreat1. There have been a number oflarge specialist healthcare opco’s and realestate portfolios brought to market oradult healthcare provider ExemplarElysium Healthcare and Priory GroupuuWith specialist healthcareservices poised to see more usersin the aftermath of Covid-19, weexpect to see further investmentinterest in these niche sectorsgoing forwarduuto lean heavily on the private hospital– the latter being sold to private equitygroup, Waterland, for 1.1 billion at thestart of 2021. With specialist healthcareservices poised to see more users in theaftermath of Covid-19, ian-listed Aedifica continued itsexpansion into the UK elderly sector,acquiring five trading care homes for 61million. The purpose-built homes are letto two leading operators on 30-year leases,at a gross yield of 6%. Very few assetstraded at the prime end of the market in2020. While investors paused to digestthe impact of Covid-19, the availabilityof prime quality stock is actually thebigger barrier. The forward funding ofnew care home developments is thereforebecoming increasingly common amonginvestors as a way to access prime stockand help the sector upgrade. OctopusRE’s purchase of eight care homes fromLNT Care Developments for 100 millionin December 2020 is one such exampleof this – the specialist investor agreeingLAST 5 YEARSto buy five of the properties at practicalcompletion and forward fund the2020Source: Property Dataremaining three.funds becoming increasingly active,and socially impactful or ESG investingbecoming a growing priority, we expectFig 4: Healthcare property investment, by buyer type2018Fig 5: Healthcare property investment – overseas shareForward-funding in the elderlycare home sectorHealth Care, and mental health providersa 250 million upgrade programme.REIT also acquired six BMI hospitalsniche sectors going forward.in the pipeline. This includes specialistconfidence in this sector.Circle Health, which has committed toCanadian-based NorthWest Healthcareto see further investment interest in these2020Table 1: Major Deals 2020PRICE ( MILLION)DATEBMI (Circle Health)1,500Jan-20General MixerHealthcare PartnershipBMI (Circle Health)98Feb-204UndisclosedAspen Healthcare260Aug-20Octopus RE8LNT CareDevelopmentsIdeal Care Homes/Elmfield Care100Dec-20Southern England portfolioAedifica SA/NV5UndisclosedBondcare and MMCG61Jan-20Elderly careHolmes Care (Scotland) PortfolioImpact Healthcare REIT9Holmes CareHolmes Care48Mar-20Primary care20 x Medical CentresPrimary Health Properties20UndisclosedGP & NHS47May-20Primary care7 x Medical CentresAssura Group Ltd7UndisclosedUndisclosed35Jun-20Childcare5 x London children’s nurseriesNewcore Capital5Public sector vendorsBusy Bees, BrightHorizons and others23Mar-20ChildcareLearning Experience Nursery(Finchley)Undisc.1250 East End Road LLPLearning pitals30 x BMI Healthcare PortfolioMedical Properties TrustHospitalsMagnolia PortfolioNorthWest Healthcare REITHospitalsAspen (London) portfolioElderly careASSETSSELLEROCCUPIERBMI (Circle Health)6NorthWest Healthcare REIT8 x New build portfolioElderly care3080%70%60%50%40%30%20%10%0%REITS & LISTEDINSTITUTIONALPRIVATEPROPERTY CO.OCCUPIERSource: Property Data4PRIVATEINVESTORUNDISCLOSEDOVERSEAS5
H E A LT H C A R E C A P I TA L M A R K E T S 2 0 2 1H E A LT H C A R E C A P I TA L M A R K E T S 2 0 2 1Q & A: LATEST TRENDSIN THE DEBT MARKETWith the healthcare market in need of inward investment and financing,we asked Craig Wilson (Partner in Debt Advisory) for his latest summaryon trends in the healthcare lending space.Fig 6: Prime healthcareyields (fixed-income, %)INVESTMENT PERFORMANCEAND OUTLOOKYields stay lowYields across a range of healthcare assettypes have remained compressed, despitethe pandemic. In the elderly care homesector, there was a limited amount ofprime stock coming to market but investordemand for such assets remains strong.CRAIG WILSON, PARTNER,KNIGHT FRANK CAPITAL ADVISORYand a limited supply of prime gradeof retail. The exception is healthcare,assets. Prime yields across all sectorswhere returns held strong at 6.3% in 2020,are therefore expected to remainmatching the long-term average. Withcompressed for the foreseeable future.testing economic conditions ahead in 2021and beyond, investors are expected to seekReturns holding, unlike otherproperty sectorsstability and healthcare fits this mould.As shown in Figure 8, which illustrates therisk-return