The UK healthcare real estate market remains a go-to for investors, despite the challenges of high operational costs, the increase in the cost of capital, and rising construction fees.

This was the take-home message from Knight Frank’s Global Healthcare Capital Markets Lunch, held recently in London

Attracting speakers from across the globe, the event, chaired by Henry Elphick of Mansfield Advisors, provided an overview of real estate investment in the health and social care sector, both in the UK and overseas.

And the experts agreed that while the market has faced pressure from political unrest and recent policy decisions, the health and social care sector remains an attractive prospect for M&A activity, with Knight Frank predicting a record year of some £10bn of UK healthcare transactions as a huge influx of inbound capital looks to invest into Britain.

The UK Government’s 2035 Industrial Strategy and housing reforms are bringing pension fund and insurance fund capital from overseas to the UK and this will likely boost infrastructure investment moving forward

Will Matthews, a partner in Knight Frank’s capital markets research team, said: “The economy is on life support. We had a month where the economy did not grow, where inflation was almost 4%, and unemployment is rising a little bit.

“It remains uncertain how we are going to pay for the services we are supplying, but if we look at GDP growth, we are expecting to see 1.3% growth this year. This is not going to drag us out of it, but it’s not nothing either.

“The UK Government’s 2035 Industrial Strategy and housing reforms are bringing pension fund and insurance fund capital from overseas to the UK and this will likely boost infrastructure investment moving forward.

“The bigger picture is that UK companies are still quite active, and we are seeing overseas funders coming in, with the UK still the number one destination for global real estate investment.

“More businesses are borrowing and some of this is for investment purposes, and they would not be doing that if there was doubt about it.

“In particular residential care and human health are showing quite strong growth.”

But he said all eyes would be on the next UK Budget announcement in a couple of months.

More businesses are borrowing and some of this is for investment purposes, and they would not be doing that if there was doubt about it

“It will come down to when the Office of Budget Responsibility makes up its mind about how far productivity growth is from where it should be and that will tell us how short we are.

“If we have an increase in employment costs some people will reduce investment.”

Lisa Attenborough, Knight Frank’s leader in the debt advisory team, said buyers, builders, and developers were taking the same approach and favouring buying existing stock rather than embarking on new-build schemes.

“The cost of capital is increasing and construction costs are high,” she said.

“But in 2011 there were around 100 private credit funds in the UK and Europe, and there are now over 1,000 in the market.

“There are lenders for any sector and any deal, pretty much, so it is a really good time to be a borrower.”

But she also warned that credit funds need to have a USP and they are starting to be more bespoke in targeting specialist sectors, particularly health and social care, which is seen as a long-term, secure investment opportunity.

Elphick revealed that in the year to date there had been 70 major M&A deals within the health sector, a high number of these in the months of July and August.

It’s a tough market because the cost of finance and development is so high and this can be prohibitive, but serial entrepreneurs within social care are still looking to invest

“When you look at these deals it’s not necessarily all real estate, but there are serious amounts of capital coming in for healthcare,” he added.

“But people are starting to lose faith in the Government and there is the possibility of Reform winning the next election and we do not know much about their economic or growth policies and the debt markets are scared.

“There is also noise on immigration and care worker recruitment and staffing costs.

“This will all have an impact on how people see the market.”

The round table discussion also saw input from Andrea Auteri from Elevation Advisors and Jorge Manrique Charro of Welltower.

They revealed transactions are still going ahead, particularly in the social care sector, where there is a significant shortfall in bed numbers.

The sector needed some landmark deals to get the confidence back up and, while there is not a super-wide field of buyers, there is capital for the best ones

Charro said: “Care homes will continue to be a focus because of the operational leverage.

“The UK tends to favour the sale and leaseback approach, whereas elsewhere we see management contracts being more attractive to investors and operators.

“It’s a tough market because the cost of finance and development is so high and this can be prohibitive, but serial entrepreneurs within social care are still looking to invest.”

Auteri added: “We look to identify undersupplied and undercapitalised sectors and this could be healthcare, but we have to be more nimble and agile.

“We have been particularly successful raising capital from the US, Australia, and Korea.”

Representing Knight Frank’s business in the US were Sabrina Solomiany and David Fasano, while Sam Biggins and Shehzad Jamal gave an insight into the Australian and UAE markets respectively.

The banks are coming back and we are seeing some companies who were concentrating on markets such as purpose-built student accommodation moving into healthcare as the education sector is hit by government policy changes

And, while there were stark differences in public and private payment approaches, the sector is still a key target for M&A activity.

Thibault Poirier of Rothschild & Co said: “There were a lot of large deals last year and hopefully that is giving more confidence in the investor sector.

“The sector needed some landmark deals to get the confidence back up and, while there is not a super-wide field of buyers, there is capital for the best ones.”

Fasano concluded: “Health is one of the few sectors where there is still positive leverage.

“The banks are coming back and we are seeing some companies who were concentrating on markets such as purpose-built student accommodation moving into healthcare as the education sector is hit by government policy changes.”