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26 May 2023

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What is the impact of high interest rates on the cost of borrowing for GPs investing in their premises? 

A medical specialist accountant advises a doctor looking to better understand the risks of GP property investment

Question from Management in Practice reader:

I’m a GP considering buying a 25% share of my GP premises. I know that investing into the surgery is worthwhile and can yield a stable income. But I’d like to understand more about the effect of current high interest rates on the cost of my borrowing. What are the risks and do they cancel any potential benefit?

Also, what other financial factors should I be thinking about if I do go ahead and make the decision to invest?

Answer from Andrew Pow, Director Healthcare at Mazars:

Generally, investing in a GP surgery has always been seen as a stable long-term investment and that position has not changed despite short term economic pressures. It is worth remembering that this is a property investment where the rent is backed by the government for the long term and historically rent has always increased.

At present, it can be difficult for new partners to find individual loans to buy into premises and in addition the interest rate for unsecured borrowing can be at a level where the rent does not cover the full interest and capital repayments on the loan. However, this is a long-term investment and hopefully overtime rent will increase and interest rates may stabilise/reduce in the future. If the property is valued correctly then any differential should currently be minimal.

Anyone considering a premises buy in needs to consider a few things:

1. Bear in mind that the interest is a tax-deductible business expense. You will get tax relief on at your marginal rate of tax.

2. Over time your equity will hopefully increase as the loan is paid off and the value of premises rise so this can be seen as a savings plan which you will get when you leave the practice.

3. Under the notional rent scheme, the rental income on the premises can be revalued every three years. Rent reviews for other tenants such as pharmacies may also result in additional income over time. Practices need to keep on top of these review dates to maximise income received.

4. New partners do need to consider how they exit the premises in the future. Retaining partners is therefore important to keep the practice business stable. You also need to ensure the property remains relevant for modern general practice.

5. At the moment, there appears to be some lack of clarity in political thinking of the model of general practice going forward. You should always remember that general practice needs premises, and they will need to be owned by someone. There is an active market to sell to larger investment companies now, which to us, indicates that fundamentally property investment remains good.

It is essential for anyone looking to invest in GP premises to take full advice and understand the implications of their investment. If there are issues to do with accessing individual borrowing, then there are alternative models available that allow the practice to borrow the money but then allocate specific loans within the partnership agreement internally. Banks remain happy to loan where lending is secured on premises which  can overcome some of the short-term interest problems we currently face in the marketplace.

Visit our Ask an Expert page for more Q&As, or if you have a question you’d like answered then do get in touch.