BDJ-December20-Dental Elite-FYI
Signs of recovery in dental property market despite COVID-19 pandemic
By Adrian O’Dowd
As the COVID-19 pandemic has taken its toll on many aspects of life (personal and professional) this year, the property market has also been affected but signs of a strong recovery are emerging.
The government’s decision in March to implement a national lockdown of most businesses meant that dental practices had to close with patients only able to access emergency dental treatment via urgent dental care hubs.
One of the consequences of lockdown was the overall property market being, effectively, frozen, and dental property found itself similarly affected until practices were able to reopen in June.
Property prices fell and housing market activity reduced sharply but the situation appears to have improved since the summer with easing of national restrictions.
In September, specialist business property adviser Christie & Co said it had seen increased buyer appetite from private associates who were choosing to buy their first dental practice as part of a growing demand for property from the independent market.
We asked two experts – Paul Graham Head of Dental for Christie & Co, a leading specialist advisor for buying and selling businesses in healthcare, and Luke Moore, Co-Founder of dental consultancy firm Dental Elite – their views on how the pandemic and resulting restrictions have impacted on the dental property market.
Q: What impact have you seen on the dental property market as a result of the COVID pandemic?
Paul: ‘The pandemic was an unexpected shock to the start of the new decade. It was an unprecedented disruption to commerce and most industries. While some businesses were struggling, equally, we have seen some businesses thriving and particularly those that were related to healthcare.
‘The dental market unfortunately hasn’t gone unscathed as many practices closed their doors to patients and worked on a triaging system. That had a major impact.
‘For ourselves as a company we came out of 2019 – which was a very strong year – with a number of deals in the pipeline into 2020. It was encouraging that very quickly there was a realisation that, despite the pandemic being an unexpected blip on performance, there was a mutual arrangement between buyers, sellers and intermediaries involved that we just ‘pause’.
‘The pipeline remained robust and there were very few deals dropping off which was a relief.’
Luke: ‘I think there’s been a number of impacts. As we approached the pandemic going into March what we saw, in essence, was the market freeze, so there was very little, to no activity or completions from the last week of March through until the beginning of June.
‘There was the odd practice that completed but they were scarce considering that normally about 600 practices a year would change hands and you would normally expect a spike at the end of March to dovetail in with the end of the financial year. We didn’t get that this year.
‘As we came out of June, we saw almost the opposite happen with an increased level of activity of people coming into the market who wanted to buy practices.
‘You’ve got associates who didn’t benefit from the self-employed income support scheme so they were left high and dry if they worked in private practice throughout the initial period of lockdown. A lot of them took the view that they would rather steer their own ship going forward so we saw a surge in both new buyers registering but also buyers who have probably sat on the database who then decided they were going to pursue the acquisition of a practice more seriously.
‘We saw a number of people who would have perhaps invested in other asset classes who then said we’re going to move money more towards the healthcare sector because we think it’s a safer sector.
‘Completions and actual practices properly transacting didn’t really kick back in until September. It was almost like someone switched a tap on and said okay, we can get on and start completing things.
‘Since then, completions have gone back up and we are seeing practices complete regularly. We are still not at full pelt and we’re probably running at 70% of the volume of completions that we would expect to see if this time of year.’
Q: Did the pandemic – especially during the first lockdown in March – deter dentists from buying or selling their practices?
Paul: ‘It was an initial concern but very quickly we saw a pattern emerge that was quite encouraging. From a buying perspective, there was quite a significant wave of new associates who made inquiries about purchasing a practice and I think the reason for that is that they looked at their fellow principles for whom there was a lot more government support available.
‘The self-employed nature of the associates meant they were they were stuck in the sidelines ever so slightly, so many were taking that leap of faith to secure the future within the profession.
‘In terms of sellers, we did see a little bit of nervousness from people who were recognising that they had a good business but was now the right time to sell?’
Luke: ‘I think it just meant that everyone sat on their hands for a period of time. I wouldn’t say necessarily it was a deterrent. Lots of people were concerned about what the impact would be economically, particularly for private practice. Their income just ceased for that period of time unless they had an insurance policy for business interruption which would pay out.
‘There was concern that private practice might not recover as quickly as it has done whereas in actual fact, the opposite has happened. Because NHS practices are only having to deliver 20% of their activity levels, you’ve got a lot of people who would have otherwise accessed NHS dentistry who are now going into the private sector because they can’t get NHS appointments.’
Q: What has happened to practice values – did they dip and are they now recovering?
Luke: ‘Practice values have recovered pretty quickly. The pendulum of popularity, which was swinging away from NHS dentistry in February, has probably swung back the other way for the time being. The NHS practices were very well looked after and they maintained 82.5% of their income throughout the pandemic.
‘You’ve seen people now who like the idea of NHS practice, whereas otherwise they maybe would have bought more privately than they did before but equally, we have now seen private practice recover very quickly.’
Paul: ‘It’s been a dire prediction from many buyers who had a vested interest in the sector that the values would plunge significantly.
‘However, we have to look at what has created the demand in the market place – the multiples that we’re currently achieving. Up to pre-COVID, that was because the demand outweighed supply and that’s still a formula that sits well now.
‘Some of those practices that we’ve seen come on board during the summer and the premium prices that have been received are comparable to that of pre-COVID, so practice value have definitely not dipped. It’s a recovering picture.’
