In good health

Healthcare professionals predict that any post election NHS cuts won’t occur at the front or primary end of services.â¨

Healthcare professionals predict that any post election NHS cuts won’t occur at the front or primary end of services.â¨

Healthcare professionals predict that even if cuts are made in the health sector and the NHS following the general election, they won’t occur at the front or primary end of services.â¨

Harry Hyman, managing director of Primary Health Properties (PHP), says that the UK’s government is focusing its resources on the primary area of healthcare, involving basic general practitioner or GP services, which suits his fund’s activities very nicely indeed.

PHP has a portfolio of 130 modern dedicated healthcare facilities that are leased to GPs, primary care trusts and pharmacies. Most of its rents are paid by the NHS, which is legally bound to increase them at inflation-related rates, or about 2 per cent a year. This is a point Hyman is keen to emphasise, along with the fact that the buildings provide the basic services that the politicians of all persuasions are keen to protect.

‘People assume that the NHS is an amorphous blob and that cuts will occur across the board. This won’t be the case. There may be a smaller number of hospitals, but the demand will still be there and the services, instead of being carried out by hospitals, are being transferred to primary care units.’

He points to one of the group’s flagship assets, the £15.5 million, 60,000-square-foot medical centre in Port Talbot, Wales. It contains four GP practices, primary care trust accommodation, two dental practices and a pharmacy.

In times of economic uncertainty, government spending is at the heart of what makes PHP a compelling investment. About 90 per cent of its income comes from the government, and PHP has delivered an increase in its dividend every year since its listing in 1996.

Mike Foster, an analyst at UK stockbroker Fairfax, compares investing in PHP to investing in index-linked gilts, since PHP’s dividends are covered by earnings, its average lease duration is 17.5 years and a recent court decision has strengthened its ability to increase its rents at the rate of inflation.

If PHP is so similar to government bonds, then why is its yield so high? At 296p, its dividend yield is forecast by Fairfax at 6 per cent, much higher than the UK two-year gilt yield of 1.2 per cent.

Once again, we come back to the risk that government spending in the cash-strapped UK will fall. Although Hyman’s argument is a strong one, and with at least one prospective administration claiming that health spending will be ring-fenced, it would be a brave and deeply unpopular stance to cut back on front-line services.

There is a risk that PHP will go back to investors for funds. Currently its assets stand at close to £400 million and Hyman says that he has ambitions to reach £1 billion. This journey will most certainly involve raising more cash. But the company’s balance sheet is strong in the wake of its rights issue last October, which raised £60 million and its loan-to-value ratio stands at 52 per cent, well clear of its covenant level of 70 per cent. Hyman estimates that he can take the company’s assets up to £500 million on its current funding levels.

He says that growth in its portfolio will come from further purchases, but also from improvements to its existing portfolio. This means that not only do investors get a strong dividend yield, but there is also good potential for capital growth. Although the trust’s shares trade at a slight premium to its net asset valuation, it would not be surprising for the differential between the fund’s income yield and the gilt yield to narrow.

PHP will never be a high-growth play. It will never return 20 per cent in any one year. But it does offer a high degree of certainty for investors looking for a return in the region of 10 per cent, of which about 6 per cent will be made up of dividends, representing money in their hands. This is as valuable a commodity as it has ever been – even with the depths of the financial crisis behind us.

Nick Britton

Nick Britton

Nick was the Managing Editor for when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...

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