Lessons learned from the current economic crisis are that the speed of change can catch out even the most prescient of investors and that the extent of that change can, and has, penetrated far deeper than most could have anticipated. One of the areas where the symptoms of this change are being acutely felt in the long term care sector is in the market for new development.
So much has the world changed, that it is hard to believe that just over 12 months ago good quality sites for new care development were harder to come by than hen’s teeth and that “per bed” values being paid for the best sites were pushing figures previously seen only for trading homes. Until then, such had been the strength of the housing market, most developable land in population centres had been gobbled up by house-builders, with the full support of a government trying to meet self-imposed targets for new housing.
In fairness, in early 2008 the cracks in the house-building sector were beginning to show, but through the fog of habit or complacency these companies had not yet seen the vertiginous cliff over which they were about to drive. Similarly, the share price of the most acquisitive healthcare operator, Southern Cross, was still riding high. The prices they had been able to pay as a consequence of their Opco/Propco model had not only fuelled, but underpinned, the values paid for new build care homes throughout the sector and consequently the land on which they were built. The elderly population was increasing and the need for new care beds unquestioned.
The consequence of this convergence of factors was that developers of care homes, who could not compete with the land prices being paid for prime sites by house-builders, began to settle for those which were more marginal. Perhaps they had awkward boundaries or topography requiring design compromises, or were away from public transport links or on the periphery of communities rather than at the heart. In the end, none of this really mattered because the developer could always find a strong operator to take these off their hands, and they in turn could always find an investment market which would take it off theirs and lease it back to them.
Until of course, the sharp downturn in the investment market meant they couldn’t.
Jump forward 12 months and the world seems a very different place. The collapse of the house-builders has flooded the market with land as that sector tries desperately to correct its balance sheet. In addition, the failure of other sectors such as the licensed trade, with the ongoing closure of pubs, has thrown new redevelopment opportunities into the pot.
In the February issue of Healthcare Business alone there were 21 healthcare development opportunities or sites advertised, and informed though it is, this is by no means a publication recognised traditionally as a land-buyers journal. The pages of Estates Gazette, Property Week and suchlike are full of similar opportunities. The skill these days for site-finders in healthcare is not in the sites you buy - its about the sites you don’t. The intelligent “State of the Market Survey” from Carterwood Research reported in the same issue of Healthcare Business , “investment value uncertainty will increase investors’ focus upon the covenant strength of prospective tenants” and also that, “Values of secondary/marginal sites will continue to fall in the short term.” This suggests a clear emphasis on the quality of not just the operator, but the location of the home.
The point is, developers of long term care facilities no longer have to compromise when it comes to acquiring sites and therefore nor do they when it comes to design. Indeed, so much has the market turned, in terms of both land values and investment values, that those with sufficient vision will have cleared out their existing pipeline of sites being acquired and started again from scratch with a new model. The simple fact is, there are larger sites available in better locations and at lower prices than was the case a year ago however, takers for the end product are fewer and more discerning.
This all throws open opportunity to take another step forward in the design and setting of long-term care facilities in the UK. Admittedly, the squeeze on funding impacts on development as much as it does anywhere else, particularly given the cash-flow issues around opening a new home. Banks are particularly sensitive to cash flow at present, so it is all the more critical that the feasibility study for any new development demonstrates demand and an ability to achieve target occupancy in a timely manner. Well capitalised developers will be able to take advantage of this market however, and the key will not just be building the right assets, but building them in the right places.
Ian WilkieMarch 2010