Luke Moore: The rising tide – what does this mean for dentistry?
At the time of writing, the Bank of England (BoE) has raised interest rates from 1.25% to 1.75% in a bid to manage soaring prices. This is a dire turn of events for the economy, with the BoE predicting a recession that will begin later in the year – the longest recession since 2008.
Increasing gas prices, following the Russian invasion of Ukraine and the restriction on gas supplies to Europe, have largely been blamed for the rise in inflation (currently 13%), which in turn has prompted a higher interest rate.
It has been theorised that the BoE may have to lift rates as high as 3% to tackle inflation, but others believe they may peak at the current 1.75%. What does this mean for the dental sector?
A number of dentists will feel the impact of these rate increases on any commercial lending they have, as commercial lending rates aren’t usually fixed. Equally, over the next two or three years, a lot of mortgages will be reaching the end of their fix-term periods, and many people will be paying much more when they re-mortgage.
It has been suggested that those on both typical tracker and standard variable rate mortgages would be paying an additional several hundred pounds every year. Correspondingly, people will feel this in their pockets affecting their spend, and further hikes are anticipated.
Good news for the healthcare sector, commercial lending rates are still cheap when compared to other options. So, when you consider that a lot of dentists are borrowing commercial debt, between around 2%-3% plus BOE base rate on average, this is still incredibly cheap debt, especially when commercial debt is tax deductible.
Lending is on course to become more expensive, but it’s unlikely that it’s going to become more difficult to borrow. Banks are encouraged to lend more money to keep the banking wheel going round, and the dental market is considered one of the few green light sectors, which banks tend to gravitate towards in times of difficulty.
Wesleyan Bank announced last year that they had agreed a sale with the Hampshire Trust Bank (HTB) and closed their commercial lending arm. While Wesleyan Bank was a huge name in healthcare lending, they were not lending quite as much as you might have expected, so the impact on the dental sector should be fairly modest.
The only places where difficulties might arise is in relation to trickier to lend deals which typically fell to Wesleyan but which will now likely go to another challenger bank but with less keen pricing. It is also anticipated that the new owners of Wesleyan Bank will be keen to offload existing debt which were often deals with lower contribution levels.
For those who have already borrowed money from them, Wesleyan Bank may be open to a negotiation on leaving the pre-agreed commitment period. However, this may be good news for those whose asset value has increased, or if they have more available to contribute because they’ve owned a business for a number of years and have a better loan-to-value ratio.
In turn they may be able to offset the rise of interest rates by taking a lower business margin on a more competitive deal, with a mainstream lender. Many banks are actually looking to return to the dental sector, because, as with most things in this market, it’s all cyclical. So, while Wesleyan Bank is out, names such as Metro Bank and HSBC are striving to perfect their dental offerings.
There are many other lenders out there also showing a keen interest in the healthcare sector and offering bespoke deals, albeit at a higher cost, as they can see that the risk element is reduced.
Buying a practice will become a more expensive endeavour. The question to ask is: could this impact goodwill values in the short term? Buyers expect a certain return, so, will the only way to maintain that return be to pay a lower price for the asset in the first place?
However, to balance this, in a hotly-competitive market – where the bank of mum and dad actually could be the biggest lender – the rise in interest rates may be unlikely to significantly impact the market, and the sector may be strong enough to resist this change either way, especially considering the level of competition between the private equity backed buyers.
To put things in perspective, if you consider that the equity market expects a certain level of return, something has got to give somewhere. When considering inflation pressures on the dental sector that has already started to manifest in materials, laboratory fees, associate remuneration, and the costs of employed staff, it remains to be seen whether patient fee rises will stomach a rise to offset this or whether ultimately it will hit practices’ bottom lines.