Healthcare transactions Overseas capital targets Stable returns in healthcare hit a record £2.7 billion the private hospital sector look increasingly attractive

Healthcare Capital Markets

Research 2021 HEALTHCARE CAPITAL MARKETS 2021 HEALTHCARE CAPITAL MARKETS 2021

face of an unprecedented challenge. The way healthcare operators The operational impact of Encouragingly, many investors continue have handled the crisis has helped to the pandemic 2020: A HISTORIC YEAR FOR to favour the long-term investment case maintain confidence in the sector, but Despite healthy investment flows, the for the sector – a view vindicated now there is a much broader investment THE HEALTHCARE SECTOR pandemic has posed an unprecedented that the vaccine has been deployed and case which is driving capital toward operational challenge to the sector. a recovery is expected. the sector. This is outlined below. Hospitals, care homes, GP practices and other specialist healthcare facilities have had to adopt stringent infection Fig 2: Percentage change in Fig 3: Healthcare property control measures, often at a cost, and property investment volumes investment, by asset type Healthcare investment reaches a record £2.7 billion, despite the pandemic private sector workforces have been stretched in many of the same ways as Healthcare property Elderly Care Adult Care our NHS. All commerical property Primary Care Hospital Facilities The greatest concerns were focused Childcare Other medical Even in the midst of a global pandemic, The breadth of assets within 150% on the elderly care home sector, with its Fig 1: Recorded healthcare the healthcare sector has received a healthcare is matched by a growing Last 5 years 2020 only (£2.7 bn) population base of over 85s at greatest investment volumes, £ billions significant level of investment. As breadth of investor types. This includes 100% 1% risk of mortality. This had some impact 3.0 shown in Figure 1, recorded property an increasing weight of institutional on transactions in 2020 with the 18% 1% transactions across the healthcare capital, a strengthening selection of 50% 2.5 elderly care sector representing 18% arena reached £2.7 billion in 2020, real estate investment trusts (REITs), of all healthcare property investment, 2% 2.0 making it a record year. This end-year and intensifying demand from overseas 0% compared to 39% across the last five 32% figure owes much to some significant investors targeting UK healthcare. 39% 1.5 years (Figure 3). The data show that as of 9% portfolio deals within traditional With a growing pool of investors and -50% January 2021, UK care home 1.0 healthcare sectors like private asset types, healthcare transaction 12% 15% was just below 80%, reflecting a 9-10% hospitals and care homes, but there volumes have increased year-on-year -100% 0.5 Ageing fall since the onset of the pandemic. Ageing Ageing has also been growing activity in since 2016 and were up 55% in 2020.

populations populations2017 populations 2015 2019 2016 2014 2018 69% Increasing mortality levels and a 2020 0.0 more specialised subsectors, including In contrast, deal volumes in the wider reduction in admissions have had 2017 2012 2013 2015 2019 2016 2014 2018

2020 assets supporting mental health, commercial real estate market have an effect but the independent care disability housing, childcare and stagnated and fallen in recent years Source: Property Data Source: Property Data Source: Property Data sector has been hugely resilient in the specialist schools. (Figure 2).

THE INVESTMENT CASE FOR UK HEALTHCARE PROPERTY

H uu

sold With a growing pool of investors and a diverse range of different asset types, healthcare DEMOGRAPHIC SECURE LONG-TERM INVESTMENT DEMAND FOR STRUCTURAL SOCIAL transaction volumes have SHIFT INCOME INCOME PERFORMANCE SAFE-HAVENS CHANGE IN IMPACT increased year-on-year REAL ESTATE since 2016 and were up With the UK over 85 population Operator revenue and rental Weighted average unexpired Total returns are historically Broader UK real estate typically Real estate investors were Many investors now have ESG set to increase from 1.7 million income is reinforced by terms (WAULT) are around stable, giving investors offers security and liquidity already de-risking from requirements and are targeting 55% in 2020 to 3.7 million by 2050, there traditionally high occupancy 25-30 years in the residential protection and diversification. in a global downturn and traditional sectors such as retail, social infrastructure investments uu will be increasing demand for rates as well as a healthy mix care and hospital sectors. Returns measured 6.3% in healthcare’s long-dated income prior to Covid-19. The pandemic with healthcare very much a part residential care, primary care of self-funded care and public- are commonly indexed- 2020, higher than many core offers further safety. is expected to accelerate of this agenda. and acute hospital services. funded care. linked to inflation. property sectors. this trend.

