UK healthcare real estate could become a £20B sector, given the gap between the funding needed to provide services to the public and the amount of funding being put forward by the government. But it is being held back by numerous factors, including a lack of trust in property companies.
“There is a £50B funding gap, and the private sector is going to have to step in and fill a lot of that. The government is not going to fill the gap — get over it,” Alpha Real Capital co-Head of Social Infrastructure Anne Copeland told attendees of Bisnow’s Healthcare Real Estate Outlook, held at the Victory Services Club in London Wednesday.
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The vast majority of funding for care homes, supported living apartments for people with learning and physical disabilities, nursery facilities and primary health facilities has historically been provided by the government via local authorities. But that has been cut sharply in the last decade — by 58% for adult social care, according to data from the National Audit Office.
At the same time, the UK population is ageing — we are living longer, but not necessarily more healthily.
Rather than “blame old people for getting ill,” Copeland said the real estate sector needs to partner with local authorities and local government pension schemes to build the physical infrastructure required by the healthcare industry.
The needs of these groups are potentially aligned, and the structures could exist for them to come together to provide social and healthcare services. Local government pension schemes want to invest in real estate assets with long leases to solid covenants and would love to invest in assets that provide a benefit to their local community. Local authorities could provide that covenant by paying rents that are affordable but still profitable to developers and real estate investors that build and own assets.
But the problem is trust. Local authorities are wary about entering joint ventures with developers, saying the sector has historically produced poor-quality assets and charged inflated rents for them.
“If you left £10 on the floor at a meeting with local government, they wouldn’t pick it up,” Copeland said. “We need to address the elephant in the room, which is trust.”
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Investing in assets such as assisted living communities can reduce the overall burden on the NHS and local authorities by allowing people to live more healthily into old age, Patron Capital partner Irina Stamate-Rocha said.
“There are inefficiencies in the way the existing budget is used,” she said. “Instead of focusing on reducing the cost of services, we need to focus on reducing demand.”
Some developers are looking at turning existing buildings for which demand has waned, like offices or town centre retail, into healthcare assets.
It is not easy. The physical capacity of these buildings often doesn’t suit conversion to healthcare assets — floor-to-ceiling heights are too low, and the load floors can bear is not high enough. Vehicular access is vital for healthcare assets but can be tricky in town centres. And often the financials don’t quite stack up.
“There is often a gap between what the local valuer will tell you the NHS can pay [for a primary health facility] and the long-term income we need to justify the capital outlay,” Ellandi Development Manager Holly Harcus said.
But she said when Ellandi has put health centres into former retail space, it has contributed to an uptick in footfall.
“If you’re willing to reduce the spec, there’s no reason why a Grade B office building can’t become a rehabilitation hospital,” EEDN Chief Operating Officer Elad Levin added.
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