When asked about the critical success factors for healthcare property investment, Jonathan Murphy, CEO of FTSE 250 listed healthcare REIT Assura Plc., has a very simple response: “Having the best assets is fundamental; it matters so much in the healthcare space.”
Yet, for an end-to-end property company focused solely on development, management and acquisition of primary care centres in the UK, ‘having the best assets’ is actually quite complex.
The NHS and GPs are the principal customers and tenants of Assura assets. And as a result, geography, political continuity and a myriad of issues surrounding government funding and processing are all major obstacles around which Assura must navigate the line that separates the provision of vital public services and ensuring shareholder profitability.
And it is a fine line, indeed, according to Murphy. All his new assets are built to NHS order. This means that assets can be located anywhere in the country, as long as there is a requirement for services delivered from that asset. In many cases, this can mean developments in regional areas where intrinsic land values are low. And this is a serious challenge.
“We are often in a position where we are investing significant capital in areas that are not wealthy,” says Murphy. “If those buildings become vacant, they are worth very little. The value to us and our shareholders is in the consistent delivery of public services from our assets. Empty buildings are the single greatest risk to our business model.”
To offset this risk, the duration of lease agreements tends to be long. The typical lease of an Assura asset is 21 years, for example. But the Assura philosophy is to look ahead to the next lease agreement, designing assets that are futureproofed with the aim of signing tenants for at least 42 years.
Critical to this is “understanding the importance of this building to the local health economy” so that it remains relevant. Matching the needs of the tenant – either a general practitioner (GP) or an NHS entity – to the healthcare requirements of the community, therefore, is paramount to long-term success.
The key to this? “Innovation. Creating outstanding spaces for health services. Pushing the boundaries of design,” says Murphy. To some, this might sound like hard-to-grasp business jargon to impress, or perhaps confuse, the layperson. But, according to Murphy, innovation can be about finding simple, appropriate solutions that meet the new requirements of the tenant.
For example, mental health has recently shot to the fore of the UK national healthcare agenda. Catering for patients who are suffering from mental health issues requires a different approach to design and fit-out. Assura has led the way in incorporating these considerations into its newest assets. It is, right now, developing its first UK dementia-friendly medical centre, equipped with scientifically tested signage and colour schemes, clean-line carpet systems and maps, among other things, to accommodate those with dementia. “Without these, people who have dementia can find it more difficult to spend time in and navigate through primary care buildings,” explains Murphy.
“This process does require investment, but the state of healthcare funding right now means that the NHS cannot invest in research and development in dementia-friendly design, for example,” explains Murphy. “The NHS did not pay us to do that, but we see the social benefit and our tenants want these innovations, so we take this extra cost on for them. Everybody wins.”
The ‘everybody wins’ philosophy has certainly been reflected in Assura’s share price and, sure enough, since Murphy took over the business three years ago, the business has doubled its market capitalisation.
But it has not been plain sailing. Murphy began at Assura seven years ago as the company’s Chief Financial Officer before rising to CEO; a progression that took place amidst a ‘turnaround situation’ for the company.
“When I came across to Assura, the business had diversified into too many areas and had got itself into difficulty financially,” he says. “I had previously worked in a property funds role, so this presented a new challenge and was one of the big attractions of taking the job.”
Since then, Assura has focused its business model, specifically engaging the GP and primary care market. The business comes with an in-house development and management team, plus a specialist investment team that knows the market inside out and has been instrumental in helping the business to grow through acquisitions. And the business has been very acquisitive.
Most recently, Assura signed a landmark deal, purchasing GPI, another specialist healthcare developer, with its pipeline of GBP 92 million in May 2019. Murphy is keen to explain the magnitude of the deal. “We were already the largest developer of new build medical centres in the market. GPI was the second largest, so it really is quite significant,” he says.
The deal provided Assura with exclusivity on GPI’s development pipeline of GBP 92 million and was a solid addition to the business, which currently boasts its strongest development pipeline ever. Murphy is quick to point out that, while this is certainly an achievement, the business has started from a low base. And while there is modesty baked into this statement, there is also a serious ambition to grow in a market where there is demand. After years of serious NHS funding issues, the appetite for new, state-of-the-art healthcare facilities is massive.
For many, the natural assumption is that healthcare development across the UK took a serious hit during the austerity years. And while there has been an enormous drop off in funding for primary care facilities, according to Murphy, austerity is actually not the problem in healthcare development.
“The drop off in investment was not a deliberate policy,” says Murphy. “The issues we have faced are principally bureaucratic roadblocks that have been a byproduct of the Health and Social Care Act.” This Act, in short, transferred responsibility for healthcare facilities from primary care trusts, NHS entities that organised all the planning and financial aspects that enabled healthcare property development, directly to Clinical Commissioning Groups (CCGs), which have no authority to sign off property deals.
“In effect, healthcare property development approvals stopped for six or seven years, which, while bad for the investment business, has been very detrimental for the state of primary care buildings in the UK,” according to Murphy.
For Murphy, this presents an enormous opportunity in healthcare property, and investors should take note. Of the 9,000 primary care centres in the UK, the NHS, Assura’s main customer, has itself identified more than 3,000 that need upgrading. And these are not just cosmetic, nice-to-have upgrades; a quarter of the 9,000 centres pre-date the set-up of the NHS, meaning they are at least 70 years old – and many are much older than that. A sizeable proportion of GP practices are located in Victorian townhouses, for example, which are in no way fit for modern healthcare requirements.
“What we are looking at is government-backed, long-lease properties, where the funder – the NHS – has identified a need to upgrade a third of the entire UK portfolio of primary care buildings.”
In addition, the recent movements in politics and legislation have been positive for the sector. Assura remains firmly neutral on politics, but Murphy is clear that “continuity means deliverability.” And so, contrary to the political narrative in the UK, a reelected Conservative government is a positive signal for new healthcare facilities following several years of stalled investment. The fact that the government has committed to legislated funding increases for the NHS is the icing on the cake.
The healthcare property sector in the UK is emerging from hard times. Political upheaval and bureaucratic byproducts have led to negative outcomes in the extreme, but it appears this era of low funding and lethargic approval rates is drawing to a close. In his seven years at Assura, Murphy has helped the business tick along nicely despite mixed market conditions. Now, with all the pieces in place, investors can expect Assura to lead a speedy recovery for a sector on the mend.
