Impact Healthcare REIT poised for return to investment market

Impact Healthcare REIT has signalled a return to investment activity early next year as it gains more confidence in the market. The move follows the interest rate cut by the Bank of England last week and positive financial performance reported by the firm this year.  Andrew Cowley, co-founder and managing partner at Impact Healthcare, said if the rates go down further, the REIT will start getting “less cautious”. “We’ve had the handbrake on [investment] pretty hard in the last 12 months, but we might start releasing it a bit. Maybe early next year. Eighteen months ago, there was a lot of uncertainty around the direction of travel on pricing,” he said.  According to Knight Frank’s Healthcare Capital Markets 2024 report, a total of £1.2bn was invested into healthcare property in 2023, just shy of a half of the £2.4bn invested into the sector the year before. In turn, the data also showed that average annualised returns reached 4.4% in 2023, up from 3.5% in 2022. Cowley said: “The market didn’t dry up, buyers could get what they wanted, but it was about half normal volumes. That hasn’t changed. It’s still more a buyer’s market than a seller’s market at the moment.” As Impact Healthcare looks to scale up its portfolio, which spans 140 care homes and 7,721 bedrooms, Cowley said there is a lot of opportunity for the REIT to grow. “About £23bn a year gets spent on keeping people in care homes. It is a big market. It is a very fragmented market. At the moment we own about 1.5% of it. If we double in size to 3%, there’s still a long way to go before we run out of things we could buy. “I don’t know what’s going to happen next. I’m not sure we are completely out of the inflationary woods, but it feels like rates are more likely to go down than up. Yields could come down as well. It’s all good.” Asset management Impact Healthcare has also stressed its intention to invest into the “quality” of its care homes. “Growth isn’t just about buying more homes but how you can build value in your existing homes,” said Cowley. “Care homes operate 24/7, 365 days a year. They get a lot of wear and tear.” So far this year, the REIT has committed to nine new asset management projects, which cost it about £11.6m, with an expected effective yield of 8%. Most of the work was focused on enhancing both the quality of the environment and energy efficiency. “We’re always looking at ways to do a bit more than that,” Cowley said. Impact Healthcare has 16 projects in the pipeline, with anticipated capital funding of £26.8m over the next two to three years. The REIT aims to position itself in a middle market, providing care homes which are both high quality and affordable in order to deliver long-term sustainable returns to its shareholders. Cowley said: “If I put it in hotel terms, we don’t want to be in the five-star market. We want to be in the three star, with potential to become four star. So good quality that haven’t lost contact with affordability.” The focus on affordability comes amid long-term lease agreements that the REIT holds, which are mostly 20-year with no break clauses and 100% inflation-linked. “We need to be sure that we’re going to get paid for rent over the life of those leases, which means the rent has to be affordable,” said Cowley. This strategy helps the REIT to achieve certainty around its rent role over the long term. “There is a lot of inbuilt resilience, both in our lease structures, but also what our tenants do – they are providing an essential service,” said Cowley. “I think REIT investors are looking for something that can deliver attractive returns sustainably over a long time period.” The REIT increased its interim dividend payment to 3.475p from 3.385p paid a year ago. The stock was trading up 1.2% on 9 August at 88p. The share price added 8.8% so far this year. Image © Impact Healthcare REIT