As the dental market emerges from a prolonged lockdown due to the Covid-19 pandemic, it is becoming clear how the property market has weathered the storm.
The signs are good with indications that selling, purchasing and value of dental practices have, despite temporarily dipping, all survived pretty much intact despite the pandemic, although experts do not anticipate a sudden and significant growth in the market for the rest of 2021.
According to the latest Dental Market Review1 by specialist business property advisor Christie & Co published in March 2021, although the first national lockdown in March 2020 due to the coronavirus, led to an “instant and dramatic reduction in dental market activity” matters slowly but surely started to improve as the year progressed once it became clearer how practices were to start reopening.
During the lockdown period, the company says it saw an increase in enquiries from first-time buyers and a rise in their age profiles, suggesting that more experienced associates were looking for greater security through practice ownership.
Despite upheaval in the market during 2020, sale prices also held up well, says Christie & Co, with pre-Covid-19 levels of demand returning in 2021 for what it describes as ‘quality’ practices and indeed, there was a slight increase in the average multiple (a measure of value) paid for larger practices, in contrast to the average multiple paid for owner/Principal led practices, which reduced slightly.
The report says: ‘Considering the enormity of the pandemic and the huge disruption it has caused, the dental market remained remarkably resilient with transactions put on hold rather than abandoned.
‘The dire predictions made by some commentators that prices would crash have proved to be well wide of the mark and most buyers took a long-term view and re-engaged negotiations soon after practices re-opened in June.
‘Subsequent lockdowns in November 2020 and the New Year have, to date, had little or no negative impact on demand or transaction volumes as dental practices across the UK have remained open, albeit operating within a restricted trading environment.’
Dental Elite, the leading dental valuer and sales agency, agrees that the market has got back on its feet.
Its latest Goodwill Survey2 published in April 2021 found since the 2019 survey (the 2020 survey was not released due to the pandemic), the average sale value broke £1million for the first time, up £93,667.
According to a commentary accompanying the survey: ‘To summarise where we are at present the market is incredibly acquisitive with some incredible deals for finance available across a number of lenders.’
The company’s co-founder and director Luke Moore says: ‘I think the dental property market has recovered.
‘In terms of the volume of transactions , we agreed 40 transactions in the last quarter running until the end of March and whilst completions aren't running at quite the same level – completions are currently around 24 – that is an indicator of the market’s recovery when you’ve got agreed deals outpacing completed deals because normally they should be running, roughly, at parity.’
In addition to the obvious problems for the property market caused by dental practices having to close for several months last year, there were other indirect effects such as fewer Care Quality Commission staff processing business transitions and capacity issues with specialist dental lawyers.
Despite this, Moore says: ‘In general, I would say that a private practice, for example, now is probably worth more than it was in February 2020 overall. That has recovered.’
Moreover, now that NHS England has clarified its expectation of 60% UDA target performance until October of 2021, there is no hesitancy over NHS practices, he adds.
A large element of recovery appears to be due to increasing numbers of associates deciding to take the plunge and buy their own practice for the first time.
Last summer, Christie & Co reported a rise in associates buying dental practices and a 59% increase in buyer registration3 figures in the dental sector since lockdown measures began to ease in the UK in the period between late April and late June 2020.
Dental Elite’s Moore says: ‘There are a number of factors. In the first instance, you've got a lot of associate dentists who didn't really get any government support if they worked privately in the last lockdown who said ‘I don’t want to be in that position again’ so they are looking at potentially buying a dental practice.
‘While the NHS associates did get paid, to a large extent a lot of them were at the mercy of the generosity of their principals relying on government NHS advice and there are still some associates out there who work in the NHS who haven't been paid for one reason or another or the principal has made reductions.
‘Those kinds of things are fuelling people saying I want to buy a practice and run my own ship.
‘You’ve then got a number of people from a financial affordability perspective who haven't had the ability to spend money on other things [during lockdowns] and suddenly found themselves with a lump sum of money.’
People in such a position have, therefore, been able to build up a bigger deposit than they would have done otherwise so they are coming into the market earlier than maybe they would have done, he adds.
Paul Graham, Head of Dental at Christie & Co, said at the time of the buyer registration figures being released: ‘The Buyer Registration Index, which shows an uptick in new users, suggests an increase in activity and that buyers are actively starting to look for new business opportunities.
‘As lockdown measures are slowly easing and practices are reopening, some trends are beginning to appear. For example, certain owners who have enjoyed not being clinically active within their practice during lockdown are now looking to exit from the profession, and there is a noticeable return of demand from corporate buyers looking to buy and build again, with a strong appetite for quality practices.’
Another important factor at the moment which may explain why the dental property market is doing well is due to the fact that borrowing is the most affordable it has been for years.
