Primary Healthcare Property – why is it so popular ?

Scarcely a day goes by without a headline in the media about the latest funding crisis in the NHS and many commentators would agree that the financial pressures on the NHS are notably acute at this time. In this context, the news (confirmed by the results of the IPD UK annual healthcare property index issued last week) that investors in healthcare properties are continuing to see a strong return on their investments might seem perplexing. The question might reasonably be asked, if the NHS is enduring such financially straitened times, why are the property assets from which numerous NHS services are delivered proving to be such a sound investment ?

The answer in part relates to prevailing economic conditions in the UK; the sustained period of significantly low interest rates since the 2008 global economic downturn has pushed investors towards property as an investment as they search for reasonable returns on their capital. As a result, there has been significant investment in commercial property over recent years. But this only explains the strong performance of primary healthcare properties in part, as the IPD annual review shows that healthcare property in general, and primary healthcare in particular is outperforming other forms of commerical property investment.

So why are primary healthcare properties more attractive than other forms of commerical property investment?

1. Primary healthcare property investments have become increasingly attractive as a result of the long term security offered (provided by lease terms of 20-25 years and the strong covenant strength of NHS tenants) compared to other forms of commerical property investments such as shops and offices. Whilst there is a gradual challenge on the part of the NHS to the longer lease terms that have traditionally prevailed in the sector, lease lengths remain significantly longer for healthcare properties in comparison to other property types.

2. The past ten years has also been characterised by a significant drop in demand for commercial property; the advance of online technology has changed the way society functions over this period and has significantly reduced the demand for both office accommodation and traditional retail units whilst the level of demand for primary healthcare property has remained stable.
Looking to the future, there are new innovative technologies which are beginning to enable the delivery of healthcare remotely, although to date these have not been scaled up to significantly impact the requirment for a physical environment from which healthcare is delivered. Whilst it is possible that such advances will enable the delivery of healthcare remotely at scale in the future, this is in the context of an ageing population and a seemingly ever increasing demand for NHS services. Such changes mean that it is likely that the demand for primary healthcare property will at least remain stable.

3. Scarcity of supply of primary healthcare property has driven down investment yields in the sector. The most notable impact of the funding crisis in the NHS on the primary care estate is the significant reduction of the availability of revenue funding for new property developments. Leaving aside the most disappointing consequence of this dearth of funds (i.e. the lack of much needed progress in improving the primary care estate), the reduction in the development of new premises over the past 5 years has resulted in an undersupply of the better quality investment stock in the sector for which there has been great demand from institutional investors.

As a result of the continuing high levels of demand and limited supply, the value of available stock has risen significantly in the primary healthcare sector and has consistently outperformed other forms of commercial property investment.

It is reasonable to conclude that primary care property will remain a sound investment over the medium to long term due to the predicted continuing demand for this property type and characteristics of this market as described above.