Richard Lunn, Managing Director – Care, Christie & Co
Despite pandemic related challenges, 2021 saw a resurgence in market activity with strong demand and limited supply underpinning pricing across most segments of the market. Whilst there are current operational challenges, particularly around workforce, buyer activity remains strong, and we anticipate that 2022 will be a busy year.
Market activity and buyer appetite
The care market demonstrated great resilience in 2021, both operationally through providers and their staff, and in the transactional market, which experienced a resurgence of M&A activity at all levels.
A relative shortage of available stock and strong buyer demand resulted in highly competitive sale processes, with the average number of offers on care businesses increasing by 11% on 2020 and the average number of offerees per sale increasing by 56% over the last four years.
We also saw a 14% rise in the number of transactions in 2021 and achieved an average of 95% of quoted asking prices.
Ironically, in such a challenging year of COVID, we saw a decrease in distress deals in the market as the huge levels of government funding and infection control monies supported operators whilst occupancies were suppressed. In recent years, as a percentage of all care deals undertaken by Christie & Co,18% included were flagged as distressed in 2019, 13% in 2020 and just 8% in 2021.
Development and investment
Many operators continued with development and new build site acquisitions in 2021, fulfilling strategic long-term objectives to futureproof the quality of their asset base. Investor appetite at this end of the market is undoubtedly increasing, with the arrival of large European investors and a broadening array of institutional investors attracted by the long-term fundamentals that the sector offers.
However, labour shortages and global supply chain issues, compounded by COVID, led to rising labour costs and construction material shortages. We expect this to continue as a medium-term challenge but there is hope in the industry that construction material pricing will become less volatile.
Land availability in locations with compelling underlying demographics remains scarce and securing planning permission continues to be a highly protracted, costly, and uncertain process. As a result, land values for sites with planning permission have continued to increase at a steady rate and demand is likely to remain robust for the foreseeable future. Values have also increased in line with demand for the best quality assets.
Steady yield compression is fuelled by strong demand from capital and limited stock availability, which is particularly notable for third sector covenants which are favoured by a number of institutional funds. There is also significant activity from UK and International sector specialist investors which is driving the primary and super prime market.
An increasing number of operators are now considering lease agreements, often within the context of new build development assets. Rents for such assets are linked to mature trading potential and the covenant strength of the operator with a typical range, based on Christie & Co activity, being in the order of £10k to £14k per bed.
What’s next for the UK Care Market?
Looking ahead at 2022, we expect:
- Significant investor interest will remain as UK and international capital continues to be attracted by the strong fundamentals underpinning UK healthcare.
- Workforce related challenges and increased cost pressures are unavoidable, with mitigation provided by increased occupancy rates and fee levels.
- Providing COVID-19 vaccinations remain robust, the trend of post lockdown occupancy recovery will continue.
- Funding reform will remain a key issue on the political and sector agenda.
- The strong healthcare development market seen in 2021 will continue.
- Further activity from European consolidators and expanding UK operators will drive M&A activity and will potentially lead to one or more OpCo transactions occurring.
For more information on the UK care business market, read our ‘Business Outlook 2021: Business Outlook 2022: Adjust, Adapt, Advance’ report here.