More savvy buyers emerging in a stabilising dental property market

After the widespread upheavals of the past few years, the dental property market is changing with buyers becoming increasingly savvy and careful about what they want to secure amid tough economic realities.

The market is still strong but has some stabilising ahead after the inevitable disruption of the Covid pandemic, according to property experts who are positive about how the market is performing.

 

Sellers’ or buyers’ market?

Last year, it was very much a sellers’ market with a shortage of good quality, larger dental practices, leading to competitive bidding and higher than asking sale agreements.

This is changing with a move towards more of a buyers’ market, according to Dental Elite, which specialises in dental practice sales and valuations as well as finance and recruitment.

Its director and co-founder Luke Moore says: “In some elements of the market, particularly the bigger NHS market, that has now moved more towards a buyers’ market and equally some of the heat of the market overall has probably dissipated.

“Whilst it's still competitive, particularly with mixed and private practices, often the deal terms aren't quite as competitive as they were. There are a number of reasons for that. Firstly, we’ve had the merger of two big players Dentex Health and Portman Dental Care which has removed some of the competition out of the market.

“Secondly you’ve got the situation where debt is that much more expensive, so you’ve still got private equity sitting over the top who have an expectation in terms of level of return.”

Specialist business property adviser Christie & Co agrees the market is shifting as Jonathan Watson, Director - Dental at the company, says: “There is still a lot more demand than supply in the market so it is still a seller’s market in the main, with lots of different buyers to choose from. However, some buyers are being more selective in what they choose and are more cautious on location and performance.”

 

Market performance

Those working in the dental property sector are still very active.

In its most recent annual business outlook report published earlier this year, Christie & Co said its dental team had its strongest year of performance on record. The company’s dental business completion volumes rose by 23% from 2021 to 2022, and 124% from 2018 to 2022, showing a clear growth in demand for quality practices.

In 2022, 150 offers were formally accepted – up by 50% on 2021 – and the aggregate offer value received rose by 48% to more than £930 million.

The company’s Dental Market Review 2023 published in October also said that good demand remained for quality private and mixed practices across the UK and during the first half of 2023, Christie Finance experienced a surge in borrowing demand from both newcomers and veteran operators in the dental sector.

Similar positivity can be seen from Dental Elite whose most recent goodwill report said the market was strong with demand for NHS practices in less desirable locations from independent operators.

Luke says: “The market has certainly softened and cooled in comparison to where it was 18 to 24 months ago when we came out of Covid and debt was cheap, you had people who had saved a fair amount of money going through the pandemic and banks were keen to lend. But if you're comparing it go to the market of four or five years ago, it's still significantly stronger than where it was so it's still a busy and bustling market.”

 

Corporate merging

The role of corporates in the market had reduced somewhat in the past year with mergers of some of the big players.

Dental Partners merged with Rodericks, and then Dentex Health merged with Portman Dental Care, which removed two significant market players. Earlier this year also saw BUPA identifying 85 practices for merger, sale, and closure, but Luke believes this had a positive impact on the independent market.

“Forty or so of those [BUPA] practices have either completed or exchanged contracts and are now going through the NHS and the landlord negotiations to put them back into independent ownership,” says Luke.

Jonathan recognises the change in the market players but does not believe this is a bad thing, saying: “With the corporates displaying less appetite for bigger mixed practices, that has led to some softening in the multiples being paid for larger NHS. You might describe it as a healthy recalibration because multiples were increasing steeply, but we are not seeing any particular change to prices paid for owner operated practices. Those multiples are still holding up, but often against a lower level of profit than before, due to rising costs.”

 

Inflation’s impact

A crucial factor that has hit the market is rising inflation rates with interest rates for loans to buy dental practices now being as high as 7.5%, and there is little doubt that this has had an impact.

Luke outlines the problem, saying: “Typically if you're an independent person and you are buying a dental practice, the interest rate normally starts with something like 2.5% or 2.7% plus base and that is 5.25% so you are looking at the upper 7% range as it currently stands. Just two and a half years ago, the base rate was 0.1% so if you were getting 2%, you were paying a lot less.

“If you have an associate dentist whose earning potential is probably higher than what it was 18 to 24 months ago, you’ve got someone who is earning £100,000 to £120,000 a year and they're looking at an opportunity which generates them £30,000 to £40,000 a year. But with the cost of debt depending on the kind of loan that they are taking, often most, if not all, of that is eroded by the time they have paid back the loan and the interest on the sale.”

 

Savvy buyers

Consequently, buyers are having to become wiser with their purchases, say the experts, as Cathy Murphy, Business Agent – Dental, for Christie & Co, explains: “We’ve seen more savvy buyers coming through that know what they want and what they can afford.

“Coming out of the Covid period, we saw a surge in the first-time buyers’ market driven by associates who were looking for the security of their own site and I would argue that level of engagement is still there.”

Luke adds: “Purchasers are more considered in terms of what they’re looking for. They are not quite as gung-ho in their approach to things, and you tend to get a group of dentists who are a bit more entrepreneurial.

“Rather than looking for businesses to maintain the status quo, in order to maintain their earning potential, they are having to look at opportunities where they can grow the business relatively quickly to restore what they were earning as an associate.”

 

Bank lending

Banks are still happy to lend albeit at higher interest rates in the current market, but this is not deterring independents from committing.

Cathy says: “The banks are happy to support the right acquisition. In the first eight months of the year (2023), we launched 165 practices of which 105 were agreed or exchanged.”

 

Best advice

For those who are keen to buy, there is some sage advice from the experts who recommend being thoroughly prepared and focused on exactly what the person is interested in while also being realistic.

Cathy says: “Do your research. A buyer needs to know what it is that they are looking for and to take early advice from both brokers and funding experts to be in the strongest position possible when offering on a practice.”

Luke’s advice is simple, as he says: “For someone looking to buy a practice, I would take note of the opportunities out there, be more considered and do your research before you look at an opportunity. In today's market, you either need to buy the practice at the right price or you need to buy where you feel you can add value relatively quickly.

“In order to do that you need to make sure that you ask the right questions on the viewing and recognise where those opportunities are so you can capitalise on them quickly.”

As for good advice for sellers, the experts recommend sharp focus on the most recent year, as Jonathan says: “Quite often, practices will provide three years of accounts going up to the last financial year, but often banks will only lend if they have the revenue data up to today’s date. They will want another six, seven, eight months of data just to show the trajectory and performance of the practice and to make sure the buyer can afford it against the serviceability of the loan.

“Take advice early. Quite often, there is a lot you need to get in order with your solicitor and accountant, for example, the structure of your company or partnership, and all the wealth management and investment advice as well, tailored to your situation.”

 

Predictions for 2024

The coming year is likely to see the market stabilise and grow in strength as Luke says: “The correction in pricing in the market has largely already happened so I think the market will stabilise over the next 12 months or so. We are seeing a bit more overseas recruitment coming back into the UK.

“I think as that changes, you will start to see a market particularly for mixed and NHS, that will start to recover relatively quickly over the next 18 to 24 months.”

Jonathan predicts more corporate activity, explaining: “The corporates have been fairly cautious in the last couple of years, but they have big ambitious private equity houses behind them. These investors don’t just want to get their money back, they want to make a significant return on their outlay by acquiring rapidly.

“If they want to get to those numbers, they will have to start paying higher multiples and more attractive tie-in terms than what we have seen in recent months. I’m sure we will see a much more competitive offering from the corporates in the months ahead.”

Cathy adds: “I suspect this year we will see the emergence of some newer groups and those looking to expand their portfolios. The independent market is still active as shown within the recent BUPA disposals with all the practices selling very quickly.”