Institutionalisation of RE: healthcare

In the third instalment in our series looking at the institutionalisation of real estate sectors, we consider the healthcare sector.

The UK healthcare sector is a highly fragmented in which has undergone a significant shift over the last four to five decades from a market dominated by government-provided beds to a market of independent care home owners and operators.

More than two-thirds (67%) of the beds in the UK care home market is provided and managed by small operators with 15 care homes or less, according to LaingBuisson, the healthcare business intelligence consultancy. Less than one in five beds (19.1%) are provided by local authorities, NHS and the voluntary sector.

Demand for care homes will increase exponentially over the coming decades as the UK’s ageing population ages with the number of people aged 65 or over in England forecast to increase by 65 per cent in the next 25 years, supporting demand supply dynamics in the sector.As the UK population ages, greater numbers of people will need regular, specialised care than has historically been the case.

At the same time, increasingly less care is provided to the elderly by their family at home and the NHS capacity to address the future demographic challenges is likely limited. Indeed, the number of suitable assets for providing care has reduced over the past two decades.

Kenneth Mackenzie, founder and chief executive of Target Healthcare who is planning to deploy a further £100m in the UK before the end of the year said the challenge for sector is that only around 20% of current market stock is “fit for purpose over the long term”.

He explained: “Of the remaining 80% of the universe, around one-third to one-quarter of the stock is not fit for purpose, often because rooms are not ensuite equipped, and will phase out over time. Anything up to 50% will need substantial investment to refurbish and repurpose assets.”

Giovanni Perin, managing partner at Threestones Capital explains: “The stats for the healthcare sector are very compelling.  In Europe alone, over 65s will make up more than 20% of the population by 2025 and there’s a shortfall of quality space.”

Several major institutional investors are now involved in the sector after identifying demography and healthcare as a ‘mega-trend’ and have allocated an increasing proportion of their real estate investment capital to healthcare and nursing homes. These investors are attracted to the long-term income streams and yields of 5.5%-6% – typically 190 basis points higher than other core real estate sectors in key markets.  

Our exploration of the healthcare sector continues tomorrow.

james.wallace@realessetmedia.com