U.K. social infrastructure: Opportunity hiding in plain sight
By Paul Jackson
Along the United Kingdom’s M4, or any major motorway for that matter, roadside service stations offer essentials such as petrol, food and other services. Elsewhere, childcare facilities, educational centers and waste-management locations quietly serve the population with much-needed social infrastructure. This asset class often passes unnoticed by investors but remains a lucrative and growing segment for the savvy investor. The need to improve social infrastructure has been recognized in the United Kingdom for many years. Back in 2017, the London Plan devoted an entire chapter to this topic, placing substantial emphasis on the creation of essential facilities, including childcare and educational centers, healthcare and social facilities, and sports parks and recreation areas. The London Plan serves as an overarching blueprint for the growth of London as it seeks to meet the needs of its diverse population. London’s needs are echoed throughout the United Kingdom; recent press and research highlight the challenges to revitalizing aging facilities across the country, which have been subject to insufficient spending since the global financial crisis. As the commuter belts around major cities expand, this has created an environment of opportunity for investors looking to capitalize on the myriad of value-add assets coming to market. Much of the discussion around social infrastructure revolves around various philanthropic schemes, but there is a very strong rationale for the private sector to get involved and take the lead. This article attempts to highlight the opportunity for investors in U.K. social infrastructure across education, healthcare, retirement, transportation and waste management, which benefit from:
Strong occupational demand. Tenants often sign extended term leases, with some as long as 25 years.
Limited supply. These sectors generally suffer from an undersupply, typically due to planning (zoning) and natural barriers to entry.
Resilience against the deflationary effects of technology. Social infrastructure is difficult to replicate on the internet (e.g., children’s nurseries).
A value-add strategy Social infrastructure investment relies heavily on two primary channels to generate return: (i) purchase and refurbishment of existing properties for leasing and (ii) the strategic development or redevelopment of properties for new or expanded uses. As tenants in either channel are long-term focused, there are multiple opportunities for value creation. In childcare, for example, value-add improvements increase the likelihood of long-term lessors, which, in turn, can provide an exit opportunity selling to institutional investors. In waste management, upgrading facilities to higher value services, such as clinical waste handling or energy production, can deliver additional value to investors.
Five key reasons to invest in social infrastructure:
1. Resilience against the effects of technology
Social infrastructure requires physical locations. Whether the property is a childcare facility or a waste-management location, these businesses must have a physical premise to provide their services. Furthermore, they are unlikely to experience a significant decrease in space requirements as a result of technological advancement. Kids still need places to learn and play. Garbage still needs to be collected, sorted and managed. Technology is unlikely to displace or replicate the services this infrastructure provides.
2. Maturing market
Institutional investors are recognizing the opportunities in social infrastructure as a source of core income. Operators’ covenants are strengthening, and private equity investors are getting involved in the backing of such potential operators, including nurseries (Ontario Teachers’ Pension Plan invested in Busy Bees), storage, waste management and retirement homes (Octopus backs senior living).
3. Widening commuter belt
Soaring house price to income ratios in the U.K. (and particularly London, currently at 10x) alongside the COVID-19 lockdown impact are pushing the population further into towns along the commuter belt. As population densities grow and the commuter belt widens, so does the natural demand for services key to society, such as children’s nurseries, waste management and retirement living.
4. Value-add opportunities
The global financial crisis resulted in 12 years of governmental underspending on social infrastructure, which today has created a pipeline of capex-starved value-add assets coming to market. These assets can be converted to higher value social infrastructure uses by a growing private market of strong operators in education, childcare, retirement, healthcare and waste management.
5. Government incentives driving growth
The U.K. government has prioritized both public and private investment in the Green Revolution, with a goal to make the U.K. carbon-neutral and a leader in technologies that deliver carbon reduction. The recent pandemic has focused minds on the importance of life sciences in the United Kingdom with tight links to leading universities. Among the aging U.K. social infrastructure that currently requires upgrades or refurbishment, there is vast opportunity for private capital sources to employ green strategies during the redevelopment process. These Green Revolution–friendly investments could include EV charging options at petrol stations, energy-efficient lighting at educational centers or low-flow toilets at retirement facilities. As the mature social infrastructure assets in question have generally not been modernized, they are primed for investors to implement the government-driven transition to sustainable, net-zero operating systems.
Where are the opportunities?
Infrastructure to support childcare for working parents is an opportunity that has high potential. The market is highly fragmented. According to the Laing Buisson Childcare U.K. Market Report, as of 2020, the top 20 childcare facility operators comprise less than 15 percent of the private U.K. market. Operators in the sector have seen EBITDA coverage ratios of 2.5x to 5.0x, which makes for very stable, long-term tenants. Childcare real estate presents the opportunity to create long-lease income of 15–25 years with Retail Price Index (RPI) uplifts from vacant sites.
Refurbishment of old government buildings
Across the United Kingdom, former government buildings such as Royal Mail sorting offices and warehouses sit vacant and available for reuse. Typically well-located, these properties make for excellent value-add projects, often anchored by mixed-use tenants, childcare, education and residential.
As London’s commuter belt widens, demand is increasing for roadside infrastructure, such as motorway petrol stations. These service areas present strong barriers to entry for existing sites due to complex planning and set-up costs.
Environmental permits for waste management are difficult to secure, providing defensible barriers to entry. Current sites are being converted into higher-value uses, such as green waste recycling, clinical waste handling and energy production. Occupiers of the sites typically opt for long-term inflation-linked leases to lock in sites and amortize their capex.
Social infrastructure is an unheralded part of the real estate landscape. But that doesn’t mean it should be avoided — it should be embraced. There is vast opportunity for value-creation through distinct strategies that rely on the benefits inherent in this category — higher barriers to entry; long-term, stable tenants; and a plethora of former government properties suffering from underinvestment that are ripe for private operators to deliver higher-value services with new tenants.
Paul Jackson is a managing partner at Accord Group Holdings.
ABOUT ACCORD CAPITAL PARTNERS LLC
Accord, through its affiliates, is a global capital advisor, principal investor and investment manager. With its headquarters in San Francisco and personnel in Chicago, London, Hong Kong and Seoul, Accord engages with a wide variety of participants in the real estate private equity industry. Accord Capital Partners, its broker/dealer affiliate, provides advisory and capital raising services in the United States. Accord Europe Limited, its broker/dealer affiliate, provides advisory and capital raising services in the United Kingdom and Europe. For further information on Accord, visit: www.accord-group.net.