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Healthcare investment activity is expected to remain robust in 2023 with investors attracted to strong occupier demand, long lease terms, index-linked reviews and the ability to deliver on ESG strategies.

Key Takeaways

  1. Investor interest in healthcare property remains strong and transactional activity continues, albeit at a slower pace. As acoss the wider real estate market, there is some downward pressure on pricing due to wider economic factors, although less so than in other sectors.
  2. UK healthcare investment activity is likely to remain robust in 2023, with investors attracted by strong occupier demand, the opportunity to deliver on ESG strategies, long leases and index-linked reviews.
  3. Understanding the operational position of healthcare opportunities is critical to investment approach and being able to analyse performance at a local asset level is vital.
  4. The current lending environment is creating opportunities for property investors that can work with operating businesses to create flexible, long term funding partnerships. We expect this to be an area of increased activity in 2023, particularly where refinancing has become more challenging.

Investors drawn to strong occupier demand and attractive lease terms - Private acute hospitals

Private hospital providers have seen significant growth in both private pay and NHS activity in 2022, as a response to increasing NHS waiting times, and improved private/public sector integration because of the COVID pandemic. It is likely that this trend will continue in 2023, with more than seven million people waiting for NHS treatment as of August 2022.

We anticipate that the next round of investment activity will be characterised by larger scale strategic recapitalisations.

As the trend from inpatient to outpatient activity in the sector evolves, we expect to see an increasing number of smaller local development fundings for elective day surgery facilities. This will create further opportunities for the emerging post-acute rehabilitation market.

Primary care

The COVID pandemic has highlighted the importance of primary care to social infrastructure. As NHS waiting lists reach record levels, primary care will become an important part of delivering healthcare services. Over the last decade, primary care rents have decreased in real terms, and construction costs have risen. We expect to see upwards pressure on primary care rents in 2023, to enable and encourage third party development, to meet increasing demand and deliver on NHS ESG strategies.

Investment activity slowed following the mini-budget, but we believe volumes will return in the first half of 2023, with investors attracted to stable NHS income streams in a time of economic uncertainty.

Figure 22: Condition prevalence rates, England

Source: NHS Digital QOF Framework

Elderly care

Rising operational costs, compounded by staffing shortages remain a challenge for elderly care providers. Despite this, many operators with a private pay focus have been able to pass on inflationary costs through fee rate increases of over 10%.

Most operators that we work with have seen occupancy recover to pre-COVID levels in 2021, and it is expected that occupancy will fully recover by the end of 2023.

Although real estate investment slowed at the end of 2022, we have seen more overseas investors consider opportunities in the UK elderly market. This will likely translate into a return in volumes in the first half of 2023. An understanding of operational performance at an asset level will be critical for these investors.

Anchor’s acquisition of Halcyon has evidenced the demand for OpCo investment in the elderly care space. We expect this demand to gain momentum in 2023.

Retirement living

Investor demand is focused on the nascent rental model given similarities to the BTR sector. We are also seeing growth in consumer demand for a rental product, but supply will lead this trend.

Development activity in London and the South East has been strong and we expect this to continue in 2023. However, wider economic factors and residential market trends will impact activity.

Specialist care homes

Infrastructure funds are drawn to the Government-backed income in this sector. There is, however, a question around whether strong historic fee growth will be maintained in 2023, given increasing scrutiny on local authority commissioning.

Cost inflation and staffing has been a challenge for all operational sectors, and we will see continued M&A activity within the specialist care market as groups with efficiencies of scale expand. This market consolidation will be led by smaller platforms, since the top groups are more constrained by competition law.

Services that require specialist real estate, like neurorehabilitation, have attracted capital from property investors. This was demonstrated by the Octopus Real Estate acquisition of six Inspire NeuroCare assets in May 2022. The neurorehabilitation market is fragmented, and we believe there is a significant opportunity for both M&A and real estate investment in this space.

SEN schools represent another key growth market, with parents increasingly demanding specialist care, specialist education and specialist facilities for their children.

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