Why healthcare property may offer greater income security

Medical centre landlords and developers Primary Health Properties (PHP) and Assura (AGR) both confirmed they would pay their respective interim dividends and said rents due for the second quarter had been in line with historic norms. 

Around 85 per cent of Assura’s £104m annual rent roll was backed by the NHS during the first-half. For PHP,  that proportion is even higher, with 90 per cent of rent paid directly by the UK and Irish governments, with the balance predominantly coming from pharmacies located on GP surgery sites. “You don’t have the same issues about rental collections as companies with exposure to retail or other areas of the economy have,” said PHP managing director Harry Hyman. 

Total returns across the healthcare sector averaged 8.7 per cent between 2015 and 2019, outperforming office and retail sectors, according to data from index provider MSCI. Yet crucially, they have also been the least volatile, indicated by a standard deviation multiple of 2.6.

The major UK healthcare Reits span three broad segments – primary care, elderly care homes and adult supported living. Institutional demand has been particularly strong at the prime end of the care-home market, according to research by Knight Frank. That compressed average investment yields for super-prime and prime assets to 3.5 and 4 per cent, respectively, last year, below those attached to primary care and supported living assets. 

In the UK, that market includes Reits Target Healthcare (THLR) and Impact Healthcare (IHR), which invest in residential care-home facilities that are subject to annual uplifts linked to RPI inflation. 

An ageing population, lack of adequate care home facilities and a “paucity in long-dated income” have driven investor interest in the care sector, said Knight Frank head of healthcare Julian Evans. “From a humanistic perspective and from a provisional real estate perspective, it’s compelling,” he said. 

Mr Evans said he had spoken with several large Asia Pacific fund houses and family offices that are keen to invest in the UK healthcare market. “I think healthcare will be considered a flight to safety and quality,” he said. 

However, the security of rental income is dependent on the financial health of the care providers - funded via a mixture of local authorities and privately paying residents - which have signed the leases. In 2011, Southern Cross - then the UK’s largest residential care home provider - collapsed into administration after being unable to make rent payments and squeezed by public funding cuts. 

“That was a perfect storm of RPI-geared annual [lease] escalators, a high proportion of tenants were local authorities and a significant proportion were over-rented,” said Mr Evans. 

Diversification of the tenant base and the extent to which care provider fees cover rent payments are crucial to determining the risk defaults pose to landlords’ income streams. Target Healthcare had a rent cover multiple of 1.6 on the mature home in its portfolio at the end of December and tenants that numbered 28, with the largest accounting for less than 12 per cent of income. Meanwhile Impact had a rent cover ratio of 1.8 across nine care operators, with the largest accounting for 33 per cent of contracted rent.