The overwhelming majority of investors have either maintained or increased their investment allocations since the COVID-19 outbreak, with 16% stating that they have increased their allocation to healthcare real estate by more than 25%. This is according to the CBRE UK Healthcare Sentiment Survey, which surveyed investors, developers, operators and lenders with a combined investment of nearly £24bn.

Investor demand has been resilient throughout the pandemic and although investment activity has slowed, pricing has generally been stable. 88% of respondents expect demand to continue to rise, which we would expect to drive an increase in pricing. Currently, Elderly Care and Retirement Living are the sectors seeing the most interest from healthcare investors.

Tom Morgan, Head of Healthcare comments: “The Healthcare sector has become a key area of focus for investors. At a time of wider-market uncertainty, the sector’s needs-based demand characteristics, underpinned by a compelling demographic story in the UK, have grown in appeal as evidenced by the acquisition of Priory Group for over £1bn at the end of 2020 in which CBRE advised Medical Properties Trust, the funding partner to Waterland Private Equity.”

The survey results show that COVID-19 has shaped the investment decisions of a significant proportion of respondents, with around 40% of respondents mitigating reputational risk by adjusting their criteria for higher quality stock and strong management that supports infection control.

Tom Morgan continues: “It is becoming increasingly clear that the main weight of capital is focusing more heavily on quality. This applies to both the physical asset and the quality of the operation and its management. We therefore expect fit-for-purpose, well operated healthcare assets with solid demand fundamentals to benefit from this shift in investor demand.”

60% of respondents state that COVID-19 has not impacted their development strategy. Of the 40% that have been impacted, 33% predicted an increase in activity and 67% predicted a fall. Those that did note a likely slowdown attributed this to delayed decision-making and a decrease in operator engagement.

The survey indicates that developers are clearly focusing on Elderly Care and Retirement Living where demand is underpinned by the UK’s ageing population. Developers have focused on the more affluent towns for the high private pay fees that are achievable which broadly mirrors where investors predict the most investment demand. However, more developers are now targeting towns and areas where there is less competition and with fee levels that support the cost of developing. The Midlands, North West and East Anglia are predicted to experience growth in demand where there are pockets of affluence.

Andrew Surgenor, Senior Director, Valuation & Advisory Services comments: “The focus for developers appears to be shifting to the regions where there may be less affluence overall but, more importantly, there is limited provision of high-quality facilities resulting in pockets of unmet demand.”

In line with investors and developers, operator respondents anticipate greater demand for new care services in London and the South due to population density and high affluence enabling the development of new high-specification services. New development in the south has improved the overall quality of stock and therefore the ability to provide high-quality care. As such, homes in these locations have typically seen more stability in their occupancy and referrals.

Andrew Surgenor continued: “Respondents have also predicted demand in other regions such as the Midlands and East of England as they target under provided locations with sufficient fees to support a new build.”

Restrictions on move-ins and the delaying of decisions to place a relative in a care home during the pandemic, coupled with COVID-19 related deaths has caused a decrease in occupancy for 73% of survey respondents. 67% of operators have maintained their private fee rates and 60% of respondents believe that it will take at least 1 to 2 years for occupancy to recover to pre-COVID19 levels. However, recovery of the care sector will be contingent on an effective widely administered vaccine which could be an attempt to quickly capture demand as soon as more normal conditions resume.

The healthcare sector has seen relatively high levels of transactions compared to the traditional core real estate markets. The Lenders responding to this survey have loan books of approximately £7.75 billion in the healthcare sector. As a result of the healthcare sector being needs-driven rather than choice-driven, consumer demand has been robust throughout the pandemic. As such, there is a higher sense of security amongst lenders when dealing with healthcare asset classes and 72% of respondents are interested in increasing their level of exposure.

Chris Gow, Executive Director, Operational Real Estate Debt & Structured Finance, CBRE comments: “The lending landscape in 2020 has been altered by the pandemic. On new financing or refinancing we are seeing a flight to quality with lenders being selective on sponsors, asset class and locations. That in turn is having an impact on leverage and pricing of debt across most asset classes in real estate finance.”

Unsurprisingly, the survey has shown that despite the economic uncertainties resulting from COVID-19, healthcare as a needs driven sector remains a positive market for participants from across the spectrum. There is real optimism at how the operator universe has reacted to the challenges presented which will have long term benefits, both in terms of patient outcomes and operational efficiencies. The fundamentals of the sector are attracting greater levels of capital eager to identify investment opportunities as an ageing population drives demand, whilst inadequate real estate impacts the ability to deliver the social benefits challenges to occupancy but are seeing confidence return, supported by improved testing, better supplies of PPE and greater recognition for the work of the independent healthcare and social care sectors.

Tom Morgan concludes: “The resilience of the UK health and social care sectors has really shone through in this survey of the leading participants in the UK healthcare market. Despite the ongoing challenges, it is impossible not to be hugely optimistic about the strength of this sector and the opportunities for high-quality operators and high-quality real estate investment.”

Notes to Editors:

A variety of investors, including specialist healthcare REITs, private equity funds and institutional investors, participated in the healthcare market sentiment survey. Combined, these investors have deployed over £16bn into UK healthcare real estate. Over 40% of respondents have invested over £500m into healthcare property.