profile of each sector over theWell capitalised bidders remain willing toAs shown in Figure 7, total returns fellpay a premium for well-located purpose-across a mixture of traditional andbuilt homes positioned for the private-alternative commercial property sectors inpay market. Prime elderly care yields are2020. Moreover, returns are significantlyexpected to remain below the 4% mark,below the long-term (10-year) average – aespecially with more institutional investorsproduct of a mixture of factors includingcompeting for long-term income-backedthe pandemic, the current real estateassets in safe-haven markets. Core marketcycle and structural change in the caselast ten years, healthcare returns while notremarkable have been extremely stable.Not only that, with demand for healthcareservices and accommodation fuelled bythe unrelenting growth of our over 85population, the sector is largely seen as ahedge against economic recession.elderly care stock has been trading closerHow would you summariseand diverse loan books. More recentlyfinance in the healthcare sector over thelender appetite for healthcarechallenger banks and debt funds havepast few years, taking note of the strongproperty at the moment?entered the market, gaining marketdemand fundamentals driving theshare and targeting transactions higherneed for healthcare real estate. Financeup the risk curve.is now available for a wide variety oflender appetite across the UK healthcaresector has held up relatively well,particularly when compared to lessresilient sectors such as retail and leisure.deals across the capital stack. Senior,What type of healthcare assets arestretch senior, mezzanine and wholelenders targeting?loan products provide a broad range ofdevelopment financing options betweenIn the initial market shock in Q2 2020,Elderly care remains the most liquidliquidity in the healthcare debt markethealthcare sub-sector from a seniordid diminish and senior debt pricingdebt perspective, however lendersincreased by 0.50% to 1.00%. But, debtare also targeting more specialist carepricing began to soften in Q3 2020 andsub-sectors, such as mental health andhas remained largely stable, albeit atbrain injury. Since the pandemic, thererebased levels, over the past six months.has been a ‘flight to quality’ in the debtThe stabilisation of the debt marketsmarket, with stronger lender appetitelooks set to continue with an increasinglyWhat is the profile of lendersfor prime, purpose-built assets withpositive economic outlook, driven by theand have there been any newreputable operators. Some establishedvaccine roll-out. There is an expectationentrants into the healthcarelenders are being increasingly selectivethat leverage will return to pre-pandemicspace in recent years?in originating new-to-bank clients andlevels and debt pricing will reduce bymay seek to churn the ‘lower end’ ofup to 0.25% by Q4 2021 and Q1 2022. Wetheir loan books on refinancing events.will continue to see new opportunisticThe debt market in the sector isrelatively niche, with around 20established debt providers. Ultimately,lenders need to be comfortablewith reputational risk within thehealthcare market, particularly giventhe vulnerable nature of residents50-90% loan-to-cost and 40-75% ofElsewhere in the healthcare propertyacross different sectors and withineach sector. However, all sectors aredefined by growing investor demand,What are your predictions for theFig 6: Prime healthcareyields (fixed-income, %)151290-3-6-9E L D E R LYCAREdebt markets in 2021?with capital previously invested into lessresilient sectors redirected into higherforward. Would you say lendersyielding debt funds, including thoserecognise the opportunity?exposed to healthcare.bolstered the availability of developmentLong-term avg (10-year)-12play a huge role in the sector goingbuilt a dominant position with large20203turnkey value.New development is expected toAlternative lenders have RE4 .0 0P R I VAT EH O S P I TA L S4.75Residential(PRS)IndustrialOfficeRetailFig 8: Risk vs Returns, 10-year history14CHILDCARE(NURSERIES)5 .0 0A D U e86HealthcareAll property4Retail2012LOW RISKSource: MSCIHotelResidential (PRS)46Risk (Standard deviation)Source: MSCI*Education refers to schools and nurseries, not student accommodation6HotelSource: MSCIentrants into the debt markets in 2021,and end-users. High street banks haveFig 7: Total returns (%)market, there is wide variation in yieldsTotal return average (%)Despite the impact of the pandemic,to 6% and above in 2020.7810HIGH RISK
