Christie & Co launches 2023 review of UK healthcare market

HEALTHCARE CAPITAL MARKETS

The first half of 2022 reflected the peak of the market, with the economy in an optimum low interest rate environment and average UK Bank of England base rates at 1.75 per cent. UK Government gilt yields were tracking at 2.2 per cent, and super-prime yields within the UK care home sector had compressed to record low levels for best-in-class assets.

Entering 2023, the market began to adapt, with buyers returning albeit with yields adjusting to reflect higher costs of capital and the changing market environment. Positively, despite the macro-market challenges, there is good demand for care home opportunities, with investors attracted by the strong needs-driven underpin of the sector coupled with long-term index-linked cashflows.

LAND AND DEVELOPMENT

The underlying business case for purpose-built care homes remains robust, with a continued need for future-proof market-standard beds in many locations across the UK. Despite operators continuing to face significant headwinds - in particular, construction cost inflation and the cost and availability of capital - the care home development market remains active, says Christie & Co, which continues to transact a high volume of new-to-market beds within the UK. Sentiment remains good, with more operators prepared to take leases on new build assets as a way of achieving growth, resulting in an upward movement in rental levels over the 12 months to June 2023.

Christie & Co is starting to see more domestic and international capital entering the market, attracted by the defensive characteristics of needs-driven Operational Real Estate and the excellent ESG credentials new care homes offer to investors. This additional liquidity, accompanied by the continued imbalance between demand and supply of market-standard beds to cater for the rapidly ageing demographic, will support sustainable levels of transactional activity for consented care home development sites in both the short and long-term.

TRANSACTIONAL ANALYSIS

Key transactional trends in H1 2023:

• Instruction volumes rebounded, sitting 70 per cent ahead of where they were in H2 2022
• There was a rise in the number of larger care homes (60 beds or more) going up for sale
• Only 3 per cent of our transactions were to first-time buyers, around a third of the proportion in 2022
• There was an increasing number of transactions concluded by the larger companies and corporates
• Independent buyers remain the broker’s most active buyer group, accounting for 34 per cent of its deals in 2022 and 36 per cent in 2023
• In 2022,13 per cent of Christie & Co completions were on a closed basis, this increased to 18 per cent in H1 2023.
• In H1 2023, 45 per cent of closed care home deals were sold to care providers for ongoing care use and 55 per cent were purchased for residential conversion.

OPERATIONAL COSTS

Christie & Co data shows that registered managers’ salaries, on average, increased by 13 per cent between 2021 and 2023. There are even greater wage pressures on kitchen staff, with head cook wages increasing by 14 per cent, on average. The situation with maintenance staff is also acute, with wages rising by 18 per cent. An analysis of utility costs shows that heat and light costs have also increased by an average of 19 per cent on a per-occupied bed basis.

LOCAL AUTHORITY FEE RATES

When conducting and analysing a Freedom of Information Act survey - covering all local authorities across England, Wales, and Scotland – Christie & Co found:

• An average residential fee increase in England of 9.5 per cent compared with 5.4 per cent in 2022/23
• An average nursing fee increase in England of 8.1 per cent compared with 6.8 per cent in 2022/23
• Fee rate levels remain a challenge in some areas, with the increases being insufficient to offset inflationary cost pressures
• The burden on the self-funded client base is likely to rise, with the majority of providers achieving private fee increases of 10 per cent or more

OPERATOR SENTIMENT

For its 2023 operator survey, Christie & Co interviewed a cross-section of local and regional providers in the UK. Results show:

• 46 per cent of operators have achieved a reduction in agency usage over the last 12 months, whereas 28 per cent stated agency usage had increased
• Private fee rates increased across all country regions, with 43 per cent of operators reporting a 10 per cent or above increase in private fee rates. Only 9 per cent of respondents reported increases of under 5 per cent, compared with 31 per cent with local authority fees
• 38 per cent of operators said that occupancy has increased, and 70 per cent stated it had returned to pre-pandemic levels

THE FINANCE LANDSCAPE

Historically, whilst in low interest rate margins, lenders have applied a higher interest rate or a ‘stressed margin’ to calculate affordability. However, we are now operating in a new stressed rate environment, which has made lenders look in greater detail at a business’s ability to service their current levels of debt, as well as any potential increases.

Results of a survey of a section of local and regional providers conducted by Christie Finance in July 2023, found that 38 per cent of respondents are looking to buy a care business in the next 12 months, 30 per cent of which will seek finance to do so. When asked about the confidence they have in lenders to support their plans, 46 per cent said they are very confident, 18 per cent said not confident, and 36 per cent remained neutral.

The report also includes a view of the German care market from Christie & Co’s new Head of Healthcare in German, analysis of the healthcare insurance market from Christie Insurance, Christie & Co’s key market activity, and a feature section on Care Home Open Week 2023.

Michael Hodges, Managing Director – Healthcare Consultancy, comments, “Despite the more challenging macro-economic environment, the healthcare property market continues to perform well. Operators have benefitted from encouraging fee rate rises whilst there are signs that agency challenges are easing. Transactionally, the market remains active with there being good demand for appropriately priced stock.”

To read the full Care Market Review 2023 report, visit:  https://www.christie.com/care-market-review-2023/

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For further information on this press release, contact:
Phoebe Burrows, Corporate Communications Manager
P: 07540 063 598 or E: phoebe.burrows@christie.com

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