Q: Given that dental practices had to endure financial losses because they could only provide emergency dental care earlier this year and practitioners have had to pay for new equipment to expand patient access, has that impacted on the desire to buy or sell dental property?
Paul: ‘I think a lot of these businesses have now become future proofed to an extent. Whilst there’s been capital expenditure required in order to restructure, set up and be adaptable to what’s going on, that’s a safe investment to make.’
Luke: ‘What people want to see now is a practice that can operate. When people are looking to buy a practice, they are looking at it saying if I was having to run the practice in line with the current COVID-19 guidelines, could I maintain income and if the answer is no, then that acts as a deterrent for sale.
‘With regard to selling, you’ve got opposite effect – you’ve got people who want to sell because they don’t want to deal with the COVID-19 guidelines.’
Qs: How easy or difficult is it going to be for the market to get back on its feet?
Luke: ‘From the goodwill and business valuation perspective, I think we’re more or less there. That will probably happen by the end of March [2021] when I think we’ll see a market that is probably similar to where it was in February of last year.’
Paul: ‘We are looking at the situation on a case by case basis and we see certain practices in better financial shape than others. It’s something that because of how it is future proofed and how it has emerged probably stronger than it was pre-COVID, those businesses are going to be in high demand.
‘While there are success stories going on of practices achieving premium prices, we have to reflect value on certain practices that aren’t trading as well just now. That’s always an opportunity for a buyer to transform that type of business.’
Qs: Is there now growing demand for practices and from whom?
PauL: ‘There’s a bit of a two-tier market appearing. If we look at corporate buyers, at any given time they have accounted for about 15% of the market and from a transactional perspective, we see that stat remaining quite consistent.
‘The market is dominated by independent buyers and they generally have a ceiling height in terms of what they can afford and what bank support is available for them. You naturally hone in on corporate buyers when you have a practice of a certain size and value and typically, you start looking at those transactions and we have a fairly long list of corporate, semi-corporate or PE [private equity] backed buyers who are keen to acquire.
‘In terms of demand going forward, there’s a lot who are going to be making up for lost time particularly during the closure of the initial lockdown.
‘Equally when associates are seeing the market recovering, they are probably seeing fellow colleagues buying practices and want to jump on that bandwagon quickly as well. As we trade out of this now with a vaccine on the horizon, if you look at the healthcare sector, the pandemic has heightened the importance of healthcare in general.’
Luke: ‘It’s a real mixed bag. As it stands at the moment, we’ve agreed 54 transactions since we came back out of lockdown since the beginning of June. In the main, 11 of those are to consolidators with more than 20 practices already in group.
‘You’ve then got another six or seven which have been agreed to people who are buying their fourth, fifth or sixth and up to tenth practice and then the balance is with people buying their first second or third practice, so the demand is there from all sectors, but clearly the fundamental element of what we do is still to the independent practitioner.’
Qs: How important is it to have the support of property experts and accountants when considering buying a dental practice?
Paul: ‘Aside from our own services, other intermediaries involved in the sector such as dental accountants and dental lawyers – they speak the same lingo amongst the profession and they are under the skin of all things dental. In a transaction, that is vital. In the operational side of a business, it is equally important.
‘An accountant integral to the sector will be able to analyse a business on a six-monthly basis year-in and year-out just to make sure that the business is performing within sync of the industry averages that we are seeing.
‘When that comes to our own services, Christie & Co are the only RICS [Royal Institution of Chartered Surveyors] regulated agent in the whole of the UK both for valuing and selling practices and it’s with that code of conduct that we have to give accurate and professional advice.’
Luke: ‘We are looking at dental practices all day, everyday so we recognise the trends. I think it’s very easy at the moment for some people to take advantage of the situation and we did see that going into COVID where we saw a number of groups who started to reduce offers, explaining that they felt because of COVID-19, goodwill valuations had crashed.
‘To people who aren’t doing this every day, it’s quite easy to listen to the excuses and in some respects there’s some valid arguments but the reality is a business is always worth what someone is prepared to pay for it.’
Q: What do you think the market will look like in six months’ time?
Paul: ‘I think we’re going to see springtime with the vaccine emerging and that will safeguard a lot of healthcare related businesses.
‘We’ve already seen on the news about the hundreds of thousands of missed dental appointments and the publicity around a dental practice and the importance of oral healthcare has been heightened quite significantly.
‘As we fast forward six months in coming out of this pandemic, we’re going to see a very lucrative market within dental.
‘These businesses that have now got under the skin of how they operate. I think they are going to emerge very strongly from this pandemic.’
Luke: ‘There are a number of other factors that are affecting dental practice valuations and mainly it is the potentially touted changes in capital gains tax. The Office for Budget Responsibility has done an assessment of capital gains tax and made recommendations potentially for it to rise to assist with paying for the COVID pandemic.
‘I don’t think the change is going to be that great but if that change did happen, I think we’ll see a big reduction in the supply of dental practices coming to market because the incentive to sell isn’t there.
‘If you’ve got to sell your practice and pay the same rate as you pay on income tax, I think you’ll see a lot of people hold off for two to three years to really benefit from the COVID recovery and then go on to sell, so we’ll have a blip for a couple of years with less practices coming to market.’
