Primary Healthcare Bulletin

Transcription

1 Health Primary Healthcare Bulletin Autumn 2013

2 02 I GVA 10 Stratton Street London W1J 8JR

3 Primary Healthcare Bulletin 2013 Spring 2013 Introduction Over a million people a day use an NHS facility, whether at a hospital, GP surgery or treatment centre. This year sees the implementation of the Health and Social Care Act 2012 which has delivered some of the largest structural reforms to the NHS in recent history. Investor appetite for primary healthcare property has seen the sector grow in size and continue to deliver a better level of performance than many of the more established commercial property markets. The combination of market reform and concerns over the financial impact of private finance and public private finance initiatives (PFI/PPP) as a conduit of delivering new healthcare infrastructure means that the sector is at something of a crossroads. One of the largest changes to the structure of the NHS has been the abolition of primary care trusts, strategic health authorities and the creation of localised clinical commissioning groups supported by NHS England Local Area Teams. A consequence of this is that the real estate that was part of the old structure has now been transferred to a new body, NHS Property Services Ltd with the sole aim of managing over 4 billion of freehold and leasehold assets. In the future a growing and ageing population will place increasing demands upon the healthcare system in the UK. At the same time, advances in medicine, and the associated rise in costs, have met with increased expectations of service delivery. As a consequence of this, government policy is encouraging the shift in healthcare delivery from hospital to community settings, with improvements to primary healthcare assets a key feature. This bulletin seeks to highlight the main issues raised by the reforms within the NHS and primary care sector, as well as looking at the impact these will have. In addition, the report looks at the primary healthcare market and how it has performed from a property investment viewpoint and what fundamentals will drive the sector in the coming years. 10 Stratton Street London W1J 8JR GVA I 03

4 NHS Reform: Health and Social Care Act 2012 The NHS in England has undergone a period of major reform under the current government via the Health and Social Care Act 2012, with one of the largest changes being the abolition of primary care trusts (PCTs) and strategic health authorities (SHAs) in favour of clinical commissioning groups (CCGs), run by GPs themselves. The administrative role of these bodies which were responsible for overseeing primary, secondary and community care meant that over 80% of the NHS budget was devoted to them. Up until the implementation of the Act, there were 10 SHAs and 151 PCTs. In 2009, it was estimated 1 that spending on management consultancy was 300 million, while PCTs were spending an average of 1.2m on external companies, compared to 361,000 in Ownership of the property assets under control of the PCTs has been handed to the newly established NHS Property Services, which holds almost 4,000 assets. This is to allow the NHS itself and the CCGs to focus on their principle function. In turn, NHS Property Services is a dedicated private company, who as part of the broader NHS family, is responsible for property which was previously under the PCTs stewardship. A detailed breakdown of the estate is listed in Table 1 herein. Of these assets, approximately half is freehold in tenure, with the remainder being leasehold or let on short term tenancy agreements. Over the course of the first two years of the company s operation, the main purpose of NHS Property Services will be to hold property for primary and community care services, and to deliver cost effective property solutions for community health services. On this basis, GVA estimates that as much as 30% of the estate could eventually be disposed of as it doesn t fall within these principle functions. Table 1- NHS Property Services estate Asset type Primary Care Number Share Community care Yes 150 4% Hospital Yes % Land No 279 7% Residential No 77 2% Support No 162 4% Office No % Health centre Yes 1,994 50% Care home No 299 7% Total n/a 3, % Source: NHS Property Services Over the course of 2013/14, the NHS has a target of 4% efficiency savings which is to be reinvested into services and to limit the impact of inflation. The new company has an integral role to play towards this. The majority of its income is from NHS organisations, and it is duty bound to minimise costs to those parties using its facilities and passing those savings back on to the wider NHS. For GPs in England, the cost of premises has increased by 32% between 2007/8 and 2011/12 to 661 million and now accounts for 34% of all costs, compared to 27% in 2007/8. Unlike PCTs which received funding direct from the government, NHS Property Services receives no state funding or allocations. All income will be a result of billing its customers who occupy the estate or via rationalisation of that estate. The leasing arrangements held with these customers will be those which were inherited from the PCTs and SHAs so rather than introducing wholesale changes, current terms will be maintained. This applies to rental increases as well, which will only be applied if already in place prior to the 2012 Act being implemented. The downside of this is that the income will be as much as 50% below the annual expected running costs of the company of 700 million. In 2013/14, income from tenants is estimated to be 425 million, meaning that commissioners (NHS England) will have to plug the shortfall. 1 Management Consultancies Association 2 Pulse Magazine 04 I GVA 10 Stratton Street London W1J 8JR

