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REITs prep for new UK medical center activity

Investment activity in the U.K.'s general practitioner clinics is set to accelerate this year as new developments are rolled out across the country, says Primary Health Properties Plc managing director Harry Hyman.

Specialist listed property companies PHP, Assura Plc and MedicX Fund Ltd. have tapped into primary healthcare assets across the U.K. and the Republic of Ireland, including dental practices and pharmacies, for their government-backed rents and long-dated leases. But players in the sub-sector have had to deal with tight competition for premium modern assets due to sluggish development pipelines.

PHP's Hyman said in an interview that his company was hopeful of more deals being approved throughout England this year as the new, larger practices proposed in last year's Sustainability and Transformation Plans get the green light. Local health bodies, known as Clinical Commissioning Groups, have completed the plans to reflect the National Health Service's Five Year Forward View, which addresses the country's growing and aging population. Part of the strategy is to recruit 5,000 more general practitioners by 2020/21, while increasingly shifting hospital services such as nurses, therapists and other community-based professionals into the primary health space.

Hyman said new developments were necessary since about half of existing GP estates were unfit as modern primary health centers, with many still operating in small, dated houses and offices, unlikely to meet the needs of the larger multi-specialty teams expected in the future. "Our strategy is to acquire the larger, multi-doctor practices," he said, adding: "Typically, the acquisitions that we've made recently have patient numbers of about 25,000 patients per building, whereas a single doctor usually has 2,000-2,500 patients."

The managing director said gaining approval for new projects had been "quite a slow process" due to rigorous consultation and structural changes happening in the sector. There is pressure on government authorities to speed up the development pipeline and sanction further projects in order to meet NHS targets, he added.

Despite the limited supply, yields on primary healthcare assets appeared to compress only marginally in 2016, with all three pure-play companies recording net initial yields of 5% to 5.5% in their most recent earnings reports last year.

Peel Hunt real estate analyst James Carswell said in an interview that primary healthcare yields compared well against other commercial real estate sectors and asset classes. He said the highly fragmented market, with assets typically worth £2 million to £5 million, were too small to draw competition from larger competitors. "Pension funds and sovereign wealth funds don't have the time or experience to buy and manage 100 £3 million properties," he said.

Rental growth has slowed in recent years due to a shortage of new developments and low inflation, the analyst said. With most of the rent roll reimbursed directly or indirectly by the U.K. government, the majority of the rents have faced open market rent reviews conducted every three years by the District Valuer office. Carswell said higher specifications in new buildings could push rents higher. "We think, and most companies believe, that when developments restart in a meaningful way, that could provide the evidence for rents to trend upwards," Carswell said.

Primary health portfolios have, in recent times, been looking abroad to the Republic of Ireland for new opportunities. PHP acquired its first primary care center in Ireland last year, acquiring an asset in Tipperary for 6.7 million. The company is actively negotiating more deals in the country.

Listed company portfolios have average lease lengths of about 15 years and very high occupancy rates, with the highest recorded by PHP at 99.7%, according to latest earning reports. The market remains largely fractured, with portfolios holding less than 400 properties in a sector made up of about 7,600 GP practices in England, according to NHS figures from November 2016. Assura said in its most recent earnings report that there were close to 9,000 buildings in the total U.K. primary health market, but only about 2,000 were suitable for acquisition.

Secondary healthcare assets, such as hospitals, care homes and specialist treatment facilities, have also offered investors high yields and favorable market conditions. Target Healthcare REIT Ltd., which invests in U.K. care homes, noted in its latest earnings report that U.S. investors had returned to the U.K. care home market last year due to the favorable exchange rate. The company said traditional real estate investors were also active in the subsector, investing for pension and annuity funds that were seeking income-producing assets in the low interest rate environment.