OUTLOOK FOR 2021 AND BEYONDThe year ahead will not be withoutglobal and domestic capital directed atand education are very much a partits operational challenges for thehealthcare real estate for a multitudeof. With no shortage of investorhealthcare sector. The elderly careof reasons.appetite, the availability andsector will need to recover occupancyInvestors will be seeking the safetycompetition for healthcare stock islevels now that the vaccine has beenprovided by long-dated income, suchpotentially the biggest challenge.deployed, private hospitals will beas that provided by healthcare, moreAs a result, we expect to see morestretched by the backlog of non-Covidinvestors will be looking to de-riskinvestors target new developmentpatients, and margins across theand re-weight asset allocations out ofopportunities through both directhealthcare and education businessretail and into alternative sectors, andinvestment and lending. Thisspace will be squeezed as governmentthe pandemic will likely accelerateinward investment is vital to thefinancial support retracts. Despiteinvestment into social infrastructure,future of the sector.this, we expect to see increasedof which healthcare, specialist housingPlease get in touch with usFootnotes:(1) Provisional figures on deaths registeredin England and Wales, provided by the ONS,showed that only 10% of Covid-19 deathsoccurred in those below the age of 65.Front cover photo: Elworth Grange, Sandbach.LNT Care Developments and Ideal Care.2020 UK Care HomesTrading PerformanceReviewWhy is investmentinterest growing?6 key trendsdriving the marketCase studies: Germany,France & SpainEuropeanHealthcareElderly Care Market, Research 2020Knight Frank ResearchReports are available atknightfrank.com/researchEuropean Healthcare ReportAdditional governmentfunding until March 2021Debt AdvisoryJulian Evans FRICSCraig WilsonHead of HealthcarePartner 44 20 7861 1147 44 20 7861 tfrank.comPatrick Evans MRICSCommercial ResearchHead of Corporate Valuationsknightfrank.com/researchOperators adapt quicklyand show resilienceknightfrank.co.uk/researchOccupancy down 8.5%by mid-year 2020Trading Performance ReviewRecent PublicationsHealthcare 44 20 7861 1757patrick.evans@knightfrank.comKieren Cole, MRICSJoe BrameSenior Analyst (Healthcare) 44 20 3967 7139joe.brame@knightfrank.comHead of Commercial Valuations 44 20 7861 1563kieren.cole@knightfrank.comKnight Frank Research provides strategic advice, consultancy services and forecasting to a wide range of clientsworldwide including developers, investors, funding organisations, corporate institutions and the public sector. Allour clients recognise the need for expert independent advice customised to their specific needs. Knight FrankLLP 2021. Terms of use: This report is published for general information only and not to be relied upon in any way. Allinformation is for personal use only and should not be used in any part for commercial third party use. By continuing toaccess the report, it is recognised that a licence is granted only to use the reports and all content therein in this way.Although high standards have been used in the preparation of the information, analysis, views and projections presentedin this report, no responsibility or liability whatsoever can be accepted by Knight Frank LLP for any loss or damageresultant from any use of, reliance on or reference to the contents of this document. As a general report, this materialdoes not necessarily represent the view of Knight Frank LLP in relation to particular properties or projects. The contentis strictly copyright and reproduction of the whole or part of it in any form is prohibited without prior written approvalfrom Knight Frank LLP. Knight Frank LLP is a limited liability partnership registered in England with registered numberOC305934. Our registered office is 55 Baker Street, London, W1U 8AN, where you may look at a list of members’ names.
HEALTHCARE CAPITAL MARKETS 2021 HEALTHCARE CAPITAL MARKETS 2021 2 3 THE INVESTMENT CASE FOR UK HEALTHCARE PROPERTY DEMOGRAPHIC SHIFT With the UK over 85 population set to increase from 1.7 million to 3.7 million by 2050, there will be increasing demand for residential care, primary care and acute hospital services. SECURE INCOME
