With political parties imploding, sterling at its lowest level in 31 years and countless EU citizens left in limbo, many are predicting a turbulent time ahead. However, that gloomy outlook is not shared by everyone.
Andrew Simmons, director at financial risk management consultancy JC Rathbone Associates, believes that Brexit could also create opportunities for the UK care home sector that has seen a significant decline in foreign investment since the announcement of the National Living Wage (NLW) in 2015.
Following that announcement, the number of international M&A deals in the sector halved in just a year; investors being put off by wage inflation in an industry with staff costs already averaging around 60% of the total cost base.
“The post-Brexit FX situation could present a unique opportunity for foreign investors,” says Simmons. “In particular, those from the US who may have been put off by wage increases which could not be passed through in the form of fee increases.
“Just prior to the EU vote, the ripples of uncertainty in the market that were caused by NLW had begun to calm as investors felt they could more confidently forecast the underlying cost base,” he says. “That clearer vision of projected profits for investors combined with a historically low GPB/USD exchange rate creates a compelling investment case.”
As of close on 11 July, the rate at which foreign investors can exchange GBP for USD is at 1.2986. This is well below the 5 year average rate of 1.5626 and does not reflect any change in the value of UK assets and is solely reflective of the EU referendum outcome.
“The good news is that Brexit has had no impact on the demographic fundamentals driving demand in the care home sector,” says Simmons. “From an operational perspective, the care home industry is functioning exactly the same way today as it was prior to the Leave vote.”
Long-term prospects for the UK care industry seem more stable now; the increased cost base now fully reflected in recent results. Investors evaluating acquisition opportunities can more accurately forecast profitability and therefore the returns on their equity. With the current FX abnormality, the time to take advantage could well be now.
“As well as equity returns looking more attractive, debt providers appear to be cautiously optimistic for good opportunities at sensible leverage levels,” says Simmons. “Additionally, the further shift down in interest rates (5 year fixed rates of interest now as low as 2.25%) could provide very interesting refinancing opportunities for existing borrowers.”
The need to house and look after the UK’s ageing population could present a great opportunity for all investors and developers in the coming years. Right now, foreign investors, particularly those from the US, have the chance to take advantage of the Brexit fallout and invest in a growing industry with vast potential.