Reforms in the way that the National Health Service provides medical care are long overdue, and while the outcome of the recent general election remained uncertain up to the last minute, all political parties made NHS reforms a key part of their manifesto.
One way of lightening the load imposed on hospitals by both an aging populace (the number of over 85s is expected to double to 2.8m by 2033) and general misuse of the emergency services, is to move as many functions as possible into more local healthcare facilities - but this is where the real problems start to emerge.
Jeremy Hunt, Secretary of State for Health, has pledged to spend an extra £8bn a year by 2020 on key development areas, and will include plans to employ 5,000 more general practitioners (GPs) in the next five years. Facilities on offer will be available from 8am to 8pm, seven days a week, with same day appointments for those aged over 75. There will also be online access for all patients and full electronic records by 2018. That's a big ask.
On the GP front there are major hurdles to overcome. The obvious problem is that many of them do not work full-time; so transforming the system to provide extended hours may prove challenging. In an ideal world, practises could be combined within a single purpose-built health centre, designed to cater for a more sophisticated range of services. This has the added attraction that GPs from several existing surgeries would be working under one roof, so the weekend shift allocation might only come round every few weeks.
Implementing such a plan has been slow and cumbersome as the NHS limps through a number of reforms, none of which has had any time to bed down. There's also the problem of funding. Late last year, the government announced a Primary Care Infrastructure Fund, a four-year investment programme to provide an extra £1bn to accelerate improvements in GP premises. This is a vital first step because nearly three-quarters of GPs maintain that their current premises are not fit for purpose.
No one operating out of a converted semi-detached house could hope to provide a fully up-to-date integrated range of services, so it came as little surprise that an invitation to submit proposals for investment in infrastructure attracted an initial 2,000 applications. And in March this year, the fund announced that over 1,000 of these had received approval in principal. This is just the start, because any proposal to build a new, high-quality healthcare centre is subject to all the usual regulatory hoops that any new build is subject to. Joe Public, for example, might be highly attracted to the idea of a spanking new healthcare centre; provided, of course, it's not built on a nice open patch facing his own house. Nor will the introduction of new centres be uniform across the country, mainly because in inner city areas, notably London, the cost of acquiring a suitable site for redevelopment is unrealistically high, especially since demand for office and residential space is so strong.
There is another challenge presented by the number of existing GPs coming up to retirement. Replacing them will be hard, not least because GPs are in effect self-employed, full-time agents and are therefore not covered by the work hour limits that apply to doctors working in hospitals. That helps to explain why GP recruitment and retention levels are at their lowest ebb for 20 years. A third of all GPs maintain that their current workloads are effectively unmanageable - a real headache for NHS strategists. On top of this, excluding locums, GP income has fallen in real terms by 25 per cent since 2004. There is also the question of ownership; a newly recruited GP may think twice before becoming involved in owning a brand new surgery.
For those prepared to go down this road, there is help at hand though specialist companies that operate as GP landlords. The attractions are significant. Operating a string of new, fit-for-purpose healthcare centres has the advantage of having the NHS as the principle tenant. This is because the NHS pays the GP's rent, thus providing an extremely secure revenue stream. New premises are often on long leases; that provides visibility of earnings, while there is the added attraction that the asset will appreciate in value.
The scale of the task is immense. The three principal specialists providing investment in primary care infrastructure are MedicX Fund (MXF), Primary Health Properties (PHP) and Assura (AGR). Between them, they operate nearly 700 healthcare centres, but across the country there are around 32,000 surgeries. Consolidation would see this number fall dramatically. Obviously, there is still plenty of work to do, but the potential cost benefits provided through a localised approach would be significant. Spending on the NHS in the last decade has risen from £80bn to £120bn, a level of expansion that is unsustainable. So improvements will have to come principally through more efficient use of capital. A recent survey from management consultant Deloitte LLP suggests that every £1 invested in increasing the GP budget would shave £5 off the NHS bill.
However, the wheels of the NHS turn very slowly; following structural changes introduced in 2013, the rate of approval for new medical centre developments slowed to a trickle. From the GP landlord's perspective, this was not good news. But with the general election out of the way, it seems that progress could accelerate. As well as addressing the task in hand, this will also help to boost rental income. This is because a majority of the modern buildings are subject to open market reviews, whereby the level of rent is calculated in relation to the cost of a new building. This is clearly rising, and will increase the rate at which open market rental reviews can be revised upwards.
A smaller percentage of rents are subject to uplifts linked to the rate of inflation, and while MedicX achieved increases in the year to March of 2.9 per cent, the rate will start to fall because inflation has disappeared for the time being. For the GP landlords, the current climate is extremely favourable for further development. Funds to invest in new centres come through a mixture of equity issuance and debt. And while the valuation yield on the portfolio maintains a decent spread over the cost of capital, the business model is sound, although at some point interest rates will start to rise, which could squeeze margins.
IC VIEW:
GPs currently provide consultations with 1.3m patients every day, with the 4.2m people aged over 75 taking twice as many consultations as the average person. Clearly, there is a need to provide not only medication and healthcare equipment, but also to improve the level of social care. Achieving this will free up specialist healthcare facilities and take much of the workload away from hospitals. It will take time, though.
Favourites and Outsiders
This is a small and highly specialised niche market. All three players are performing well, and with such a huge task in hand the outlook for further rental growth from an expanded portfolio of modern health centres is considerable. Selecting a favourite and an outsider from such a small group is therefore difficult. Primary Health Properties offers the most attractive dividend, but MedicX's shares trade at the smallest premium to net asset value. So, being very picky, Assura pays the smallest dividend and has the highest rating, which makes the current share price difficult to justify as an entry point.
