A major shift in sentiment towards healthcare investment in the UK has taken place following the rapid expansion of specialist Real Estate Investment Trusts (REITs) in the US.
According to CBRE, listed US REITs have deployed £1.75bn of debt and equity over the past two years in the UK healthcare sector, which is acting as a bridgehead for further expansion into mainland Europe. David Batchelor, an executive director in CBRE’s specialists market team, estimates that potentially a similar amount is still to come from US and other overseas investors.
The impetus for the trans-Atlantic capital push is largely down to big REITs’ acknowledged need to diversify overseas after enjoying a prolonged run of bumper returns, buoyant share prices and corporate acquisitions in their domestic market.
The top three US healthcare REITs – Ventas, Health Care REIT and HCP – own nearly 3,500 US properties and have a combined market capitalisation of about $50bn. Another REIT, HCN, has a stated objective to invest in healthcare assets outside the US.
“They are all fished out of the pond in the US but need to keep that growth story going, so they need to find a new market. The first one they’re going to come to is the UK,” says Batchelor. “If you are a listed US REIT you are raising money at 2-3%. You are distributing [dividends] at 4 or 5%; therefore if you are buying UK assets at above 6%, then you are performing.”
The turning point was Health Care REIT’s $844.6m takeover of Sunrise Senior Living in the US, followed in August 2012 by the acquisition of 17 Sunrise assets in the UK for £469m. That combined deal created one of the biggest nursing home owners in the US, Canada and the UK. The other key 2012 deal involved HCP providing £175m of debt to the UK’s Four Seasons Health Care.
This all seems a world away from the high-profile collapse of UK care home group Southern Cross in 2011, which has cast a long shadow over the sector. The roots of Southern Cross’s failure lay in reckless expansion, allied to a business model that separated the operational side of the business from its property, then geared heavily. After the financial crisis, Southern Cross’s fate was sealed by upward-only rents and falling revenue.
UK institutions feel US influence
Not surprisingly, many UK institutional investors have since steered clear of care homes and healthcare generally. But Batch-elor argues that the incoming US investors have exerted a positive influence on their UK counterparts. He says: “The US healthcare investor has a much more detailed and hands-on understanding of the business they are investing into, therefore they have more levers to pull to drive the returns.
“More [capital] has gone into student housing than into healthcare,” he adds, “which is ridiculous, given the relative size of those markets. The resistance is because of a lack of understanding by the investor. So what we’re going to see are specialist investors emerging, who will get more into the operation of the assets and play more of a role in how the businesses are going to develop.”
Two recent deals point the way forward. Last month Primary Health Properties (PHP), the quoted investor in primary healthcare facilities rather than care homes, took over its smaller rival Prime Public Partnerships for £41m, promising further acquisitions. PHP also flagged up higher earnings through asset management of the enlarged portfolio of 240 properties. The City liked what it heard and PHP’s share price immediately rose nearly 10%.
This month Medical Properties Trust (MPT) became the first US REIT to commit major funds to German healthcare property, in a deal involving the $244.7m sale and leaseback by RHM Klinik of 11 healthcare facilities. CBRE advised RHM Klinik, which is owned by Waterland Private Equity Investments and will maintain operational management of the assets.
“There is more to come in Germany,” says Batchelor, who believes US REITs will also look for acquisitions in Scandinavia and France. The starting point for this move into mainland Europe was the UK, but he argues that the spending spree here is not over. In some respects the first wave of investors picked off the low hanging fruit – the big deals and major corporate refinancings in the private sector – which has brought them instant scale.
Another potential prize is private hospital operator General Healthcare Group, which must restructure its balance sheet and a debt pile including 35 loans across two securitisations. CBRE estimates that a further £1.75bn of US capital is earmarked for the next tier of UK healthcare assets – a much more granular investment programme of add-on deals and smaller portfolios.
If they are to carry on expanding at the same pace, US investors will also have to embrace public sector healthcare, which is new territory for them. Batchelor adds: “The big challenge is how we get the US investors interested in the public-pay model, which I think will come over the year.”