Healthcare

Investment conditions will remain challenging in 2024. Still, opportunities may exist for investors who have a detailed understanding of the healthcare sector which is currently characterised by strong operational performance, rising demand and attractive lease features.

Key Takeaways

1. The flight to quality for healthcare assets will continue in 2024 as real estate investment remains challenging in a high interest rate environment. Stronger operational performance, particularly around occupancy and fee rate rises, is creating attractive opportunities for experienced healthcare investors able to price operational risk in a more dynamic market.
2. Investor focus has pivoted from income driven strategies to more value-add, yet investment volumes remain weak, while initial yields are at a 15-year high. The tighter lending market means that real estate investors are looking at opportunities where real estate can be the catalyst for operational improvement in care home businesses. Higher yields, strong underlying cashflows, better understood ESG characteristics, and the ability to create value through CapEx, are likely to drive investment in 2024. 
3. Healthcare development activity is slowing due to increasing build costs, lower tolerance for risk, a more challenging planning environment, and the increasing cost of debt. This will exacerbate the demand and supply imbalances across the healthcare sector moving forward. This imbalance may explain the fact that residual land values continue to hold up.
4. Independent sector operational performance will continue to strengthen as demand is driven by the UK’s ageing population, increased private/public sector integration, and rising NHS waiting lists.
5. Staffing will remain a challenge across all healthcare subsectors with the ongoing nursing shortage across Europe. However, in the UK, the successful sponsorship of overseas staff will continue to relieve pressures.

Operational performance continues to improve 

Private acute hospitals 

Operational performance continues to improve as growing NHS waiting times lead to increased private/public sector integration and patients seeking faster treatment times. We expect private patient volumes to continue to increase in 2024, with 7.75 million people waiting for NHS treatment, and over 40% waiting for more than 18 weeks.  

Greater willingness from the NHS to engage with independent providers will strengthen the private acute hospital market and could lead to opportunities for investment. 

As with other healthcare sectors, a shortage of nurses across the UK and Europe remains a key challenge and is a risk to operational performance moving forward. 

As the UK’s ageing population with more complex care needs seeks increasingly specialist treatment, we have seen the emergence of private acute sectors such as diagnostics, cancer care and post-acute rehabilitation. In line with patient demand, we expect operators and investors will show more interest in these sectors in 2024. These emerging sectors also represent a good opportunity to ease pressure off the NHS.  

Primary care 

Primary care remains an important part of delivering healthcare services in the UK, and investors are attracted to occupational lease lengths that can provide long-term income in a secure market with robust demand dynamics. 

Primary care real estate investment activity fell in 2023 with the two dominant players, PHP and Assura, turning their focus to rent reviews and asset management. We saw increased rental growth in 2023, and it is expected that this will continue in 2024, with the financial viability of new development continuing to be a challenge.

Figure 27: NHS elective activity by independent sector providers

Source: CBRE Research

Elderly care 

Elderly care providers are reporting strong operational performance, with occupancy returning to pre-COVID levels, steady growth in both private and local authority fee levels, and better management of agency costs. Operational performance is expected to remain strong throughout 2024 for all independently provided healthcare sectors. The ongoing nursing shortage will likely remain a challenge in 2024, although the successful sponsorship of overseas staff in the UK has alleviated pressures. Recruitment and staff retention should be a focus for operators. 

Increasing build costs, planning challenges, and the availability of debt have slowed care home developments in the UK. This will further exacerbate the undersupply of purpose-built market standard beds. In line with elderly population projections, we estimate that there will be an undersupply of all care home beds by 2030. However, in the right locations with the most experienced and high-quality operators, there may be opportunities to invest in and extend existing mid-tier assets. Annualised elderly care investment volumes are down 60% because of the high base rate, reflecting investment activity across wider real estate sectors. In 2024, there may be increased activity driven by financial stress, and we anticipate that good opportunities will exist for equity-backed investors who have a detailed understanding of the sector and are willing to take on risk. 

We have seen a flight to quality and a wider pricing differential across the quality spectrum. Despite yields weakening, per bed values have remained robust for best-in-class assets with the strongest covenants, which highlight the importance of underwriting elderly care investments. 

Figure 28: Adult social care vacancy rates, whole sector estimate

Source: Skills for Care - Adult Social Care Workforce Data Set (ASC-WDS)

Specialist care homes 

Infrastructure funds are drawn to the Government-backed income in this sector. Still, there remains uncertainty whether strong historic fee growth will continue to be a feature in 2024, considering a slowdown in 2023. This is driven by signs of further budget constraints on local authority commissioning expected next year. 

Inflation and staffing have been a challenge for all operational sectors and will remain a challenge for specialist care sectors in 2024. Successful sponsorship of overseas staff, like in the elderly care sector, has started to alleviate staff shortages and the impact on operational performance. 

The Government agenda for increased supported living care commissioning remains in place, where care needs are better serviced in independent settings, with closures of defunct residential facilities inevitable. 

2024 will likely see a cautious return to the sector by investors, following the contraction in 2023. M&A activity will be focused on the largest, most well-capitalised groups targeting existing strong and growing platforms. The Disabilities Trust acquisition of Sue Ryder’s neurological services in 2023 demonstrated a continued market appetite for well-run services, in high demand and with high barriers to entry, offering complex care services.  

Partnerships between M&A and real estate investors have historically been a feature of the sector. This is likely to be less prominent in 2024, where real estate investors will likely target mature, stable operational platforms and new high-quality assets.