The majority of practices own the property as a partnership asset with the NHS then pay notional rent. With the various changes in NHS organisations sometimes it is overlooked that notional rent is to be reviewed, particularly as these rent reviews occur quite frequently, being every three years. Whilst many practices tend to wait for the Integrated Care Board (ICB) to commence the rent review, this doesn’t have to be the case. By submitting the appropriate form (now a spreadsheet) to the ICB this should start the rent review process.
The process should then entail the District Valuer proposing a rent which is then notified to the practice. It is this letter that is imperative to review since this should set out the detail District Valuer’s proposed rent but may also have time limits attached to it by which to contest the rent if appropriate.
Often in negotiations District Valuers have resisted rental growth or have sought to restrict growth to be no more than 1% per annum. Given changes in the property market such modest increases may no longer be appropriate and there are instances of more significant increases now being achieved. Furthermore, by undertaking a re-measure of the surgery premises, this can sometimes lead a further increase in rent since there have been some instances some surgeries having not been re-measured for many years yet the approach of how to measure a surgery has changed over the course of time. This can result in an increase in the floor area to be valued.
An increasing number of rent reviews are being referred for Dispute Proceedings. This is not as intimidating as it may sound. The first stage is a Local Dispute Process which, in the main, tends not to be overly productive but is a required step to take ahead of applying for the formal Dispute Process which is run by NHS Resolution. It is proving necessary to refer more rent review to NHS Resolution but from the results achieved to date it is worthwhile doing so.
Whilst some practices are reluctant to challenge a rent review since the increases may only be modest and the next rent review may only be, say, a year or so away, it is often still worthwhile to challenge a rent review since it is harder to achieve an increase if a previous rent review has not been challenged. Even a modest increase in rent has a compounded effect since this increase is received in years thereafter. Furthermore, this also has a positive impact upon the capital value of the property.
The value of properties is topical given the movement in interest rates over the last year. It does follow that the upward movement in interest rates generally has a negative impact on the capital value of a property since investment yields tend to move upwards in line with the increases in interest rates. Whilst it may cause concern that capital values have fallen; primary care property has tended to fare better than other property sectors which have experienced more significant reductions in value.
The valuation needs to take account of various factors of the property, notably the income stream which may or may not include a pharmacy which has been in a state of turbulence in recent times.
The pharmacy market is in a slight state of turmoil which has been caused by reductions in Category M being the tariff that the pharmacist is paid to dispense prescriptions. There are many instances of the large operators of pharmacies attached to medical centres now seeking to exit various branches with there being many requests for leases to be assigned from the current operator to a new operator. What is encouraging is that there are new operators being keen to take on the leases resulting in there being quite a change in the pharmacy market. The number of multiples is now reducing as the number of independent operators increases.
There is much demand for new premises to be built. This is largely because there was much activity with new premises being built some 20 years ago with only a limited number being built in the intervening years. With a growth in population and the primary care estate getting older there is increasing demand for new premises to be provided. The challenge now is that construction costs have doubled over the last two years with construction costs now being typically in the range of £4,000 to £4,200 per square metre. This has been compounded by the increase in interest rates. This means that the level of rent required for a new medical centre to be viable is considerably higher than it was even two or three years ago. The challenge then is that the District Valuer may not consider that the level of rent required to be value for money, being the axis of the District Valuer’s opinion of Current Market Rent. This disparity is challenging to overcome and in some instances this has been achieved by the NHS paying additional rent, referred to as Top Up Rent. This has not been a perfect scenario but has been a way to facilitate new premises being built.
From an ICB perspective, whether the level of rent is referred to as Market Rent or Top Up Rent is irrelevant since it is funded from the same revenue budget. Conversely, should there be an issue as to the financial impact of the medical centre upon the ICB’s budget then that is a different matter. It may then be that a commercial negotiation can take place between the developer and the ICB as to what is affordable for the ICB and a transaction may be constructed around that rather than it being such a one dimensional valuation issue.