2 3 HEALTHCARE CAPITAL MARKETS 2021 HEALTHCARE CAPITAL MARKETS 2021

to see further investment interest in these niche sectors going forward. KEY DEALS AND Fig 5: Healthcare property investment – overseas share

TRANSACTIONS Forward-funding in the elderly Overseas Domestic care home sector 41% 59% 72% 28% Overseas capital targets UK sector in 2021 as it looks to deal with Investors moving towards Belgian-listed Aedifica continued its healthcare sector a huge backlog of non-Covid patients, specialist healthcare assets expansion into the UK elderly sector, especially cancer patients. acquiring five trading care homes for £61 Across the healthcare sector, overseas The pandemic has fuelled greater Deals in the elderly care home sector million. The purpose-built homes are let capital was very active in 2020, investor interest in specialist healthcare were broadly subdued in 2020, but to two leading operators on 30-year leases, accounting for 72% of transaction sectors such as mental health, learning there have been some hugely significant at a gross yield of 6%. Very few assets volumes. As shown in Figure 5, this was disability, children’s nurseries and overseas entries into the UK and Ireland traded at the prime end of the market in well above the 41% share seen across the specialist schools. Not all that surprising, already in 2021. Korian, the giant French- 2020. While investors paused to digest last five years. The most significant deals given that these sectors tend to be based care operator, made its entry into the impact of Covid-19, the availability were focused on the private hospital focused on users below the age of 65, the UK by acquiring Berkley Care group in of prime quality stock is actually the market, capital supplied by specialist for whom Covid-19 is much less of a Q1 2021. While Belgian REIT, Cofinimmo, bigger barrier. The forward funding of North American REITs. In a mega deal threat1. There have been a number of purchased seven assets in the Irish market new care home developments is therefore valued at £1.5 billion, Medical large specialist healthcare opco’s and real for a reported 100 million Euros. Both becoming increasingly common among Trust acquired 30 BMI operated hospital estate portfolios brought to market or transactions will do much to restore investors as a way to access prime stock facilities in early 2020. The real estate in the pipeline. This includes specialist confidence in this sector. and help the sector upgrade. Octopus deal followed the buy-out of BMI by adult healthcare provider Exemplar RE’s purchase of eight care homes from Circle Health, which has committed to Health Care, and mental health providers LNT Care Developments for £100 million a £250 million upgrade programme. uu Elysium Healthcare and Priory Group in December 2020 is one such example Canadian-based NorthWest Healthcare – the latter being sold to private equity With specialist healthcare of this – the specialist investor agreeing REIT also acquired six BMI hospitals group, Waterland, for £1.1 billion at the LAST  YEARS  services poised to see more users to buy five of the properties at practical and four Aspen Healthcare hospitals for start of 2021. With specialist healthcare in the aftermath of Covid-19, we completion and forward fund the Source: Property Data a total £358 million. These acquisitions services poised to see more users in the expect to see further investment remaining three. look well-timed, not just because the aftermath of Covid-19, infrastructure interest in these niche sectors dollar has since weakened against the funds becoming increasingly active, going forward pound, but because the NHS is expected and socially impactful or ESG investing Table 1: Major Deals 2020 to lean heavily on the private hospital uu becoming a growing priority, we expect PRICE (£ SECTOR ASSET/PORTFOLIO PURCHASER ASSETS SELLER OCCUPIER DATE MILLION)

Fig 4: Healthcare property investment, by buyer type Hospitals 30 x BMI Healthcare Portfolio Medical Properties Trust 30 BMI (Circle Health) BMI (Circle Health) 1,500 Jan-20

2018 2019 2020 General Mixer Hospitals Magnolia Portfolio NorthWest Healthcare REIT 6 BMI (Circle Health) 98 Feb-20 Healthcare Partnership 80%

Hospitals Aspen (London) portfolio NorthWest Healthcare REIT 4 Undisclosed Aspen Healthcare 260 Aug-20 70%

LNT Care Ideal Care Homes/ 60% Elderly care 8 x New build portfolio Octopus RE 8 100 Dec-20 Developments Elmfield Care

50% Elderly care Southern England portfolio Aedifica SA/NV 5 Undisclosed Bondcare and MMCG 61 Jan-20

40%

Elderly care Holmes Care (Scotland) Portfolio Impact Healthcare REIT 9 Holmes Care Holmes Care 48 Mar-20 30%

20% Primary care 20 x Medical Centres Primary Health Properties 20 Undisclosed GP & NHS 47 May-20