5 Primary Healthcare Bulletin Autumn 2013 The impact of PFI In terms of rationalisation, one of the strategic objectives of the company is to ensure the tax payer as well as patients and staff receives best value for money with a smaller, better quality estate. Given the scale of change and difficulties in implementing a new corporate real estate strategy, for 2013/14 the company will inherit the programme used by the PCTs. From April 2014, key performance indicators and good practice guides will be put in place to ensure the efficient use of property in the ownership of NHS Property Services. To date, the company has identified some 340 sites suitable for residential or employment use which are considered to be surplus to requirements and will be disposed of over the course of the next two years. In all, there is the potential to deliver as many as 2,000 new homes (NHS PS business plan 2013). The majority of these are small sites although there are some with the capacity to provide more than 50 units. Overall, the estimated value of these sites is 250 million, although this is likely to increase as more sites become available. To date, the company has yet to publicly identify which clinical sites are considered to be no longer necessary. Where this is the case, it is the responsibility of the CCG and not NHS Property Services to conduct the disposal process itself once the necessary consultation and closure process has been implemented. The use of private finance initiative (PFI) within the healthcare sector has been widely reported, with the most notable example being the placing of South London Hospitals into administration. In this instance, the trust had to pay in the region of 69 million a year to service the PFI payments and interest, culminating in an accumulated debt of more than 200 million in late The share of servicing this debt as a proportion of all outgoings for the trust was 6%. There are two other trusts in England with a share greater than 7%. Introduced in 1992, PFI was used as a means of capitalising on private sector skills and expertise in the process of delivering public infrastructure. In practice, a private developer or operator finances and builds a new project and sometimes remains responsible for servicing and maintenance, then receives repayments and interest over the course of a 25 to 30 year term. Its use escalated to the extent that it became the preferred form of public private partnership (PPP). Over this time however, a broad range of problems associated with this process have arisen, the foremost being that it is overly costly, lacks transparency and inappropriate risk transfer to the private sector has resulted in increased premiums charged back to the public sector. As of 2012/13, the value of current PFI projects across the UK was 54.7 billion. Over a fifth of this ( 11.6 billion) was for 118 projects for the Department of Health, the largest financial share of any government department or organisation. This in itself is a considerable sum, but this fails to take into account payment terms which are linked to RPI inflation. A recent study by the Nuffield Trust showed that annual PFI repayments by NHS trusts in England increased from 459 million in 2009/10 to million in 2011/12, an increase of 170 million. This rise is equivalent to more than 18% per annum over the last two years. One issue is that margins for PFI finance have trebled since 2007 from approximately 1% to 3% in This is a combination of the increased risk associated with covenant strength (typically BAA/ BBB) and less liquidity in the financial markets due to new capital reserve requirements. The consequence of this is higher interest rates are passed on to the public sector to match the increased risk burden and cost of finance shouldered by the private sector partner, at the expense of other healthcare services. Questions have also been raised about how much PFI delivers in terms of value for money. In 2011, the cost of delivering healthcare infrastructure was 121 billion, although the value of the assets in question was assessed to be 52.9 billion. 10 Stratton Street London W1J 8JR GVA I 05

