Next week’s budget will be vital viewing for investors, with changes to capital gains tax and inheritance tax mooted. Among the column inches in the lead up to the new chancellor’s first budget, have been some encouraging announcements on reforming the UK’s ailing health service.
It appears that, at last, sensible ideas are being put forward to turnaround the beaten-up NHS for good. Moving care from a hospital to a community setting is the cornerstone – and that is great news for the two listed real estate companies focused on providing primary health centres.
Both Assura Group and Primary Health Properties (PHP), and the wider sector for that matter, have been hamstrung in their growth agendas by an impasse in negotiations on rent. To get the development of the much-needed state-of-the-art healthcare centres off the ground, developers need to charge a certain amount of rent.
That rental level has increased in recent years as construction cost inflation ran wild. District valuers (government employed valuers that advise the NHS on rent negotiations) baulked at the proposed rent and a two-year stalemate in development has ensued.
It seems that things are about to change, however.
Health secretary Wes Streeting’s vision of a “Neighbourhood Health Service”, where more procedures are moved away from hospital settings and into community health centres, requires some drastic work and funding. The government has said more of the NHS’s circa £175bn budget will be allocated to primary care – up from the current level of less than 10%, while input from the private sector is paramount.
The benefits for carrying out more procedures in a primary (community) hub rather than a secondary (hospital) setting are vast. Government research suggests that the cost per patient in primary care is around 10 times cheaper than in secondary care (£40+ versus £400+).
The Darzi report into the performance of the NHS, which was published in September 2024 and identified an abundance of issues that need to be addressed, found that around 50% of primary care centres in the UK are no longer fit-for-purpose.
It is not surprising when you look at the age profile of the NHS estate. As shown in Figure 1, just 1% of NHS properties were built in the last decade, and staggeringly just 20% since 1995. Some 62% predate 1978.
As well as switching care settings from hospitals to the community, the government’s 10-year plan for health, which is due to be published in spring 2025, prioritises shifting focus from treatment to prevention and moving from analogue to digital.
Early intervention requires greater involvement of primary health, while technological advances in diagnostics and an upgrade to electronic health records both promote more use of local services.
Assura and PHP
Both Assura and PHP are obvious beneficiaries of this reform. An urgent upgrade to community health infrastructure is needed. The standoff with the district valuer will have to be broken and new healthcare facilities backed by government.
The purpose-built, state-of-the-art centres that both Assura and PHP develop house a number of merged or consolidated GP practices. There is also the potential for diagnostic centres and hubs for urgent care activities to be built on existing sites or included in future schemes.
Assura and PHP have recognised the opportunity. PHP is targeting the delivery of six new schemes per year at a capital cost of £45m. It will target a profit on cost greater than 10% and a yield on cost in excess of 6%.
This is likely to be funded through disposals of older assets or through forming a joint venture with an external investment partner. This investment-light structure has been utilised by Assura, which announced a £250m joint venture with Universities Superannuation Scheme (USS) in May.
After a frustrating couple of years of inactivity from the two primary health players, it finally feels like substantial growth is on the horizon. Trading on high single-digit discounts to NAV, and healthy dividend yields of between 7.1% and 8.2%, they could now be worth a look.