As well as plenty of the investors we speak to each day, from those starting out to those with extensive global portfolios, powerhouse property companies such as Knight Frank and Savills are demonstrating significant interest in the healthcare asset class. In 2017 there was £1.32bn worth of documented investment transactions in healthcare, see here.
Savills recently commented on healthcare investment becoming mainstream here – “Over recent years, the healthcare market has positioned itself as a more mainstream asset class offering, in many cases, a secure income against a strong operator covenant. The sector has seen renewed interest from overseas investors, particularly from China and the Middle East, while also remaining popular with UK pension funds and insurers.”
We work with established developers from across the UK, our role is to market and effectively sell the individual properties within developments, if that be traditional residential, care, student or hotel assets. As a result, we have an in-depth understanding of the pros/cons of each market and how the care sector really differentiates itself. Below I’ve detailed some of the key aspects:
High Rental Return – one of the first things most investors look for in examining an investment property is the rental income. It’s important not to analyse this as a cash figure, but more so in relation to the cash outlay/purchase price. We work on a NET return basis, as an example, if you invest £100k and earn £6k per year (after all costs), in income, this is a 6% NET return. In regional cities such as Manchester, Liverpool, Leeds etc you will be able to find residential properties which return 6/7% NET. The Care sector offers 8-10% NET returns, so in terms of cash flow and regular income, it’s more lucrative compared to traditional single let properties.
Moving onto the market conditions, I’ll focus more on the statistics in this section for those that like to analyse investments based on hard data.
Demand – firstly, we all know we are living longer with advancements in medical research and improved technology, the older population is increasing. According to the Office of National Statistics, in 2016 the UK population was 65.6m, the largest ever. 18% of this population was quoted at over 65 and 2.4% aged 85 and over – see here. The UK has a long history of providing quality care home accommodation, the demand for such accommodation is already substantial and will only increase into the future as the population continues to live longer. The occupancy rates for all care homes across the UK for 2018, is at 89.4%, see here. The lack of government funding for the public sector means publicly funded built and operated care homes are less common, as a result, private providers e.g. developers are stepping in and meeting the demand for quality accommodation within the market. Knight Frank quote there is likely to be a shortfall of 192,000 care suites by 2024.
Profitability – whilst most care homes have a mix of funding methods e.g. local authority, NHS and privately funded residents, the fees are substantial for all residents. The average fee for a care suite across the UK in 2018 was £733 per week, some of our developments go over £1,100 per week. Throughout 2017/18 Knight Frank reported the EBITDARM (% of income) was at 28.3% for all care developments e.g. profits on fee total, see here. It’s clear to see the margins developers make and how they can afford to pay out such returns. Although, as an investor, your income is fixed, of course, it’s important and provides comfort that the development itself is profitable, justifying how the developer can pay such returns.
Whilst the lucrative returns and demand for the sector draw the attention of many property investors, there are some ‘cons’ to the asset class which you must be aware of.
Resale Ability – as touched on earlier, care rooms can only be sold to cash investors or back to the developer through the buyback option. If flexibility to exit, e.g. you think in a couple of years you may need to suddenly leave the investment, is one of your concerns, then care is not for you.
The ethical factor of investing in care homes is also a common point of discussion. Private investors in this sector are enabling developers to build and manage much-needed accommodation, with demand increasing substantially in the future, many care homes are considered absolutely essential to plenty of local communities where some of the most vulnerable members of our society live and socialise.
Care homes are heavily regulated by the Care Quality Commission, with online reviews and more exposure into the quality of the home and care service provided, the transparency in the industry has improved drastically over the years. The demand for care will reach the headlines more and more over the coming years and private developers are essential to meeting this demand. By investing in care you’re indirectly assisting in providing a home to elderly residents, of which some rely on. As a company which is marketing such investments, you would expect us to form the above opinion. However, I would encourage all investors to conduct their own market research and due diligence on the sector, demand can simply only be met by private developers, who can only grow their portfolio’s through private investor equity.
I think that’s enough for now but hopefully, you can see the benefits of investing in the care sector. If you have any questions such as Brexit related points (Knight Frank quoted the care sector as the asset class least affected by Brexit as demand is related to domestic factors), management of the property, the developer going bust etc, please contact us using the details below.
To summarise, if you’re happy with a cash investment of +£70k, want high, predictable income and are looking to hold for the medium to long term, then I would argue care is one of the more attractive asset classes.