Brian Haugh, Head of Valuation & Financial Modelling services, recently featured in the Irish Medical Times, discussing the changing primary care landscape in Ireland.
Brian forecasts that the arrival of funds willing to invest will lead to an increase in the development of primary care centre sites and the consolidation of GP practices will continue despite complications in revenue streams.
Finance for primary care has been difficult to obtain and the pace of development has remained sluggish with only one of the 35 primary care centres (PCCs) promised in the 2011 Programme for Government delivered by the end of 2016. However, the pace of development has increased, with the number completed estimated to be in excess of 140 by the end of 2019.
The inability to attract funding was in part due to the relatively underdeveloped capital markets in Ireland.
While the return on a PCC development, with average yields of historically between 6-7 per cent, is relatively low when compared to other property development activities, it is important to remember that the majority of the rental is underpinned by a Government-backed covenant, ensuring a low level of risk.
Fortunately, in recent years the market has belatedly attracted several funds which are comfortable with the risk/reward profile of Irish PCCs.
Increased investment in Irish PCC market
Two of the most notable entrants are Primary Healthcare Properties (PHP), which already has a large portfolio of PCCs in the UK, and AMP Capital, which ranks amongst the top 12 infrastructure managers globally.
Initially these funds have been acquiring existing PCCs; however both have indicated that they are now in the process of developing new centres on greenfield sites.
The impact of this increased activity in the PCC market is evident in the reduction of rental yields, with PHP indicating in a previous investor briefing that it is carrying its portfolio at a yield of 6 per cent, at the bottom end of where historical averages yields have trended. PHP has reported net initial yield across its whole portfolio of assets in the UK and Ireland is holding steady at 4.85 per cent, despite Brexit uncertainty.
As competition intensifies, this should lead to the tightening of yields which may tempt more owners of PCCs across Ireland to bring their buildings to market.
The lower yields seen in the UK certainly seem to indicate that there is room for a reduction in yields in the Irish PCC market.
BDO believes that the trend for increased investment in the PCC market is likely to continue in 2020 with an increasing focus on the development of greenfield sites. Given the large number of Health Service Executive (HSE) selected locations yet to be delivered, there is scope for this rate of development to increase should the capital be available.
Practice consolidation trends
Another major development in the primary care sector likely to continue in the coming year is the consolidation of GP practices. Centric Health has been the leader in this trend having acquired more than 40 practices across the country and now employing in excess of 400 people.
In 2018, merchant bank, Rothschild & Co, acquired a majority stake in the company and subsequently secured a long-term funding deal of €50 million from a consortium of banks.
This is a much more complicated play than investing in the physical PCC infrastructure, as existing GP practices having multiple income streams and permutations of partnership agreements.
The valuation of these practices will depend on their ability to capture these income streams into the future. In the case of General Medical Services (GMS) lists in particular, this is by no means certain.
Centric Health has enjoyed first mover advantage in this space and has gone on to acquire smaller groups operating in the same space.
There is certainly room for more than one large player in the sector and indeed this would be a welcome development for GPs considering selling their practices, as a healthy competitive sale process is likely to maximise the price achieved.
Secondary to primary care shift
Although the shift in focus from acute to primary care which commenced in 2001 has been slow, the underlying imperative remains as true today as it did then — the provision of non-acute care in acute settings, such as hospitals, results in poorer outcomes for patients as well as higher costs.
In 2018, the Organisation for Economic Co-operation and Development reiterated in its study of The Economics of Patient Safety in Primary and Ambulatory Care that: “Primary and ambulatory care are the foundation and the key to high-performing, sustainable and resilient health systems.”
As the population in Ireland ages, and the incidence of chronic diseases associated with ageing rise accordingly, it will not be possible to provide this care in the already over capacity hospital network.
The PCC is likely to increasingly become the focal point of healthcare provision, and those prepared are likely to capitalise on this shift.
Although there does not appear to be a clear Government strategy guiding this transition, the risks in the sector are offset by the predictability of the demographic changes to the population.
As a result, investment in the sector is likely to remain buoyant in the coming year.
Content Adapted from The Irish Medical Times.