Operational Real Estate

What we predicted

Leisure

1. Pent-up consumer demand for most leisure activities will remain. However, most leisure businesses will face dual macro-economic challenges of inflation and interest rate rises
2. On the operational side, these factors will impact goods, labour and finance cost, applying pressure to operating margins. Operators will be considering the impacts of raising their prices. The same factors are also likely to apply pressure to consumer spending and some consumers may trade down or cut back on their leisure spend
3. The resilience of each sector’s occupancy / utilisation to price increases will vary by sector. Sectors with a proven track record of inflationary resilience are seeing strong demand from a broad range of investors
4. On the investment side, a weight of capital is still targeting leisure markets, and this has offset any impact. Should interest rates rise further, the cost of borrowing may start to impact pricing from leveraged investors tempering demand at sharper cap rates

Healthcare

1. Continuing portfolio diversification by investors away from traditional sectors to operational real estate attracted by strong operators and rent underpinned by trading performance which has proved resilient through Covid-19

What's happened so far

Cinema

• 2022 Average UK Weekend GBOR have recovered to 80% of 2019 levels in line with the industry’s projections. Operator debt levels remain higher than pre-Covid in the wake of the pandemic. Opportunistic investors have been exploiting short-term mispricing for returns significantly ahead of other ‘traditional’ real estate sectors

Health and Fitness

• The UK health and fitness market is polarised between out-of-town clubs in residential locations and clubs that rely heavily on office trade. The former displayed a strong straight line recovery, but increased home working has had a negative impact on the recovery of city centre lifestyle clubs. Investment demand has been strong with the market, supporting forward funding transactions and investment sales at yields approaching 4% NIY

Holiday Parks

• With travel disruptions showing no signs of dissipating in the short-term, the ‘staycation’ remains extremely positive, particularly throughout the summer months. Private equity capital and US REITS have been targeting pan-European platform sales

Pubs

• Rising business rates and wage inflation, together with the ending of VAT reductions and the rent moratorium in March have resulted in increasing viability issues for pubs. However, prime single assets are still being acquired at pre-pandemic levels, particularly by private investors

Retirement Living

• Retirement living, once niche, is now actively forming wider residential strategies with funders, institutional investors and traditional property investors drawn by the demographic trends and growing need for alternative senior housing options

Acute Hospitals

• The private acute market has recovered well post-Covid with patient volumes returning strongly. New entrants have targeted the London market and existing providers are focusing on expanding their platforms with day case and diagnostics. We expect investment volumes to return strongly in 2022

Elderly and specialist care

• The occupier market stood up strongly in the face of Covid-19 with industry average occupancy dropping to mid-70%s and rent collection reportedly unaffected through 2020-21. UK institutional demand for not-for-profit care home investments remain strong. A broadening of tenants in this segment is starting to appear, with investors favouring the typically strong and stable occupancy profiles of their care homes

What happens next

Cinema

• As GBOR recovery continues in line with operator projections, buyer and seller assumptions on recovery will begin to align. Pricing is likely to improve relative to other traditional sectors. We expect good cinema and leisure park stock will become available as existing owners consider their leisure allocations in the wake of the pandemic. Early mover advantage remains

Health and Fitness

• The return to the office and cities proceeds - albeit slowly - and although flexible working appears to be here to stay, we expect further recovery of city centre clubs to erode some of the gains made by out of town and suburban lifestyle clubs. As in previous cycles, mid-market clubs will be the hardest hit by increasing costs and consumer spending pressure as their members are tempted to trade down to a budget offer. Strong ESG and inflation matching credentials will continue to drive demand for top sector covenants

Holiday Parks

• The staycation market looks set to continue, which will benefit the sector; however the cost of living crisis and impact of rising utility and staff costs will calm the market slightly. There continues to be a lot of capital targeting platform or add-on sales in the sector

Pubs

• With the critical summer months still to come, resolving staffing shortages and recovering the regularity of visits, as well as tourism trade, will be essential. Prime stock will continue to see high demand, but weaker covenants and locations may come under pressure

Retirement Living

• We expect to see a surge in retirement rental stock to meet the needs of an aging population that increasingly seeks optionality and flexibility which in turn creates investment opportunities

Acute Hospitals

• With record levels on NHS waiting lists, the private acute sector is well placed to capitalise through 2022 and beyond. We expect to see several large-scale investment transactions as well as new development of smaller, specialist acute facilities

Elderly and specialist care

• Demand continues to exceed supply and we predict a strengthening of occupancy across the sector. Development activity is increasing, which will put pressure on secondary stock as new beds are delivered. Resilience in the occupational market and the attraction of long-term stable rental cashflows to investors should see investment volumes and pricing well protected