Supply and demand: practice property markets
Jonathan Watson explores dental practice property markets in the north of England and the Midlands.
The dental market was remarkably resilient across the north of England and the Midlands in 2020 as the pandemic set in.
There was a pause in mergers and acquisitions activity as practices reopened and businesses found their feet again. This resulted in a striking shortage of practices entering the market for sale.
Though demand for dental businesses continues to outstrip supply, we are experiencing an improvement on the level of supply in the market. There is a glut of deals carried forward into 2021 that completed in Q1. And the threat of a rise in capital gains tax (CGT) in the Chancellor’s spring budget, contributes to a record volume and value of deals completing.
Competition for practices on the market remains quick and fierce. The implementation of closing dates for offers and multiple offers on practices is commonplace.
Christie & Co agreed offers with an aggregate value of £200 million during Q4 2020. In Q1 this year it received an average of three offers per practice.
Two examples of such demand were a two-chair NHS practice in south Manchester. This recently generated some eight offers, many of which were above the already competitive guide price.
A similar outcome in Coventry for a two-chair NHS practice enjoying 14 viewings and nine offers. This included multiple offers significantly above asking price.
The recent sale of First Dental in Walsall was another example where multiple offers were received from a range of purchasers. These included first-time buyers, local consolidators, and national corporates. The choice for sellers has never been so great.
A spike in completions
As we move through 2021, volumes are returning to pre-COVID levels. But the likelihood of CGT rises in the autumn budget could place another artificial deadline for completions. This might lead to a spike in September and October.
There is significant demand for all types of dental practices. Corporate buyers who were active pre-COVID now acquire and try to fulfil their ambitious buy and build targets to make up for lost time.
Privately-owned dental groups are also acquiring again. But they are less active than they were pre-pandemic as they focus on consolidating and running their existing businesses. They are buying opportunistically as they appear under no real pressure to grow to a certain size by third-party investors.
We continue to see a reinvigorated appetite from independent buyers purchasing their own practices. We expect this to continue in the long-term.
As pricing and demand for the major conurbations (such as Manchester, Leeds, Leicester, and Birmingham) increases, we are regularly seeing buyers widen their search criteria. They now seek out practices in locations further afield. This can be seen in affluent rural areas of East Anglia, for example, which are experiencing an upturn in buyer interest.
Deal structures altered in mid-2020. Many buyers defer part of the proceeds as a result of the perceived increase in risk.
However, supply and demand and the competition for larger practices has brought deferred back to broadly where it was pre-COVID.
The private pay market has bounced back incredibly quickly. This is likely a result of a rise in cosmetic dentistry and due to changes in consumer spending habits as temporary and permanent business closures hit the high street throughout the pandemic.
Pricing and deal terms across the north of England and the Midlands have returned to pre-COVID levels. Multiple offers are coming in on higher-quality practices.
The trends identified in our Dental Market Review 2020/21 published earlier this year – such as the migration of patients to private practices from NHS and average spend per patient increasing as patients are electing for multiple treatments rather than waiting – are really coming to the fore. This has pushed the value of good quality private practices up.
The question is whether this increase in revenue is here for the long term. Or whether it will be short-lived once consumers return to more ‘normal’, pre-pandemic spending habits.
There is limited evidence of distress in the dental sector despite the pandemic. However, smaller practices have inevitably found it more difficult to adapt to the new operating procedures.
There is evidence of price inflation for large practices. We expect that corporate buyers will continue to bid aggressively for such businesses.
Despite a prior nervousness to lend to first-time buyers, banks are generally supportive of the dental market. This has fared well through the pandemic. A number of challenger banks are coming into the market, which is positive for those wanting to acquire.
Clearly though, it has never been so important to use a specialist broker or bank who can present the information in the correct manner to the best contacts.
Changes to look out for in the year ahead
NHS reforms are on the horizon
It seems increasingly likely that NHS dentistry in England will see a permanent change to the way it is delivered.
The contract reform programme in Wales might point the way to a capitation-based system, as Scotland has been for years. However, whether these are workable in England given the access issues experienced through the pilots and prototypes, is another question.
A rise in squat practices
As the market for practices in prominent locations continues to be fiercely competitive for buyers, it is likely than some operators will choose to set up their own practices from scratch in densely populated towns and cities.
Expect a selling spree
As we head through 2021, we anticipate that many practice owners who put their business plans on hold during the pandemic will come to the market to take advantage of the competitive selling conditions.
With some of the corporate operators taking time to evaluate their portfolios, we may also see some divesting as groups look to churn their estates.
Need further guidance?
Christie & Co has three key agents in the region: