A bruising few years for UK commercial property has meant that the majority of our commentary on the sector has focused on the latest REIT to be taken over or decide to throw in the towel. Frustratingly, just when it looked like conditions might be turning, the macroeconomic backdrop deteriorated again.
The bull case for property has been relatively straightforward. Inflation would ease, interest rates would fall and property yields would eventually follow, providing a tailwind to capital values after the painful repricing of 2022 and 2023. Instead, stubborn inflation and renewed geopolitical and energy-market pressures have kept interest rates high and put upward pressure back on bond yields.
The fabled recovery in property values has consequently been pushed further and further back.
Against this backdrop, Target Healthcare REIT‘s (THRL) latest results stand out. The care home landlord generated a 12.0% net asset value (NAV) total return in the year to 30 June 2026 – its best annual performance since launching in 2013. EPRA net tangible assets (NTA) per share increased 6.4% to 122.1p, earnings rose 7.6% and now comfortably covers its dividend (1.08 times), which also increased 2.5%.
That 12% return is the strongest we have seen across the UK listed property sector in the latest reporting cycle, comfortably ahead of the likes of British Land (8.1%), Supermarket Income REIT (7.5%) and LondonMetric (6.9%).
More tellingly, perhaps, is the consistency of the underlying property performance. THRL has now recorded 14 consecutive quarters of like-for-like valuation growth since the property market correction of late 2022. While much of the wider sector has been waiting for lower interest rates and falling property yields to provide a sustained recovery in values, THRL has not had to.
Nor has it required much financial leverage to do so. THRL ended its financial year with an LTV of just 16.1%.
Doing it the hard way
For much of the real estate sector, the hoped-for catalyst has been a reversal of the yield expansion that hammered valuations as interest rates rose. That recovery has proved frustratingly elusive as the macroeconomic picture has repeatedly shifted. THRL, however, has not needed property yields to contract to generate attractive returns.
Its portfolio increased in value by 4.9% on a like-for-like basis last year. Of that, just 0.1 percentage points came from tightening property yields. Inflation-linked rent reviews contributed 3.2 percentage points, disposals and other asset management initiatives another 1.3 points, and additional one-off rent increases 0.3 points.
In other words, virtually all of the valuation growth was generated internally rather than by a favourable movement in the wider property market.
THRL’s leases contain annual inflation-linked, upwards-only rent reviews, with average floors and caps of around 1.5% and 3.9% respectively. Like-for-like rents increased by 3.7% last year.
Growing rents feed through into earnings, but they also support property values. It helps explain how THRL has put together those 14 consecutive quarters of valuation growth at a time when the hoped-for macro tailwind for property has repeatedly failed to arrive.
More than collecting the rent
There has been more to the performance than contractual rental growth, however.
THRL sold 11 care homes for £97m during the year at an average 11% premium to their carrying values. The disposals added 1.6p per share to NTA and were completed at an implied net initial yield of 5.5%. Much of that money has subsequently been recycled into new investments offering yields of around 6%.
Selling assets above book value and reinvesting the proceeds at higher yields is clearly attractive. It also provides useful validation of THRL’s NAV. The 11% average premium achieved on the disposals is particularly noteworthy when discounts to NAVs across the listed property sector suggest investors remain sceptical about reported property valuations.
THRL has not escaped that scepticism. Despite its strong operational and property performance, its shares continue to trade at a discount – currently around 10%. That looks slightly curious when the company has just demonstrated that assets can be sold not merely at book value, but comfortably above it.
Of course, the share price discount reflects more than investors’ view of property valuations, but the disposals provide useful real-world evidence that THRL’s underlying assets are worth what the independent valuations say they are – and, in these cases at least, rather more.
There has also been some less glamorous but equally important work behind the scenes. Six homes were re-tenanted during the year, at unchanged or improved rents, while £1.9m of historical arrears was recovered. Rent collection, which had slipped following problems with a small number of operators, was back to 100% by the year end.
That is where having a specialist manager should earn its keep.