10% Primary care 7 x Medical Centres Assura Group Ltd 7 Undisclosed Undisclosed 35 Jun-20

0% Busy Bees, Bright Childcare 5 x London children’s nurseries Newcore Capital 5 Public sector vendors 23 Mar-20 REITS & LISTED INSTITUTIONAL PRIVATE OCCUPIER PRIVATE UNDISCLOSED OVERSEAS Horizons and others PROPERTY CO. INVESTOR Learning Experience Nursery Source: Property Data Childcare Undisc. 1 250 East End Road LLP Learning Experience 2 Dec-20 (Finchley)

4 5 HEALTHCARE CAPITAL MARKETS 2021 HEALTHCARE CAPITAL MARKETS 2021

Fig 6: Prime healthcare yields (fixed-income, %) Q & A: LATEST TRENDS INVESTMENT PERFORMANCE IN THE DEBT MARKET AND OUTLOOK

With the healthcare market in need of inward investment and financing, Yields stay low and a limited supply of prime grade of retail. The exception is healthcare, we asked Craig Wilson (Partner in Debt Advisory) for his latest summary assets. Prime yields across all sectors where returns held strong at 6.3% in 2020, on trends in the healthcare lending space. Yields across a range of healthcare asset are therefore expected to remain matching the long-term average. With types have remained compressed, despite compressed for the foreseeable future. testing economic conditions ahead in 2021 the pandemic. In the elderly care home and beyond, investors are expected to seek sector, there was a limited amount of Returns holding, unlike other stability and healthcare fits this mould. prime stock coming to market but investor property sectors As shown in Figure 8, which illustrates the demand for such assets remains strong. risk-return profile of each sector over the Well capitalised bidders remain willing to As shown in Figure 7, total returns fell last ten years, healthcare returns while not pay a premium for well-located purpose- across a mixture of traditional and remarkable have been extremely stable. built homes positioned for the private- alternative sectors in Not only that, with demand for healthcare pay market. Prime elderly care yields are 2020. Moreover, returns are significantly services and accommodation fuelled by expected to remain below the 4% mark, below the long-term (10-year) average – a the unrelenting growth of our over 85 especially with more institutional investors product of a mixture of factors including population, the sector is largely seen as a CRAIG WILSON, PARTNER, competing for long-term income-backed the pandemic, the current real estate KNIGHT FRANK CAPITAL ADVISORY hedge against economic recession. assets in safe-haven markets. Core market cycle and structural change in the case elderly care stock has been trading closer to 6% and above in 2020. How would you summarise and diverse loan books. More recently finance in the healthcare sector over the Elsewhere in the healthcare property Fig 7: Total returns (%) lender appetite for healthcare challenger banks and debt funds have past few years, taking note of the strong market, there is wide variation in yields property at the moment? entered the market, gaining market demand fundamentals driving the 2019 2020 Long-term avg (10-year) across different sectors and within share and targeting transactions higher need for healthcare real estate. Finance 15 Despite the impact of the pandemic, each sector. However, all sectors are up the risk curve. is now available for a wide variety of 12 lender appetite across the UK healthcare defined by growing investor demand, 9 deals across the capital stack. Senior, sector has held up relatively well, 6 What type of healthcare assets are stretch senior, mezzanine and whole particularly when compared to less 3 lenders targeting? loan products provide a broad range of resilient sectors such as retail and leisure. 0 development financing options between Fig 6: Prime healthcare -3 In the initial market shock in Q2 2020, Elderly care remains the most liquid 50-90% loan-to-cost and 40-75% of yields (fixed-income, %) -6 liquidity in the healthcare debt market healthcare sub-sector from a senior turnkey value. -9 did diminish and senior debt pricing debt perspective, however lenders -12 increased by 0.50% to 1.00%. But, debt are also targeting more specialist care ELDERLY -15 What are your predictions for the CARE pricing began to soften in Q3 2020 and sub-sectors, such as mental health and 3.75 debt markets in 2021? Healthcare Education* Hotel Residential Industrial Office Retail has remained largely stable, albeit at brain injury. Since the pandemic, there (PRS) Source: MSCI rebased levels, over the past six months. has been a ‘flight to quality’ in the debt The stabilisation of the debt markets PRIMARY CARE 4.00 market, with stronger lender appetite looks set to continue with an increasingly What is the profile of lenders for prime, purpose-built assets with positive economic outlook, driven by the and have there been any new reputable operators. Some established vaccine roll-out. There is an expectation PRIVATE Fig 8: Risk vs Returns, 10-year history HOSPITALS 4.75 entrants into the healthcare lenders are being increasingly selective that leverage will return to pre-pandemic 14 space in recent years? in originating new-to-bank clients and levels and debt pricing will reduce by 12 Education* Industrial may seek to churn the ‘lower end’ of up to 0.25% by Q4 2021 and Q1 2022. We 10 Hotel The debt market in the sector is CHILDCARE Residential (PRS) (NURSERIES) Office their loan books on events. will continue to see new opportunistic 5.00 8 relatively niche, with around 20 entrants into the debt markets in 2021, 6 Healthcare All property established debt providers. Ultimately, New development is expected to with capital previously invested into less 4 Retail lenders need to be comfortable play a huge role in the sector going resilient sectors redirected into higher Total return average (%) 2 with reputational risk within the ADULT SUPPORTED 5.50 forward. Would you say lenders yielding debt funds, including those LIVING 0 healthcare market, particularly given 1 2 4 6 8 10 recognise the opportunity? exposed to healthcare. the vulnerable nature of residents LOW RISK Risk (Standard deviation) HIGH RISK and end-users. High street banks have Alternative lenders have certainly Source: MSCI Source: MSCI built a dominant position with large bolstered the availability of development

