The last 12 months has been an interesting period of time largely due to the increase in interest rates. This has had a dramatic impact upon the value of property and also the costs of property, notably by way of mortgage.
It follows that the investment yield applied in undertaking a commercial property valuation has risen to track the increases in interest rates. Subsequently as the yield increases the multiplier to derive the capital value falls.
In the long term perspective, interest rates are not considered to be high although they feel high since they have been at unusually low levels since 2009. However, increases in interest rates have been rapid although some consider this is interest rates returning to a more normal and consistent level.
The impact of this has been that the lower multiplier applied to valuations results in a lower capital value of the property. In some instances in the primary care sector this has led to decreases of as much as 20% in the last 12 months.
Mortgages v Notional Rent
With some practices having mortgages on variable interest rates this increase in costs has sometimes led to the Notional Rent not being sufficient to cover the mortgage cost. Where some practices have not traditionally challenged the Notional Rent, they are now doing so in order to at least achieve parity between Notional Rent and mortgage costs and hopefully to resume to a period of there being a surplus. This surplus is extremely beneficial since this should contribute towards property maintenance costs. It is prudent to maintain a fund for property maintenance with this being detailed in the partnership agreement and also in the partnership accounts. Specialist solicitors and accountants can advise on this further to ensure this is appropriately documented.
Extensions to Premises
We have received several enquiries from practices to discuss extensions to premises. Ideally practices would like to have a complete new medical centre, but this is often proving to be unviable (another topic on its own). Some practices are seeking to extend their property which of course is a cheaper alternative by way of additional funding for the NHS by the lower level of Notional Rent required for an extension compared to a new medical centre. Interestingly, we have now received a number of enquiries from practices who are seeking to extend their property regardless of whether Notional Rent is going to be applicable for the extension. This is because the practice has a significant need for expansion of premises in order to provide adequate clinical care for their patients. This particularly so, in the face of increasing size of patient lists. In addition, practices are seeking to maintain the commercial opportunity to provide enhanced services to attract additional practice income. This has also been raised as a matter for staff retention by being able to provide better working environments for staff with it sometimes being cited that it is difficult to retain staff if the working environment is poor with hotdesking and sharing space.
It is much more challenging to fund an extension to a surgery without additional Notional Rent being secured or an Improvement Grant to contribute towards the cost, however some practices are saying that they will pay for the extension as a purely commercial prospect by way of the additional practice income that will be generated. This can then cause challenges for the mortgage since banks will typically lend 100% of the value of the extension if it is covered by Notional Rent. I suspect that where Notional Rent is not going to be applicable for an extension (or an abated Notional Rent if an Improvement Grant is made) that the bank will then live with this as a commercial proposition depending on the additional practice income that is expected to be generated by virtue of the additional accommodation and additional services that can then be provided. Given this scenario, the banks will not lend 100% loan to value and are more likely to lend around 50 – 60%.
On reflection this is an interesting scenario with some practices beginning to look much more commercially at their business operations and how to generate income rather than being so dependent on Notional Rent. Given the lack of investment in primary care premises in recent years, this is exacerbated by the premises having become more worn and in some instances, obsolete, whilst the practice faces an increasing patient list with demand for appointments ever increasing and the need to provide the right facilities to attract and retain staff for the viability of the practice.