Primary healthcare facilities, such as GP surgeries, provide long-dated, Government-backed income. Uncertainty related to Covid-19 has intensified investor demand for this kind of asset. Prime investment yields currently sit below 4%. They are likely to tighten further as investor demand grows and as gilt rates fall.

Flight to certainty

On 19th March, RICS introduced a ‘Material Valuation Uncertainty’ clause due to the unique and quickly unfolding events relating to the global Covid-19 pandemic. Just four days later Boris Johnson announced the UK’s lockdown, addressing the nation by saying “you must stay at home.”

The commercial property world, like much of the rest of the world, paused. However, by 14th May, RICS updated their guidance by revealing the ‘Material Valuation Uncertainty’ clause may no longer be appropriate for some asset classes. Among them were institutional-grade primary healthcare facilities.

Whilst other asset classes have also since had their ‘Material Valuation Uncertainty’ clause removed, it was long-dated income and primary healthcare that was first. This validates the attraction for investors to what is arguably the safest and most risk-averse property asset class.

A flight to quality and secure, long term income property investment, which primary care offers, was already happening pre-Covid. In an increasingly uncertain world, this is likely to sharpen. Alongside the likes of Assura, PHP and BlackRock who dominate the market, recent years have seen a growing number of non-sector specialist investors also showing interest.

Secure income

With rent reimbursement to GPs provided by the NHS, rental income is very secure. In recent years appetite for primary healthcare has grown significantly with yields remaining consistent, investor appetite continuing to grow and a significant weight of money seeking to acquire new purpose-built premises.

Yields on shorter-dated leases, which typically include older surgeries, were seen to improve until relatively recently, due to a limited amount of stock coming to the market. Over the course of 2019, these yields stabilised, suggesting the emergence of a more pronounced, two-tier market. Typically, second-tier investment yields are 50–100 basis points higher than new build investment yields when accounting for location, age, condition, build quality, unexpired term and having regard to underlying alternative use-value, particularly if that is ultimately for a higher value residential use.

New stock is not located where it is needed most

Our analysis reveals a lack of new GP practices where they are needed most. Changes to S106 and CIL and greater Government funding will help to modernise GP surgeries in areas with the oldest stock. However, legislative, design, and environmental challenges mean developing new GP surgeries remains a difficult and slow process.

Age of stock

A vast majority of GP practices (87%) are in buildings that were built prior to 1990. Rural areas tend to have the oldest stock: Devon, Somerset and Dorset have between 94% and 95%, respectively. The equivalent figure for North London is 72%, meaning 28% of its stock was built since 1990.

ONS population projections show these areas with older GP surgeries will also have the largest proportion of people who rely most on GPs and healthcare services by 2040. Those most in need of GPs tend to be those aged nine years and younger and 65 and older. In 2040, 46% of Dorset’s population will be within this age range, up from 35% in 2020.

The urban areas of London, Birmingham and Manchester have the newer stock and lower age dependency ratios. These areas have likely benefited from greater use of S106 and CIL in order to fund new GP practices with modern facilities.

GP surgeries are vital to support the health of the nation. They are the first ‘port of call’, with around 307m patient visits each year. However, the number of GP surgeries continues to fall due to closures and mergers. There are currently 6,750 active practices, a drop of 14% since 2013.

Whilst the 'NHS Long Term Plan’ aims to enable a ‘digital-first’ option for primary care patients, the vast majority of GP appointments will continue to be in-person. This is especially the case for those aged under nine or over 65.

MODERNISING THE ESTATE

Changes to S106 and CIL and greater government funding are all necessary to meet the Government’s commitment to a more modernised healthcare estate. The Health Infrastructure Plan hopes to go some way towards facilitating this ambition but it is too early to tell if this will be enough.

Developing GP surgeries can take a long time as they face many legislative and practical barriers. For new GP surgeries being built today, practices ideally need to be at least 1,000sqm in size to cater for increasing CCG requirements. With Environmental, Social, and Governance (ESG) becoming a greater priority for Government and investors, we anticipate the environmental credentials of new developments will also be scrutinised more closely, which will no doubt have an effect on build costs and overall viability.