Healthcare Property: A Resilient and Lucrative Investment for SME Investors
This article was first published in Property Investor News, February 2025
I thought I would turn my attention this month to a sector of commercial property that really interests me – and that is the healthcare property sector. This has long been a stable and high-performing niche within commercial real estate, often offering investors opportunities to secure long-term leases with strong tenants. From NHS-backed GP surgeries to private clinics and later living schemes, healthcare property can present a good mix of security, yield, and resilience. In 2025, this sector continues to offer solid returns, supported by demographic trends, strong tenant covenants, and attractive financing conditions.
A Diverse Range of Healthcare Property Opportunities
Healthcare real estate is much broader than just hospitals and care homes. Investors can explore a variety of property types, including:
- Later Living Schemes – With the UK’s ageing population, the demand for high-quality senior living accommodation is rising. This includes retirement villages, assisted living facilities, and nursing homes.
- Extra care accommodation – these are residential led and tend to be purpose-built to cater for the clienteles’ specialist needs
- Alternative Therapy Clinics – Spaces catering to wellness services such as physiotherapy, chiropractic care, and acupuncture.
- GP Surgeries & Dental Practices – Core community assets that often come with the added security of an NHS-backed lease.
- Private Medical Clinics – Driven by NHS backlogs, the demand for private healthcare is increasing. Dermatology, diagnostics, and specialist surgeries are key growth areas.
Healthcare properties are an attractive option because they are often largely immune to economic downturns, e-commerce disruption, and remote working trends that have impacted other commercial sectors like retail and offices and can be a great investment niche to specialise in.
The space requirements for each of the sectors above tend to be as follows:
- Later Living tends to be development-led and purpose-built to cater for specific needs.
- Care Homes and extra-care accommodation are increasingly being housed in purpose bult residential-led developments
- GP / Dental surgeries and medical clinics can involve repurposed existing accommodation, but increasingly purpose-built Grade A stock is desired, particularly on properties where there are longer leases
- Alternative Therapy Clinics often take small suites in existing multi-let Class E space and can be great uses for secondary office buildings and the upper parts of high street retail space.
NHS Covenant Strength and Financing Advantages
One of the most compelling aspects of investing in some healthcare property is the strength of the NHS covenant. NHS-backed leases are among the most secure in the market, offering long-term stability and guaranteed rental income. This makes healthcare property a preferred asset class for lenders, who see it as low risk.
Private healthcare tenants may not have the same level of covenant strength as the NHS, but demand for their services remains strong due to increasing public-private integration in healthcare. SME investors considering properties leased to independent operators will want to assess tenant cashflows and market demand carefully.
Having dealt with this type of property in the corporate world, there is a note of caution needed with dealing with these operators. Often decision making is long-winded and complicated, and letting to these types of tenants can come with a level of risk, as a result. An understanding of process and procedures, coupled with great relationships, can mitigate the risks to a degree.
Investment Trends in Healthcare Property
The healthcare property sector has seen notable shifts in investment strategy due to the higher-interest rate environment. Key insights from CBRE’s and Knight Franks’ recent market commentaries include:
- Flight to Quality – Investors continue to prioritise high-quality assets with strong operational performance as market uncertainty persists.
- Shifting Focus to Value-Add – Investors are moving away from purely income-driven strategies and towards value-add opportunities where they can enhance operational efficiency.
- Higher Yields & Strong Cashflows – Initial yields are at a 15-year high, making the sector attractive for those willing to manage operational risk, with the prospect of yield compression once the market improves.
- Challenges in New Development – Rising build costs, complex planning conditions, and expensive debt are slowing new development, exacerbating the demand-supply imbalance.
- ESG Considerations on the Rise – 100% of investors surveyed (Knight Frank) have integrated Environmental, Social, and Governance (ESG) factors into their healthcare investment strategies.
- Geographical Hotspots – Areas like Buckinghamshire, Greater London, and South Glamorgan are prime locations for healthcare investment due to strong demand and favourable economic conditions.
Challenges and Considerations for SME Investors
Despite the strong fundamentals, there are challenges to consider:
- Labour Market Constraints – A shortage of nursing and healthcare staff remains a challenge, as does wage cost inflation – although UK policies on overseas staff sponsorship are helping to relieve pressure.
- Development Bottlenecks – The slowdown in new healthcare developments due to rising costs and planning challenges means that existing properties will continue to appreciate in value in the short term, at least.
- Public-Private Sector Integration – As NHS waiting lists grow, private healthcare providers are expanding rapidly, creating investment opportunities but also increasing competition for prime locations.
- Availability of Finance – as the commercial lending market has tightened, all sectors have been affected.
- Slow Decision Making – across the public sector.
Financing Healthcare Property Investments
Lenders remain receptive to financing healthcare assets due to the sector’s strong underlying fundamentals. Key considerations include:
- Favourable Financing for NHS Leases – Banks view NHS-backed assets as low-risk and are more likely to offer attractive terms.
- Private Operators Still Attract Funding – While covenant strength varies, lenders are often open to financing independent medical businesses with strong financial performance.
- Value-add Strategies – Investors who can improve property value through refurbishment and operational enhancements will find financing more accessible. Multi-let space with healthcare tenants is becoming much easier to finance.
Conclusion: A Resilient and Rewarding Investment Strategy
Healthcare property remains an attractive commercial real estate sector due to strong tenant demand, long leases, and the essential nature of healthcare services provide stability in uncertain economic times. While financing and development conditions remain challenging, high yields and value-add opportunities make this an investment niche worth looking at.