During a recent BDA webinar on buying and selling dental practices in the ‘post-pandemic era’ held on 25 March 2021, one of the speakers Malcolm Swan, Senior Healthcare Banking Consultant at Lloyds Bank plc lending to the healthcare sector in England, was asked if it was more or less expensive to borrow money now than in February of last year.
Swan replied: ‘It's cheaper for three reasons. The first one is that the base rate has come down and you’ve got a much lower base rate so it’s cheaper naturally for that.
‘Also, fixed rates have come down so if you wanted to hedge against interest rate rises, they are lower than they were, and our interest margins are also lower so we are lending more cheaply this year than we did last year. It's a good environment to borrow money.’
Moore says: ‘You can borrow money cheaply just now. Even the most expensive of loans are probably 3.5% above base. In the context of lending over the past 20 to 25 years’ timeframe, that is really cheap.
‘You’ve got a number of banks keen to lend who may be willing to lend up to a million pounds unsecured on as little as a 10% deposit for the right kind of applicant.’
Buying a practice for the first time can be daunting but has been worthwhile according to Lauren Harrhy, who bought her own practice – Sparkle Dental Centre in Pontypool, Wales – in August 2017.
‘It’s really hard work but it means that you can create an environment in which you want to work in,’ she says. ‘You are not having to find a practice that fits you, but you make a practice that suits you. That’s what I’ve enjoyed most about it.
‘It has taken a couple of years to get the team around me that I wanted and it doesn't just happen overnight. As for the process, it wasn’t too bad for me. There wasn’t much in the way of negotiation or anything because I was already an associate in the practice.’
As for her advice to other dentists interested in taking the leap into buying their own practice, she says: ‘I would say use a specialist dental solicitor and dental accountant. I got other professionals involved and they didn’t seem to grasp a lot of what was needed. Dentistry is quite niche.
‘I would also say get as much advice as possible, read all of the BDA help section and its advice sheets on this, and try to find a mentor such as someone in the area you get on with well who has already got their own practice. They can help you because as much as you think you know as an associate, there is lots and lots you don’t.
‘I still ask questions about things I don’t understand about running a practice and I’m four years in! I would also suggest getting in an expert HR firm.’
Harrhy, who is also a member of the BDA’s Principal Executive Committee, is pleased that she got her own practice despite ongoing pressures, explaining: ‘There is a sense of achievement at the end of it but everyday, there’s a whole new drama! It never calms down.’
Dental Elite’s Moore also advises a first-time buyer to be careful setting their budget.
‘Know what you can afford and understand how you can afford it,’ he says. ‘You need to learn and understand the importance of debt service cover and how that then feeds into how much you can borrow and whether you can afford to buy a practice.’
As a buyer, there is no such thing as exclusivity, he adds, saying: ‘You should cast the net as wide as possible. The more practices you see, the more you are going to be able to understand the market and the more likely you are to find the practice you want.’
Traditionally, NHS practices have been valued higher than private practices but it seems that the private sector has been catching up recently, as Moore explains: ‘Up until about three years ago, NHS practice multiples would have been higher than a private practice multiple.
‘Then before Covid, we got to a position where because of all the challenges surrounding recruitment in certain areas of the UK and because the pay rises awarded to NHS dentists were becoming more modest, the margin for NHS practices was getting ever smaller and we saw private practices – in value terms – overtake NHS practices in terms of popularity at the bigger end of the market.
‘As we went into the Covid pandemic, that went slightly the other way because people wanted the security of the income and private practices made nothing for three months unless they had a dental plan.
‘Now what we’ve seen is people are fairly comfortable and despite two further lockdowns, dental practices haven’t been required to close so we’ve seen it go back to where it was in February of last year where private practices are probably edging NHS practices.’
Goodwill is the intangible asset that a person buys with a practice whereas EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) forms the basis of the calculation for what goodwill should be paid.
When considering EBITDA, some believe this is becoming increasingly important when it comes to dental practice valuations.
Moore says: ‘If you go back 10 years, goodwill would have been valued on the basis of a percentage of turnover whereas with the increasing consolidation of the sector and the professionalisation of it from a business perspective, we’ve seen the method of calculation is now almost exclusively EBITDA focused.
‘It’s how most businesses are valued outside the dental sector so it’s a far better method.’
The property market has a positive future although it is unlikely to grow massively over the remainder of 2021, say experts, with the market continuing to maintain itself.
Moore argues: ‘I don’t think we’ll see any waning of popularity of investing into the healthcare sector. I think we will see a maintenance of the market.
‘I'm not convinced that we are going to see really big growth in the market because I don’t think that growth is there to be had, but provided that dental practices manage to maintain their revenues and once they’ve got the competition again from people being able to go out and go on holiday and have revenue, then I think that we will still see the market remaining resilient, remaining where it is and lots of activity.’
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