Finding funding for your breakthrough estates projects

16th November 2020 By Vikki Town and Phil Holland

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This is the latest in a series of articles and reports on how the health and care sector can overcome change paralysis in their estates. Here, Prime’s Group Financial Director, Vikki Town, and Chief Investment Officer, Phil Holland, reveal their tips on how to approach the challenge of identifying the funding options for your estates plan.

 


 

How can you fund each of the projects within your estates plan? Having worked with NHS Trusts such as University Hospital Southampton NHS Foundation Trust, University Hospitals Birmingham NHS Foundation Trust, GPs, CCGs and investors including Aviva, M&G and Canada Life to identify and secure the right funding, here are our recommendations.

 

Don’t stop

Constant change in our sector and in your funding options was prevalent before COVID-19 threw more curveballs into the mix. Which is why we find that, in the face of uncertainty, the best way to be the master of your own destiny is to carry on with your own preparations while you’re waiting for decisions to be made. That’s not to say that it doesn’t take careful thinking and planning to find the right funding to finance your estates plan: it does. But it also pays to be ready to take a project forward as and when sources of funding become available – ensuring you are ahead of many others who are not as prepared.

 

Get comfortable with uncertainty

Investing time upfront will pay dividends later on when the landscape inevitably shifts again. You will understand the options, be able to flex your plans and so stay on track.

 

Consider all routes upfront

When you’ve worked out broadly what you want to achieve with your estates plan, carry out a high-level appraisal of the funding available to you in the current market and when the project will likely crystallise and need to be delivered. This will influence how you structure the delivery of your plans. In turn, that dictates which funding is available and which is the best value. Don’t rely on capital coming from the NHS alone because there won’t be enough to deliver everything you aspire to. Consider:

  • The current market and its participants – understanding their likes and dislikes
  • How the market is pricing the type of project you are considering
  • Your appetite for different types of funding
  • The best source of funding for a project taking these factors into account
  • When each part of the project will be delivered

 

Identify the right projects

It is more difficult for investors to provide funding to help with your backlog maintenance so if you have capital available, you will need to use it for this. If you have money left over, use it on your complex clinical projects: you are best placed to design these and by providing the finance yourself, you will have absolute flexibility in how you operate these services going forward.

Now look at enabling infrastructure projects like car parks and accommodation (both administrative and residential) that could free up space for clinical development, and projects that could generate revenue for you, such as retail outlets and non-clinical activities like pathology. This is where investor finance can be most beneficial and cost effective.

As an example, at University Hospital Southampton, the trust is reviewing support services to see if any could be moved off-campus to the outskirts of the city, with new premises being funded with annuity fund investment. As well as providing services at a lower cost at more efficient premises, their relocation will release land in the heart of the main hospital campus for further clinical development.

 

Weigh up the pros and cons of your funding options

Despite political rhetoric, private finance is an option that is well-worth considering if you are serious about achieving your estates goals. It can be accessed competitively if a project is structured correctly which is why it’s essential to consider funding options early in a project’s lifetime.

Here are the most common types of finance currently available, many of which can be used alongside each other, for instance, you could mix a property investment fund and annuity funds in one project.

Type of finance Key considerations
NHS capital
  • If you’re a GP…As a private contractor, there is no negotiation on how much it will cost you and you are personally liable for repaying it.
  • If you’re a trust…Capital is scarce, not easy to secure and there is a prescribed cost of funding so you may want to consider whether other options will be more beneficial.
Annuity funding
  • Works well for enabling non-clinical and infrastructure projects as these investors want the lowest risk projects and cash flow certainty.
  • Good if you want to keep ownership of asset in the longer term.
  • Depending on the intended use of a property, it may be structured so it doesn’t appear on the trust’s balance sheet and use valuable CDEL.
  • Look to the long term (25 years+) to spread the cost of paying back the capital and rents.
  • The best cost of funds normally requires a minimum transaction size and so these funds may not be available for smaller projects.
Property Investment funds (REITS)
  • Works well for smaller projects such as GP premises and office buildings as these investors have a long-term commitment to the sector and assets and can assist with extensions, reconfigurations etc. in later years.
  • Good if you don’t want to own the asset in the longer-term.
Local Authority
  • Works well for projects that benefit the local areas or more than one local service, such as a car park used by both council and NHS staff.
  • Can leverage the benefits of multi-agency occupancy to increase a project’s scale and lower unit costs.
Bonds
  • Similar to annuity funding above, these work well for long-term projects, but are more appropriate where you want to retain outright ownership of the asset.
  • Be aware that as debt, it straight away sits on your balance sheet.
  • A bond may come with more terms and conditions than an annuity funded occupational lease.

 

Sovereign wealth and private equity investors may be the source of the private sector funding options outlined above, but may not be sector specialists and may have a higher cost of capital.

 

Know yourself, know your investor

Work out what you won’t budge on. You might not want to sell land, ruling out property investors. There could be a particular clause in your contract that will rule out some other investors. If you don’t identify these issues at the outset or don’t engage with investors, you might find out too late that you can’t secure funding.

Get to know what potential investors want and what is important to them. Specialist developers maintain strong relationships with a wide range of potential funders that help focus efforts on those who are appropriate options for your project. Together with the developer, you can strike out any issues that may make a project less attractive or more costly in terms of funding rates. Funders won’t get all your issues and you won’t get all theirs, so the developer can bridge the knowledge gaps and has experienced these complex conversations before.

 

Structure contracts with funders in mind

Once planning consent has been achieved and construction has been tendered, costs are more firmly fixed and you will know the risks and issues you face. Structure your contracts to be as robust as possible and so maximise the value of your project in the eyes of investors. They will price more keenly if the project is packaged up well.

 

If you would like advice on finding the right funding, get in touch.