The healthcare sector was propelled to the forefront of the political agenda again in 2017 but what are the areas to watch in 2018?

New rental model expected for retirement living

The rapid growth in demand for good quality retirement products has created opportunities in the sector and led to a number of new entrants into the market with AXA-IM acquiring Retirement Villages Group and L&G investing into Inspired Villages and Renaissance. We expect there’ll be a greater focus on introducing an established rental model and tenure in this sector in 2018, resulting in further acquisitions, mergers and direct investments. 

Healthcare investment becomes mainstream

Over recent years, the healthcare market has positioned itself as a more mainstream asset class offering, in many cases, a secure income against a strong operator covenant. The sector has seen renewed interest from overseas investors, particularly from China and the Middle East, while also remaining popular with UK pension funds and insurers. Given the stable returns on offer, we anticipate that investment appetite for healthcare will remain strong in 2018, with prime yields likely to drop below 4 per cent for the strongest covenants and stand-out locations.

Care home closures continue but often remain in the sector

Care homes continued to close at pace in 2017, mainly as a result of them being non–compliant with legislation, unprofitable or local authorities struggling to find funding for these facilities. We also saw Four Seasons, formerly the largest operator in the UK, close approximately 30 homes. While there are likely to be further closures throughout 2018, particularly in areas of high alternative use values such as private housing, these are also the general locations where new care home developments are being sought.  Furthermore, many of the homes that have been closed to date have remained in the sector through acquisition and then been upgraded, repositioned and reopened.

Brexit uncertainty

With the National Audit Office reporting that 6.6 per cent of posts across the care sector remain unfulfilled, as well as there being 8,000 fewer social care nurses than four years ago, the sector is already feeling the burden, placing pressure on operating costs and care services. This strain is likely to increase further in 2018 as the uncertainty surrounding the passporting implications of Brexit substantially impacts overseas staff working in the UK’s care sector. How this is managed moving forward is vital to securing the future of these services.

Primary Care gets a makeover

2018 is likely to see the health and social care budgets combined, which will have a significant impact on primary care in terms of how it’s run and provided. It’s likely that the Foundation Trusts (FT) and Clinical Commissioning Groups (CCG) will have more influence to determine where money is spent and their main focus is expected to be on the provision of more services and care out of hospitals. This in turn will lead to more outpatient services, community-based practices and higher acute cases being treated in primary care centres. 

We expect a significant increase in spending for new primary care centres by the NHS, FTs and CCGs, which will result in increased investor demand for NHS and Government backed income with in excess of £2 billion of capital predicted to enter the market in 2018.

Further information

Contact Savills Healthcare