Property issues and opportunities in the care sector
Breakfast Seminar - 5 November 2008
Speakers: Josh Wong, Director, Barclays Capital Real Estate Group, Harry Hyman, Managing Director of Primary Health Properties, and Martin Robb, Director, Christie & Co.
The second Care Conversation breakfast seminar looked at how the turbulant economic climate would affect property issues and opportunities in the care sector.
The lack of bank capital, coupled with falling property values, meant that the care property market had undoubtedly become characterised by a lack of momentum, said Co-Head of Origination for EMEA Real Estate Investment Banking at Barclays Capital, Joshua Wong. The market would be looking very closely for the resolution of certain high-profile transactions in the short to medium term, he said. On a positive note, however, the situation did mean that those long term investors who had been priced out of the market for the last five years could once again look to the sector for value. Looking beyond the next six months, prospects were good, he said.
‘Perversely, at a time when it’s harder to raise finance, there are a lot of terrific opportunities,’ agreed Managing Director of Primary Health Partners Plc, Harry Hyman. The situation in the primary care sector was looking very positive, he said – the NHS was interested in taking long term leases, which meant investors would be looking at very strong long term cash flows coupled with falling interest rates. ‘Unlike huge swathes of the property sector, the government will ensure that the rent is paid,’ he stressed, predicting that investors would soon come back into the market.
Underlying operational issues were broadly similar to a year ago, said Director of Christie & Co, Martin Robb. The drivers had not changed significantly – it was simply a matter of taking financing into account. Land values were now coming down and anecdotal evidence suggested that building costs were starting to fall, he added.
So what was the prognosis for the longer term? ‘It’s overwhelmingly positive, particularly compared to sectors like retail and leisure,’ said Harry Hyman. All governments were committed to the NHS, he said, meaning healthcare was an extremely strong sector to be involved in. ‘I’m not trying to say there aren’t issues. Access to finance will be harder, but the opportunities for buying property are very good – it’s a great time to be buying if you can finance it.’
The biggest risks in the UK remained the effects of the banking crisis on the availability of finance, not just term funding but also the simple on-demand facilities and overdrafts that organisations needed to operate, said Joshua Wong. Coupled with this was the fact that lending policies were changing ‘almost by the day’, said Martin Robb, leading to valuation volatility. ‘Your skill over the next couple of years is to be a better operator than you were,’ he stressed. A key problem in terms of valuations in the current climate was defining what constituted ‘a willing buyer and willing seller’, he added. ‘There is a reality gap between vendors’ expectations and buyers wanting to get a good deal.’
Bank finance did remain available, stressed Harry Hyman – ‘It has not disappeared completely – but it’s there for the right deals and the right risks’ – while Martin Robb emphasised that ‘in a bull market people gloss over risk, whilst in a bear market, the risks get exaggerated.’
When asked how the panel squared the property discussion with the government’s increasing commitment to non property based solutions, Harry Hyman stated that ‘in the primary care sector it’s impossible to deliver high quality care if you don’t have high quality buildings. Clearly we don’t want to focus just on property, but that property has to be appropriate for 21st century needs – you need quality buildings for quality care.’
In terms of the panel’s expectations for the coming year, Harry Hyman said it would be ‘naïve to think we’ve reached bottom.’ It would depend on where margins bottomed out, he said, but hopefully 2009 would see stabilisation and the care sector becoming an attractive sector to lend to. ‘There will be difficult times to get through, but after that there could well be more liquidity coming back into the system. As soon as banks get used to lending to each other, so they will open the door to corporates.’
The healthcare sector would get a ‘decent percentage’ of bank capital allocated to it, predicted Joshua Wong, and the last few months had on a relative basis seen more favourable conditions for smaller transactions to progress, larger deals were typically taking much longer to complete owing in part to the number of banks involved. ‘Expect to see fewer larger transactions in the longer term,’ he said. The financial situation did mean however that it remained difficult for smaller business to borrow in the UK, partly as a result of the demise of the traditional bank manager, said Harry Hyman. But a consequence of recent events was that ‘we may be seeing a return to that.’