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The impact of COVID-19 on the U.K. Primary Care Sector

By Frank Convery (Bristol)


In the wake of the global coronavirus crisis, GP surgeries across the UK are facing the challenge of transforming working practice within a short space of time. How is this affecting their primary care estate?

Development
We are currently working on eight schemes nationally, all at various stages within the development process. With lock down, we are seeing efforts focussed on meeting tight business case approval deadlines with architects, surveyors and GP practices working together to get the detail of new schemes approved. The DVs (District Valuers) who are no longer carrying out inspections have time to focus on development, so negotiations on VFM (value for money) rents are swift. Covid-19 has resulted in greater focus on the layout to allow lockdown of parts of the building plus ideas on how to facilitate reducing in-person consultations with patients, whilst protecting staff and maximising capacity to deal with everyday demands alongside those presented by the pandemic.

Rent Reviews
Delivering rent increases at a triennial review remains vital for the financial health of a GP practice. Every £1,000 of rent can add up to £20,000 in capital value. After a period of almost zero growth between 2012 and 2016, we are starting to witness District Valuers becoming comfortable with the concept of rental growth. Inflationary pressure on the build costs to deliver new medical centres has had a major impact on the Value for Money CMR required to make a new scheme viable. Through working with DVs around the country, we have been able to negotiate rent increases of 5-7% in different locations. Such increases boost practice income but also add significantly to the asset value of the surgery. Will Covid-19 have an impact on GP Surgery rents? Unlike the retail, office and industrial sectors, we do not expect to see any negative impact, as NHS primary care will play an active part in delivering services to local communities taking pressure off the Acute sector. Quality surgery premises will remain very much in demand and requirements for new service delivery models will ensure that the modern, well-specified GP surgery market remains healthy.

Valuation
The outbreak of Covid-19 has impacted global financial markets across all sectors. For traditional commercial property, we can attach less weight to previous market evidence for comparison purposes to inform opinions of value. Many valuations are therefore reported on the basis of ‘material valuation uncertainty’ with less certainty – and a higher degree of caution. The primary care sector has been less volatile than mainstream commercial property during the recent property cycle, in terms of both rental growth and yield movement. Underlying fundamentals of the primary care sector, such as quasi-Government backed income, long leases and the sector’s place in essential infrastructure all contribute to this stable performance. For such reasons we expect the sector to perform above its peers in the current crisis whilst mainstream property performance remains more directly linked to the economic cycle. This stability has resulted in broadened investor demand in the healthcare sector, attracting wealthy individuals, institutions and Private Equity with many new players entering the market in recent years. As a consequence, we propose making a small adjustment to our pre-Covid-19 valuations to reflect these factors.

Investment
During the Covid-19 crisis we have witnessed less primary care investment property coming to the market, making it difficult to judge the impact. We note that Blackrock recently took a large primary care portfolio comprising 20 properties worth c £50m to the investment market and the sale completed earlier this month, demonstrating confidence in this sector. However, some Regulated Funds have had to place their investment purchases on pause. Post-Covid, many partners may reconsider their position within a GP practice and - where they have an equity interest - consider how to realise the full value of their equity stake in the building. Despite Covid-19, there remain active and proceedable purchasers in the market at all price levels, allowing some transactions to progress and thereby further demonstrating the resilience of this sector. Our primary care investment teams have been able to complete on four deals during this Covid-19 period with limited impact on price paid. We are working with practices to resolve ownership issues through sale and leaseback where demand remains strong. Typical lease lengths are 15 – 20 years, depending upon practices’ individual circumstances and the infection control/ Equality Act compliance of the individual surgeries. Shorter leases can be agreed but this will have a direct impact on the investment value.

Frank Convery is a Principal, Health in Bristol, U.K.

The spread of COVID-19 and the containment policies being introduced are changing rapidly. While information in the briefing notes is current as of the date written, the views expressed herein are subject to change and may not reflect the latest opinion of Avison Young. Like all of you, Avison Young relies on government and related sources for information on the COVID-19 outbreak. We have provided links to some of these sources, which provide regularly updated information on the COVID-19 outbreak. The content provided herein is not intended as investment, tax, financial or legal advice and should not be relied on as such.