Around this time last year, in his ‘forward guidance’ 2013, Bank of England Governor Mark Carney asserted that the bank would not consider raising interest rates until unemployment fell to seven per cent or below, which he said at the time might take three years and the addition of 750,000 jobs.
Since then, much to Messrs Cameron and Osborne’s delight, growth has picked up speed and unemployment has fallen faster than
expected. However, the growing recovery brings with it the looming spectre of an earlier than anticipated rise in interest rates – at the turn of this year, many forecasters were predicting a rate rise by early 2015. Now, some are even suggesting an increase as swiftly as October or November this year. Mr Carney remains cool, indicating that the path to any increase would be ‘gradual and limited’.
With growing debt across many markets, including the dental sector, one would be forgiven for thinking that any imminent interest rate rise would have owners and operators of dental business quaking with fear. The reality, however, would appear to be somewhat counterintuitive to the logical conclusion that higher interest rates would equal higher mortgage payments and less income from property. Conversely, history tells us that strong interest rates usually, at least at first, have a positive effect on UK property. Whilst rates impact the bottom line, factors such as future cash flows, revenue growth, and economic health can often negate the impact of minor rate increases. Economic health raises investor confidence and tends to lead to a sustained rally in asset prices.
Let us not fall into the trap that because interest rates will rise at all, this will undermine the market. Remember that any rise will come from an already low base, and as Mark Carney himself has said any increase will be ‘gradual and limited’.
As far as lending from the banks and other debt players is concerned, there also remains scope for slight increases in interest rates given the levels of operating profits and, in most cases, demonstratable debt servicing across the dental market. There are also some who believe that the recovery itself has been understated, so once again any rise in interest rates may well be offset by a better than first thought recovery, and then there are the factors from the dental sector itself.
The dental sector is one where values, lending and transactional activity are less affected by the fluctuations in the general economy – and I think the same goes for any rises in interest rates. Valuations and prices of dental practices upon acquisition are subject to influences outside of the general economy, driven more by the peculiarities of a demand-led market like few others.
My colleagues often speak and write of the specific complexities of the valuation methodologies and the pricing of practices themselves, and they relate that the dental market employs more unusual methods than most. Dentistry is a market that experiences constant and rapid change, with so many factors potentially affecting valuation.
When it comes to borrowing, although the dental industry is often referred to as a ‘green-light’ sector in terms of securing finance for practice purchases, banks will only lend against an RICS value incorporating both EBITDA and turnover approaches and not just the predicted sales price.
There is sometimes a difference between market value – what a bank-backed valuation would amount to – and special purchase value – what an individual would be willing to pay.
Indeed, the high desirability of dental practices compared to the, still, relatively low supply available, means private individuals are often prepared to pay more than corporate bidders who are interested in the profitability and performance of a practice run under associates. This creates an environment of competitive bidding which tends to inflate values and prices significantly, and there would seem to be no immediate let-up in the demand for dental practices and businesses – whatever the influence of future interest rate rises might be.