Waterland paid Acadia £1.1 billion for Priory Group this year.

The UK healthcare property market saw record investment volumes in 2020 totalling £2.7 billion despite the Covid-19 pandemic, 55% higher than 2019, as investors increasingly seek stable returns and long-term secure income, according to property adviser Knight Frank.

There was increased interest in healthcare property from investors in traditional sectors such as care homes and private hospitals, as well as rising demand for more specialist assets and providers such as mental health, learning disability and children’s services including children’s homes, foster care and schools.

An increasingly broad church of investors is targeting UK healthcare including a rising weight of institutional capital, a strengthening selection of REITs, and a growing level of overseas investors. Overseas capital has significantly increased, accounting for 72% of healthcare transaction volumes last year, markedly above the 41% share seen across the past five years.

The most significant deals were focused on the private hospital market, with North American REITs expanding their UK presence. European entrants have also been involved in some significant deals already this year, with French operator Korian entering the UK elderly sector and Belgian REIT, Cofinimmo, acquiring assets in the Irish market. Both transactions are seen as restoring confidence and signal overseas capital is likely to play a role in the sector this year and beyond.

Despite healthy investment flows, the pandemic has posed an operational challenge for the sector, with hospitals, care homes, GP practices and other specialist healthcare facilities adopting stringent infection control measures, often at a cost, and private sector workforces being stretched in many of the same ways as the NHS. The greatest concerns were focused on elderly care home which impacted investment volumes with the elderly care sector representing 18% of all healthcare property investment, compared to 39% across the past five years.

Julian Evans, Knight Frank
Julian Evans, Knight Frank

Julian Evans, head of healthcare at Knight Frank, said: “Investment appetite for healthcare real estate remains strong, both in more traditional assets such as care home developments as well as more specialist assets including the increasingly popular mental health services sector. This demand is only strengthened by the limited supply within the healthcare market combined with the awareness of the ever-growing demographic fundamentals for these assets which are driving the sector and make it largely recession-proof amidst testing economic conditions in 2021.

“The year ahead will not be without its operational challenges as the sector looks past the Covid-19 pandemic. Despite this, we expect to see increased global and domestic capital directed at healthcare real estate as investors seek the safety provided by long-dated income the sector provides and look to de-risk and re-weight asset allocations out of retail and into alternative sectors; and the pandemic will likely accelerate investment into social infrastructure. We expect to see more investors target new development opportunities through both direct investment and lending. This inward investment is vital for the future of the sector.”

The strong fundamentals driving the need for healthcare real estate meant that the healthcare property sector outperformed the rest of the commercial real estate sector, with returns in the sector holding strong at 6.3% last year, while the wider sector saw returns below the long-term average. With a growing pool of investors and a diverse range of different asset types, healthcare transaction volumes have increased year-on-year since 2016 in contrast to deal volumes in the wider commercial real estate market, which have stagnated and fallen in recent years.

High-profile healthcare property deals that are on the market and in the pipeline include mental health services provider Elysium Healthcare (£900 million), children’s care and education services provider Keys Group (£250 million) in addition to another £3 billion of specialist (mental health, learning disability) providers and £1 billion of broader healthcare property transactions. England’s largest mental healthcare provider The Priory Group was sold to private equity group, Waterland, for £1.1billion at the start of this year.

Date published: March 23, 2021

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