6 LIFT and primary healthcare Size of the market A more common type of PPP used specifically within the primary healthcare sector is the local improvement finance trusts (LIFT). According to the Community Health Partnerships (CHP), the sister company to NHS Property Services and responsible for all premises involved in the LIFT process, there has been over 2.2 billion of capital expenditure in the past decade, delivering 872,000 sq m of new floorspace across 314 projects. There are 49 LIFT companies currently in operation in England which via the CHP are responsible for strategic estate management, day to day operations of the estate and rationalisation of the estate via refurbishment or new build. Compared to PFI, the number and size of LIFTs is significantly lower and its use is targeted at primary healthcare and GP practices in particular; whereas PFI has been used for larger major infrastructure projects such as new hospital buildings. So what differentiates a LIFT project from one based on PFI? LIFTs have focused more on smaller to medium scale projects and one of the reasons behind this is that the public sector partner has the ability to create a joint venture with a private sector contractor of their choosing, rather than via the costly bidding process. This way, those relationships which work well can be maintained on future projects. Another important aspect in improving PPP performance is the move by hospitals to foundation status. Most are expected to have made this change by the end of The reason behind this is that a foundation trust can carry over any unused revenue each year instead of handing the cash back to the NHS. This enables the consolidation and accrual of funds, either in terms of equity or leverage for further finance. GP practices form a considerable part of the primary healthcare estate. There are over 10,000 across the UK, catering for over 41,000 GPs. All GPs, whether multiple partners or single practitioners, receive funding based on the practice rather than the individual. In the instance of single practitioners, it is not uncommon for them to partner with other practices nearby. The cost of paying rent, staff and maintenance costs are covered by the funding for each specific practice, with the leftover sum used as the pay for GPs. Previously this would have come from the PCTs and is now provided by NHS England and the CCGs. Table 2- GPs and GP Practices Country Number of GPs Number of GP Practices England 34,101 8,230 Scotland 4,270 1,025 Wales 1, Northern Ireland 1, Total 41,349 10,112 Source: BMA Despite the scale of PFI and LIFT usage over the past decade in particular, there is still a considerable amount of the former PCT estate which has not been updated. Some 65% is older than 1994, while over half is older than 1984, with the highest concentration amongst properties dated pre 1948 (Figure 1). 06 I GVA 10 Stratton Street London W1J 8JR

7 Primary Healthcare Bulletin Autumn 2013 Investment market Recent research by GP magazine (January 2013) established that 57% of GP partnerships believe that their premises are in need of improvement. The combination of poor quality of existing stock and the changes to government policy means that demand for modern primary healthcare facilities will grow. It is this major share of the primary healthcare portfolio in the UK that will help drive investment in the sector over the coming decade as real estate assets are improved and rationalised to provide greater performance in terms of quality standards, running costs, energy consumption and meeting growing patient demand. Figure 1- Age of former PCT estate 25% 20% 15% 10% 5% 0% 2005 present Source: NHS Information Centre pre 1948 Equivalent yield % The healthcare sector has evolved as a significant property asset class over the past few years, and within that, the primary healthcare sector has become its own established market. However this development has only taken place relatively recently so there is no detailed long term historical benchmark to measure performance against. The IPD Healthcare index looks at the broader healthcare sector and specifically the primary healthcare sector, going back as far as As the market has evolved, the index has grown in size by over 40% 8.5 to cover 786 healthcare properties in 2012, while the number of 8.0total properties covered by IPD has decreased by 12%, reflecting 7.5 the increasing appeal of the healthcare sector as an asset 7.0 class. In terms of the broader all property index, healthcare as 6.5a sector has increased proportionally from 2.3% in 2007 to % in The share of primary healthcare within the healthcare 5.5 index has risen from 50% to 60%, following a 68% increase 5.0 in the number of properties from The 4.0 total number of properties within the healthcare index has recorded a 45% increase in value since 2007, with primary healthcare rising by 93%. This is in stark contrast to the all property index, where the decline in the number of properties has been out paced by a 28% fall in value over the same period Rental growth All Property All Healthcare Primary Healthcare -10 The IPD annual healthcare property index shows that over the past three years, the annualised rate of rental value growth for primary healthcare property has been 5.4% pa, compared to 4.7% for all healthcare property. Rental values increased for primary healthcare by 5.0% in 2010, reversing a decline of 5.6% the year before. In 2011, rental growth then reached 11.1% before easing to 0.5% in 2012 (see Figure 2 overleaf). Rental value growth % Stratton Street London W1J 8JR GVA I 07

