Mixed views on future of healthcare construction industry

As activity increases, experts warn election and Brexit could lead to a downturn in projects

The healthcare construction industry has seen growth in the first half of this year, but experts are warning that the market could now experience a downturn in activity as a result of Brexit, the General Election, and continuing pressure on capital budgets.

Investment activity in the healthcare real estate market picked up in the early months of this year following a relatively-subdued 2016, according to CBRE’s latest market review.

Good operators are managing in the face of sector headwinds and the sector is more sustainable than some of the negative headlines would imply

The firm expects investment volumes in the first half of 2017 to top £700m, which is not far off the total recorded for the whole of last year.

The wider asset-backed healthcare market has been more-consistently buoyant thanks to some major deals, including Bupa’s purchase of Oasis Dental and Acadia’s acquisition of Priory.

Last year, £5.3billion worth of deals closed.

The social care construction market continues to provide further opportunities, with notable transactions this year including the acquisition by Impact Healthcare REIT of a portfolio of 56 care homes for £150m; and St Cloud Care’s acquisition of LRH Homes, which had a portfolio of 13 homes in London and the South East, for a price reportedly in excess of £70m.

“This suggests that good operators are managing in the face of sector headwinds and that the sector is more sustainable than some of the negative headlines would imply,” the firm says.

The key construction opportunities in the healthcare sector are likely to be in the primary care sector and this may entail further opportunities for the development of hub facilities and integrated GP premises

As for real estate investors, the healthcare sector continues to prove attractive because of the long leases that are typically on offer. This has put upward pressure on pricing.

“The UK healthcare real estate sector remains extremely buoyant as investors seek secure, asset-backed, long-term income streams in a market sector underpinned by a widening gap between supply and demand,” says Tom Morgan, senior director of healthcare advisory at CBRE.

“Health and social care has proven itself to be a dynamic sector over the past 10 years and investors are learning to underwrite different business models and price operational risk alongside real estate and tenant credit risk.”

This optimism is echoed in the latest AMA Research report - Healthcare Construction Market Report – UK 2017-2021 Analysis - which expects steady, if moderate, growth in healthcare construction output, with annual rates of growth of 3-5% currently forecast to 2021 as work on small hospital projects is boosted by privately-funded projects under the new PF2 framework.

“The key construction opportunities in the healthcare sector are likely to be in the primary care sector and this may entail further opportunities for the development of hub facilities and integrated GP premises; while, in the acute and secondary sector, much of the medium term is expected to lie in refurbishment and extensions,” said Keith Taylor, director of AMA Research.

“Contractors will also be interested to see how new procurement routes and private finance initiatives, including ProCure22, will be used to procure work in the health sector in 2017/18 and beyond, with the expiration of the Express LIFT framework and future options for health PPPs being explored.”

He added that, as a result of GP-led commissioning and financial constraints, the procurement of services to the NHS, including construction, are increasingly looking towards partnerships with the private sector.

Future prospects look relatively bright, with the Government having announced a forward pipeline of around £5.7billion worth of capital projects in the healthcare sector between now and 2020 and beyond

A further driver is also taking place in the acute healthcare sector with the creation of NHS foundation trusts, under which hospitals can generate their own income. As a result, there has been a rise in private providers refurbishing parts of existing hospitals, adding extensions, new-build facilities, or even taking on the full operation of a hospital.

The report states: “Future prospects look relatively bright, with the Government having announced a forward pipeline of around £5.7billion worth of capital projects in the healthcare sector between now and 2020 and beyond.

“This includes nearly 600 individual health projects under almost 100 schemes, which are mainly spread across the English regions, of which there are around 10 large NHS-led capital programmes, in addition to smaller works and capital programmes procured via the Procure 21/Procure21+ frameworks.

“However, whilst the Department of Health was allocated £4.8billion for capital investment for each year to 2020-21 in the 2016 Budget, this represents a real-terms cut of 1.7% per year.”

Barbour ABI figures show around 60 currently-confirmed projects across the medical and healthcare; surgeries and medical centres; private hospitals; secure hospitals; and hospices, and nursing and psychiatric home sectors.

A further 100 projects are at the outline planning stage and will be coming through in the next couple of years, although funding remains a problem for several of these.

And 150 projects are at the pre-tender stage, showing a relatively-healthy pipeline for the future.

There are also 5,000 mixed-use residential projects which include an element of elderly care accommodation, a huge proportion with dementia care facilities.

But there are some signs that the recent General Election, continuing Brexit talks, and dwindling budgets may be putting pressure on this pipeline.

Our report highlights the scale of the issue facing healthcare if the construction figures are anything to go by

A recent Barbour ABI report stated: “The levels of funding for the NHS have been a major area of focus for the main political parties.

“Our report highlights the scale of the issue facing healthcare if the construction figures are anything to go by.

“After a poor year in 2016 for medical and health construction, April certainly showed no sign of an improvement, with figures showing the sector generated only £84m worth of construction contracts.

“According to Barbour ABI data, this was the lowest figure for almost five years and is way below its most-recent peak last January of £319m.

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