Despite the doom and gloom, pharmacy continues to exhibit strong returns. Yield rates (or capitalisation rates) continue to hold strong and prices being paid for pharmacies are consistent with prices being paid over recent years. Having said that, it is important that as a pharmacy owner, vendor or buyer, you understand what has occurred since the GFC and how it is affecting the pharmacy market.
Pharmacies In Distress:
For a long time it was near impossible for a pharmacy to be in financial distress. Those that did fall into difficulty, often fell foul due to owner specific financial issues outside pharmacy. However this is no longer the case.
It is widely acknowledged that more pharmacies were placed into administration over the last year than the last 10 years combined - most of those in NSW and most of those in large shopping centres. The reasons for this can be discussed in an article on its own, however the impact and resultant concerns to lenders will have lasting impacts for all pharmacists.
The fact that a significant level of pharmacies have gone into administration results in a large level of "bad debts". As such, the level of scrutiny being placed on new pharmacy loans has increased significantly.
Retail In Decline:
Another impact of the GFC has been the decline in retail sales. For many pharmacies, particularly those in shopping centres with high proportions of OTC sales, this has had a strong impact on their profits.
Many of these businesses have a high reliance on retail and pay huge rents to secure premises that are conducive to retail trade. However, when OTC sales are in decline and rents continue to rise at levels greater than CPI, the resultant effects on probability are poor. As such, demand for these sites has been limited - this is in stark contrast to earlier in the decade when shopping centre pharmacies often sought a premium in the market.
As a vendor, it is important to understand that these businesses have lost their appeal and often rely on purchasers who have capacity or experience in the market to make the necessary changes and ride the retail cycles. As a buyer, these businesses are selling on their bottom line and hence still do present good "buys" - but be wary of the rent reviews and approach these opportunities with caution.
Bank Lending:
Banks still have an appetite for pharmacy lending. The industry represents one of the few sectors that is "sponsored by the government" and in a sector that is due to experience continued growth with the ageing population. However it is obvious that some banks (particularly based on geographic regions) are withdrawing from the market.
Feedback from some banks have indicated that they will not lend on pharmacy transactions below certain capitalisation rates (see Looking For Finance? Work With a Financier Who Wants to Back the Industry).
These statements are not a reflection of the market for pharmacies, but rather the bank's appetite for lending. These banks are pricing themselves out of the market. The market is what the market is and pharmacies are transaction well outside those yields - particularly in Melbourne and Sydney. It's not the bank's role to control/price the market - they should observe the market and make decisions on the level of exposure they are willing to commit to. What these banks are effectively doing is changing their Loan-to-Value (LVR) Ratios and pricing themselves out of the market. If you're looking for finance to buy a pharmacy, ensure that you work with a bank/lender that has an appetite for pharmacy lending. This may not always be the banking partners that haver traditionally been strong in pharmacy.
As a pharmacy buyer, good opportunities are still available on the market. However, it will require more effort on your part (and that of your advisers) to ensure that the purchase goes through. To ensure the best outcome, work with a team of experienced pharmacy advisers to ensure that you get a goof business at a great price and that you work with a lender who has confidence in the deal.
As a vendor, take heed that the market remains strong, but that support for buyers is limited. Well-pried pharmacies continue to sell quickly and often it is possible to get a GREAT price in the sale of your business. But being realistic about your expectations and working for the best case scenario will ensure that you achieve the best result in the sale of your pharmacy.
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