8 Figure 2- Rental Value Growth Rental value growth % Source: IPD In contrast, the all property index, which consists predominantly of retail, office and industrial property, shows that rental values are still a long way below the height of the market. Having fallen by 7.8% in 2009, growth has remained subdued with growth of 0.7% 25% and 0.3% in 2011 and 2012 respectively, following an additional fall of 0.4% in The primary healthcare sector remains far less volatile than commercial property in terms of rental growth thanks to the 15% use of index linked leases and the fact that covenant strength is supported by government and the NHS. Although 2013 has been a year of reform and upheaval in the sector, GVA still expects to see less volatility within the primary 5% healthcare market as demand remains strong, despite the recent policy change, and because it is not linked directly to broader 0% economic fluctuations in the same manner as commercial property. Property Yields % 10% 2005 present All Property Primary Healthcare pre 1948 Despite concerns that the increase in yields for commercial property following the peak in the market and ensuing downturn factored in too much of an over correction, equivalent yields for all property still remain almost 100 basis points higher in 2012 than they did in This is largely being driven by the contrasting fortunes of prime and secondary property across all the main commercial property sectors, where the spread remains steadily above 500 basis points. The primary healthcare sector though has remained relatively immune to these fluctuations and has seen an increase of only 49 basis points since 2007 with equivalent yields at 6.3% for the second year in succession, and importantly 70 basis points lower than for all property. This trend remains consistent not just in one area of the market, but across all regions covered by the healthcare index, which includes London; rest of the South East, South West and Eastern England, the Midlands, North and Wales; and Scotland, all of which match the national average with the exception of London at 6.2%. Changes in yields within the sector have also been less volatile than for commercial property which peaked at 8.2% in 2008 compared to 6.6% for primary healthcare. The relative calm and investor faith in the sector that this portrays is the result of a number of factors but includes: Long leases with government backed rental income, Low risk covenants (essentially government backed), Limited supply of high quality investments, The widespread use of RPI index linked leases, and Positive banking sentiment towards the sector. Figure 3- Equivalent Yield Equivalent yield % Source: IPD Total Returns The total return from primary healthcare property over the five years to the end of 2012 was 6.3% pa. Meanwhile over the same period, total returns for mainstream commercial property have been 0.7% pa. For 2012 itself, primary healthcare produced a 6.8% return, double the 3.4% recorded by all commercial property. Much of this strong performance has been driven by income return of 6.1% for primary healthcare compared to 5.8% all property. Capital values have remained unchanged (0% pa ) for primary healthcare, 15 but in the case of commercial property have fallen by -5.2% pa over the same period All Property All Healthcare Primary Healthcare Rental value growth % I GVA 10 Stratton Street London W1J 8JR

9 Primary Healthcare Bulletin Autumn 2013 The combination of falling capital values and weak rental value performance has been behind the low returns recorded by commercial property, resulting in a softening of yields. The combination of a smaller niche market, supported by limited supply and more robust rental performance has helped maintain a stronger level of return for primary healthcare, whilst keeping yields relatively firm. Case Studies Outside of the LIFT market the main investors involved in the primary healthcare sector are Primary Healthcare Properties (PHP), Blackrock and Realstar. Other specialist investors including, Assura Group, Prime PLC, and GPi also incorporate in-house development capability, with Assura recently turning down a takeover attempt by MedicX. PHP has so far purchased the assets from developer Primary Health Care Centres and investor Apollo Medical in 2013, with a further 55 million of deals currently under offer. Over 90% of the REIT s rental income is NHS funded, with 70% of leases over 15 years in length and nearly 75% of properties held less than 10 years old. As well as the specialist funds, larger institutional investors are also looking to gain a foothold in the sector. Aviva, Artemis and Henderson are all shareholders in Assura, while Blackrock has put together a fund for investing in primary healthcare as well as other alternative sectors. The main deals since the start of 2012 are listed in Table 3 below, which highlights how the main investors are securing existing assets and a future supply pipeline by forward funding development sites as well. Table 3- Key investment deals Year Sale Purchaser Details 2013 Trinity Medical portfolio Assura Source: GVA/EGi Wales, Midlands, Somerset & London Edinburgh & Bradford medical centres Primary Health Care portfolio PHP PHP PHP 2013 Portfolio purchase MedicX 2012 Leven Portfolio MedicX 2012 TSY (PMPI) Portfolio MedicX Purchase of 32 medical centres with a rent roll of 4 million per annum. Average unexpired lease term of 16.2 years. This deal takes Assura s holdings to 197 primary care properties, with a passing rent in excess of 40 million. Two development sites as part of four purchases totalling 15.9million. Combined purchase of two sites for a total of 8.7million. A total of 11 health centres sold for 26.8million with an income of 1.7million, producing a net initial yield of 6.2%. 14 medical centres purchased for 45million. Portfolio of five properties with a rent roll of approximately 1.2million per annum at 5.75%. Corporate transaction acquiring 31 properties for 91.9million with estimated yield of around 6%. GVA has acted for a number of the above named investors and developers during 2013 in respect of portfolio reviews, asset valuations and bank refinancing reports totalling over 500 million. 10 Stratton Street London W1J 8JR GVA I 09