Quality matters
Strip everything back and THRL owns 87 properties valued at £924m, producing £61m of contracted annual rent. Its leases have an average 26 years remaining and 100% of the rent roll has inflation-linked reviews.
All of THRL’s properties are purpose-built, 83% were constructed since 2010, every bedroom has an en-suite wet room and the entire portfolio has an EPC rating of A or B. This compares with a UK care home estate where 78% of properties are either conversions or purpose-built homes constructed before 2000.
Of course, a long lease is only as good as the operator paying the rent. In healthcare real estate, understanding what happens inside the building is every bit as important as the bricks and mortar.
The care home operating businesses occupying them also appear in decent health. Rent cover on mature homes is around 1.9 times, while THRL’s properties have a useful bias towards private funding: 51% of residents are fully privately funded and another 27% receive private top-ups, with just 22% entirely publicly funded.
An ageing demographic
The longer-term attraction is equally straightforward.
There are around 1.8 million people aged over 85 in the UK today. That number is expected to double to 3.6 million by 2050 and an estimated one in eight will require residential care.
At the same time, a large proportion of Britain’s existing care home stock needs replacing. Only around 100 new homes, averaging 66 beds each, currently enter the market each year. THRL believes that rate will have to increase to meet both demographic demand and the replacement of older, obsolete stock.
That combination – rising demand and constrained supply – is precisely the sort of occupational backdrop that should appeal to property investors.
Potential stumbling blocks
None of this makes THRL immune from risk. The sector’s success has seen care homes become increasingly attractive to institutional and overseas investors. That has supported the value of THRL’s existing portfolio, but has also increased competition for the high-quality assets it wants to buy.
Inflation protection has its limits too. THRL’s inflation-linked rent reviews have caps averaging around 3.9%, meaning rental growth will not fully keep pace during periods when inflation runs materially above this level. From an operator health perspective, however, those caps provide some protection by preventing rents from rising unchecked during periods of particularly high inflation.
The bigger risk for operators is the wider cost environment. Care homes are labour-intensive businesses and wage inflation and other operating costs can squeeze tenant profitability, particularly for operators more reliant on local authority-funded residents. The perennial question of how Britain pays for social care hasn’t disappeared either.
There is also new legislation restricting upwards-only rent reviews in future commercial leases in England and Wales. THRL’s existing leases are unaffected – significant given the portfolio’s 26-year average lease length – but it could affect future contracts. Inflation-linked reviews will remain possible, but landlords will generally no longer be able to prevent rents from falling when the underlying index points to a reduction, although the precise treatment of caps and collars remains subject to further consideration.
Room to grow
The company has around £103m of committed capital available for investment, with £26m already earmarked at a weighted initial yield of 5.9%. Its wider pipeline of potential opportunities has an indicative blended yield above 6%.
Those yields are favourable to the 5.5% achieved on the recent disposals, making the recycling accretive, but they remain below the existing portfolio’s 6.6% yield. With competition for high-quality care homes increasing, maintaining discipline on acquisitions will be important.
There is plenty of balance sheet capacity. Fully drawing its committed facilities would take LTV to around 25%, while management sees approximately 30% as the upper end of where gearing could ultimately settle.
Meanwhile, the board intends to increase the dividend another 3% this year to 6.212p. That increase has deliberately been set below last year’s 3.7% rental growth to build greater headroom in dividend cover.
THRL’s experience over the past few years is a useful reminder of the danger of treating property as a single asset class. Offices, warehouses, shopping centres, student accommodation and care homes may all sit beneath the REIT umbrella, but the forces driving their rents and values can be very different.
Higher interest rates have been a thorn in the side of property companies. But people don’t stop ageing because gilt yields rise.
For THRL, long leases, contractual rental growth and an ageing population have provided a degree of insulation from the economic cycle. Add active asset management and conservative gearing and it becomes easier to understand why its portfolio has now increased in value for 14 consecutive quarters while much of the wider property market has struggled for momentum.
The macroeconomic recovery that many property investors have been waiting for may yet arrive. THRL’s track record suggests it doesn’t need to wait for it.