*Education refers to schools and nurseries, not student accommodation

6 7 OUTLOOK FOR 2021 AND BEYOND

The year ahead will not be without global and domestic capital directed at and education are very much a part its operational challenges for the healthcare real estate for a multitude of. With no shortage of investor healthcare sector. The elderly care of reasons. appetite, the availability and sector will need to recover occupancy Investors will be seeking the safety competition for healthcare stock is levels now that the vaccine has been provided by long-dated income, such potentially the biggest challenge. deployed, private hospitals will be as that provided by healthcare, more As a result, we expect to see more stretched by the backlog of non-Covid investors will be looking to de-risk investors target new development patients, and margins across the and re-weight asset allocations out of opportunities through both direct healthcare and education business retail and into alternative sectors, and investment and lending. This space will be squeezed as government the pandemic will likely accelerate inward investment is vital to the financial support retracts. Despite investment into social infrastructure, future of the sector. this, we expect to see increased of which healthcare, specialist housing

Footnotes: Please get in touch with us

(1) Provisional figures on deaths registered Healthcare Debt Advisory in England and Wales, provided by the ONS, showed that only 10% of Covid-19 deaths Julian Evans FRICS Craig Wilson occurred in those below the age of 65. Head of Healthcare Partner Front cover photo: Elworth Grange, Sandbach. +44 20 7861 1147 +44 20 7861 5226 LNT Care Developments and Ideal Care. [email protected] [email protected]

Recent Publications Patrick Evans MRICS Commercial Research Head of Corporate Valuations Joe Brame

Occupancy down 8.5% Operators adapt quickly Additional government by mid-year 2020 and show resilience funding until March 2021 Why is investment 6 key trends Case studies: Germany, interest growing? driving the market France & Spain +44 20 7861 1757 Senior Analyst (Healthcare) 2020 UK Care Homes European [email protected]

Trading Performance knightfrank.co.uk/research Review Healthcare knightfrank.com/research +44 20 3967 7139 Elderly Care Market, Research 2020 [email protected] Kieren Cole, MRICS Head of Commercial Valuations +44 20 7861 1563 European Healthcare Report Trading Performance Review Trading [email protected]

Knight Frank Research Knight Frank Research provides strategic advice, consultancy services and forecasting to a wide range of clients worldwide including developers, investors, funding organisations, corporate institutions and the public sector. All Reports are available at our clients recognise the need for expert independent advice customised to their specific needs. © Knight Frank LLP 2021. Terms of use: This report is published for general information only and not to be relied upon in any way. All knightfrank.com/research information is for personal use only and should not be used in any part for commercial third party use. By continuing to access the report, it is recognised that a licence is granted only to use the reports and all content therein in this way. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no responsibility or liability whatsoever can be accepted by Knight Frank LLP for any loss or damage resultant from any use of, reliance on or reference to the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank LLP in relation to particular properties or projects. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without prior written approval from Knight Frank LLP. Knight Frank LLP is a limited liability partnership registered in England with registered number OC305934. Our registered office is 55 Baker Street, London, W1U 8AN, where you may look at a list of members’ names.