Friday, 14 May 2010

DSP Healthcare Market Commentary - May 2010

I read an interesting article on likely falls in commercial property this morning on Bloomberg which tied in nicely with something I was proposing to write on the outlook for the Healthcare market for the rest of the year. Here are some of my thoughts on the direction of things for the rest of 2011;

New government, new direction?

The proposed emergency budget isn’t going to be ready until mid-July but it already looks as if there are going to be drastic cuts all over the place to cope with the UK’s growing debt mountain. There are already noises about the proposed ring fence on the NHS budget being reversed (see here) as a combination of tax rises and spending cuts starts to take effect.

It is likely that the cuts in the already stretched Local Authority budgets will mean that there are less funds available generally and that this could mean even greater attempts will be made to keep service users in their own homes for longer so that funding for residential care places does not need to be made available. Pressure on budgets could also mean further outsourcing of clients who need more specialist care, into assisted living accommodation.

Likely VAT rise?

The general consensus would seem to be that VAT could go up to 20%, this being the quickest way for the new coalition to raise money. I think the timing of this rise is important as growth is still weak in the UK and any VAT rise is going to impact consumer spending from a wider economic perspective.

It will also affect the Healthcare industry as a rise in VAT is a direct cost that is not reclaimable as in other sectors. A 2.5% across the board rise in prices on non-staff costs of running a care home is significant and also a distraction, especially where some operators are under pressure on occupancy and standards.

Interest Rate Outlook

Given the current weak level of economic growth, most forecasters and data that I have read predict that rates will note start going up until the end of the year or possibly even q1 2011. When rates do go up, I anticipate that they will tick up slowly to balance a weak growth pattern. Some of the inflation figures that we have seen lately may cause the MPC cause for concern but I think they will let inflation spike rather than kill growth with rate raises.

This will also affect the availability of Healthcare stock coming to the market. Generally the homes that we are seeing come to the market at present are distressed or have issues. I don’t see this changing until those operators who wish to sell out can generate a decent rate of return on the capital they realise from the sale, so my view is that there will continue to be a shortage of care homes hitting the market.

Bank funding

Lastly, the lenders are as cautious as ever with regards to the type of propositions that they are lending on. Most are looking to restrict their loan to value to 70% maximum and are cautious lending to first time buyers.

In many ways, it looks as if a combination of unresolved capital reserve issues and a big swing to a more risk led approach from the lenders has meant that many deals that we have seen recently that would have been funded with no problem (and limited risk) in 2007/8, are now being declined or offered at a lower loan to value.

That is not to say that deals are not being done, we are seeing an increase in deals over this year but this is tempered with a more realistic approach from those doing the deals about the likely loan levels and interest rates that are available.

Of course, we are always delighted to speak through your funding requirements and if you have a proposal that you would like to discuss, please feel free to call on 0208 362 9700 or email me at

David Burrows

David Burrows
David Stephen Partners

0208 362 9700 - t
0208 366 8931 - f - e - w

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