Introduction
Dental properties as an investment are a relatively new and tightly-held part of the commercial real estate investment universe. Dental properties are operational in nature, meaning their success (or failure) is linked to the performance of the dental business operations. The dental operating industry has traditionally been highly fragmented, with most dentists owning a single dental practice and owning the building they operate from.
It was only in the mid-2000’s when regulatory changes made it possible for the consolidation of dental practices. Since then, larger corporates have entered the market and purchased individual dental practices in a consolidation strategy. These corporates have larger balance sheets than individual owners, tend to be more efficient operators, and often prefer to lease their dental buildings rather than to own.
This paper looks at the dental property market in the UK, including the benefits, strengths and challenges going forward. Given the operational nature of the real estate, it is important to understand the overall UK dental sector.
UK Dental Sector
The nature of the services provided in dentistry are mainly seen as essential, with a large proportion being government funded. As such, UK dental revenues are predictable and tend to remain stable.
It is the predictable revenue streams that have driven corporate dental groups to focus on acquisition and aggregation strategies, resulting in consolidation, increased revenues and higher margins.
Despite some consolidation, the industry remains fragmented. There are approximately 12,600 practices across the UK, with over 7,800 of these still being in independent hands. The remainder are split evenly between large corporates and a range of smaller groups.
Figure 1: UK Market Composition by Ownership Type
Despite the challenges presented by the pandemic, merger and acquisition activity in the dental sector bounced back strongly in 2021 and saw a record number of transactions in 2022 and 2023.
There has been a marked shift from groups focusing on acquiring NHS led practices to ones that are primarily private income led. This shift results from the increased focus on cosmetic and aesthetic treatments driven by social media in particular.
The opposite is true for independent purchasers, where the security of NHS contract income tends to be more important. The ideal mix for a practice involves some combination of private & public income streams.
UK Dental Property Sector
It is the increase in consolidation activity that has created the dental property investment market. A typical transaction involves an independent dentist who wants a total exit from his/her business along with the associated real estate. The business will typically be offered to a dental corporate seeking to expand their operational portfolio of practices, and the real estate can be offered for sale with a long-term lease to a third party private investor.
The dental property investment market is a niche sector, where available opportunities are mostly traded “off-market”. These opportunities are often undertaken between parties with knowledge of the sector.
A typical transaction ranges from around £250,000 up to £1 million, making it attractive to private investors. From a yield perspective, good corporate backed leases tend to deliver 7.0%+.
Dental Property Investment Profile
Dental Properties make for a compelling real estate investment for those looking for long term stable income. They are one of the few asset types that allow for direct ownership, with corporate tenants, at relatively low lot sizes.
There are several attractive features of dental property, as shown in the table below:
Figure 2: Key Benefits of Investing in Dental Properties
Dental property tends to fits into the core investment profile of an investor’ portfolio. Many investors place these investments into their SIPP or SSAS for the tax efficient long term income.
With regards to rental escalations, many dental leases have a review every five years to open market value. We would also recommend negotiating an inflation-linked component in any new dental leases.
Figure 3: Case Study – Dental Property Acquisition
The tenant was a major UK dental focused group, and the surgeries were primarily private income with a smaller amount of NHS. Making for an extremely secure tenant profile and income stream to the landlord.
Summary
There is a clear investment thesis for investing in commercial dental property as it provides a solution for private investors to allocate money into a safe, tax efficient and affordable asset.
Attractive lease tenure and structure allows for investors to benefit from a light touch asset with consistent returns over the long term. Opportunities to invest continue to become available due to the ongoing trading activity, primarily driven by corporates, and this will only continue to grow as the market sees further consolidation over the coming years.
The nature of the income generated by the tenants may ebb and flow between NHS and private income, however the underlying principal is that oral hygiene will always be a necessity. Therefore the income stemming from this is constant and can never be replicated through alternative means like ecommerce which has had a significant impact on the retail market. It is this core principal that underpins all else in this market.
SIRE Capital Partners continues to work actively within the UK Dental Property Sector sourcing and managing assets for investors.
Patrick Ryan is a Principal and Co-founder at SIRE Capital Partners, working on Deal Origination and Asset Management.
Patrick has spent 20 years in the property sector in London.
His first foray into the sector was in 2003 when he co-founded a mezzanine finance business that focused on lending to property developers in and around London. Following this he headed up SIRE Properties, a healthcare focused asset management firm. Patrick has now co-founded SIRE Capital Partners that has expanded on his healthcare asset management focus to take in broader services to include brokerage and capital advisory.