10 Outlook for the sector Demand for primary healthcare is set to increase steadily over the medium to long term. Between 2010 and 2035, the total UK population will grow by 12%. Population growth is currently at 0.8% per annum for 2010 to 2020, faster than any decade in recent history. The population is set to reach 70 million by This increase in population, in particular the number of elderly, will have a significant impact on demand for the healthcare sector. The number of people of pensionable age (65yrs+) will increase by 28% by To put this into context, the number of people in employment age will increase by just 16%. As a share of total population, this age group will increase from 19.6% to 22.3%, while average life expectancy has increased by 3% over the last decade. Another major element of the reforms is the provision for NHS services to be opened up to competition from private providers, with the expectation that the majority of hospitals will eventually move towards becoming trusts. While many of the changes being made to the NHS are based on political reform, the underlying reason for this comes down to funding. As already discussed in this paper, the legacy of PFI has had a major impact on the healthcare sector. A consequence of this could well be that NHS foundation hospitals will consolidate to concentrate on general treatment, enabling private providers to provide more specialist, costly forms of treatment. There has been much debate about working practices of GPs and how this relates to current working practices and the flexibility to see patients outside of working hours. Whilst not a short term measure, primary healthcare could be used in new ways with the development of virtual surgeries online or pop-ups being established in community centres, libraries and possibly even supermarkets. 010 I GVA 10 Stratton Street London W1J 8JR

11 Primary Healthcare Bulletin Autumn 2013 Conclusions The primary healthcare market displays strong market dynamics with government backed income, a population that is increasing in size and living longer, as well as a healthcare system that holds the GP as gatekeeper to the wider NHS system. The current evolution of primary care has led to demand for modern purpose built care centres fit for current needs and trends. But the method and nature of procurement and delivery can be slow, due to the additional diligence required when mixing public and private sector involvement. Subsequently new stock only comes to the market in fits and starts and it is this infrequency of supply that helps drive investor demand, as well as ensuring a strong pipeline of new assets in the coming years. The primary healthcare sector has emerged as an asset class that has weathered the economic downturn well, outperforming mainstream commercial property in terms of rental value growth, total returns and yield movement. The more defensive nature of the sector has broadened investor interest, attracting greater involvement from individuals, institutions and private equity. And it is easy to see why. Mainstream commercial property, as recent history shows, remains volatile and has seen average lease lengths eroded to less than five years. Institutions which favour more traditional length terms must now look to alternative sectors such as primary healthcare to find 20 year plus leases. The quality of leases has also come back into focus, with the high rate of closures and administrations causing yields to fall away in some retail and office markets. The prospect of government backed covenants with little chance of voids helps the primary healthcare sector stand out as a robust asset. With limited investment stock, demand remains high, benefitting active investors and developers with a pipeline of supply. 10 Stratton Street London W1J 8JR GVA I 011

12 London West End London City Belfast Birmingham Bristol Cardiff Dublin Edinburgh Glasgow Leeds Liverpool Manchester Newcastle Published by GVA 10 Stratton Street, London W1J 8JR 2013 Copyright GVA GVA is the trading name of GVA Grimley Limited and is a principal shareholder of GVA Worldwide, an independent partnership of property advisers operating globally gvaworldwide.com For further information please contact: Richard Taylor Richard.Taylor@gva.co.uk Frank Convery frank.convery@gva.co.uk Kerry Bourne kerry.bourne@gva.co.uk James Kingdom james.kingdom@gva.co.uk gva.co.uk This report has been prepared by GVA for general information purposes only. Whilst GVA endeavour to ensure that the information in this report is correct it does not warrant completeness or accuracy. You should not rely on it without seeking professional advice. GVA assumes no responsibility for errors or omissions in this publication or other documents which are referenced by or linked to this report. To the maximum extent permitted by law and without limitation GVA exclude all representations, warranties and conditions relating to this report and the use of this report. All intellectual property rights are reserved and prior written permission is required from GVA to reproduce material contained in this report. GVA is the trading name of GVA Grimley Limited GVA