The Cinderella of Real Estate Investments
Almost 50 years ago the investment sector witnessed the floating of Australia’s first real estate investment trust (REIT), shining a spotlight on commercial property’s ability to generate returns for individuals as well as institutions. While office and industrial assets continue to hold the limelight, emerging from the shadows is the overlooked, soon-to-be belle of the ball – healthcare property.
Healthcare property encompasses hospitals, outpatient day hospitals, laboratories, medical offices, GP clinics, medical centres, holistic health centres and aged-care properties.
Healthcare is a staple sector in our society that has an increasing demand and continuous growth forecast which has a knock-on effect for healthcare real estate assets.
Ageing population and rise of chronic diseases
Throughout every life stage, an individual requires healthcare and even more so later in life. Those aged 75 years or older incur health costs approximately five times higher than those aged 25-34 years. With an ageing population, this demand won’t abate.
In the 1960s, the average life expectancy was approximately 71 years. Today, it’s risen to 83 years. However, by 2060 it’s anticipated that those living in OECD nations are expected to live to 90.5 years for women and 87.8 years for men, increasing demand on healthcare services.
Equally, the rise of chronic diseases adds to demand – in particular, diabetes. Poor sugar control leads to a 16%-33% increase in heart attacks, a 24% increase in microvascular complications (kidney, eye) and a 27%-36% increase in death after 10 years. The annual cost of managing diabetes is $3,500 without complications but increases to $9,600 with complications.
Diabetes with complications increases emergency presentations and hospital admissions by 48% and increases mortality by 13%-30%.
What this means is significantly increased expenditure on healthcare to support the Australian population and its medical needs. The 2019/20 total Federal health expenditure is estimated to be $81.8 billion, representing 16.3% of total expenditure. In the coming years it is estimated this expenditure will steadily increase.
Forecast Federal Government Health Expenditure ($ million)
|2018-19 (estimated)||2019-20 (estimated)||2020-21 (projected)||2021-22 (projected)||2022-23 (projected)|
Source: Parliament of Australia
More specifically is the significant planned expenditure on healthcare facilities and precincts from the State Governments. Below is a summary of 2019/20 State Budget allocation on healthcare property alone.
2019/20 State Budget allocation on healthcare property
|NSW||$10.1 billion||Healthcare infrastructure allocation throughout four years (includes continuing current works, upgrades and building a further 29 hospitals and health facility projects, as well as ensuring compliance with new leasing standards)|
|VIC||$1.6 billion||Building new hospitals and health infrastructure|
|QLD||$777.7 million||Capital expenditure in health portfolio|
|SA||$619.1 million||$550 million to commence construction of new Women’s and Children’s hospital. $69.1 million will be spent over four years to reactivate the Repatriation General Hospital site|
|WA||$165 million||$161 million to redevelop Joondalup Health Campus and $5 million towards an aged care facility in Carnarvon|
Source: State Governments
Outpatient facilities can help alleviate demand on public and private hospitals. In 2017, Private Health Insurers (PHI) in Australia paid inpatient hospitals 32% more than they paid outpatient day hospitals for the top nine most common same-day procedures. According to the leading industry body, Private Healthcare Australia (PHA), substituting inpatient care with outpatient care could potentially save $315 million per annum. There have been 105 new outpatient centres opened in the past 10 years across Australia.
PHA also recommends reducing preventable hospitalisation for those with chronic/complex diseases with holistic care. This indicates a continuous demand for facilities such as day hospitals and respite care. More outpatient facilities can also potentially assist with reducing hospital waiting periods for elective surgery. Currently, public hospital waiting periods for elective surgery average is 89 days compared to private hospitals’ 25 days. Arguably, more facilities can cope with the significant demand for elective procedures.
Both hospitals and outpatient facilities also create a tertiary, complementary requirement to support their services. These are specialists that are integral to treatments including pathology providers, radiology centres, physiotherapists, pharmacies and the like. Decades ago, these specialists would be geographically dispersed but now there is a benefit to be positioned in one premise, like a one-stop-shop for healthcare needs – medical centres.
In the past 10 years, it is estimated 3,274 medical centres have been built based on the 7,985 centres listed in the National Health Services Directory with a revenue growth of 41% throughout this period. Demand for these types of properties is likely to continue.
Medical advances, new technologies and scientific developments mean facilities that were built 30-40 years ago are no longer fit-for-purpose. Unlike industrial, office and other commercial real estate assets, healthcare property needs to be purpose-built so aged buildings need to be replaced or superceded.
What has helped healthcare property move into its own lane is its attractive yields, especially when compared to other property classes. According to MSCI’s research for the December 2019 year end, hospital market yields were 6.11% and medical centres were 5.97%.
A further factor is the longer leases as healthcare assets can attract 10-25-year lease lengths whereas offices leases are generally between three and 10 years (depending on the lettable space) and industrial leases average between five and seven years. Longer lease terms provide investors with more security, knowing an asset will generate rental revenue for a long term and, therefore, more likely to deliver continues returns.
For example, a $44.6 million healthcare asset located at Riverview Place in Murarrie (Brisbane), was purpose-built in 2005 for single tenant, QML Pathology. The 10,005sqm property has been let to the same tenant since its completion and has a current weighted average lease expiry (WALE) of 16.5 years (as at June 2019).
Despite COVID-19’s impact on businesses operations, the healthcare and medical sector has remained relatively resilient. Though elective procedures were temporarily postponed, it is estimated 400,000 elective surgeries were cancelled in Australia, according to a British Journal of Surgery published paper. Reports suggest it will take 18 months to process the backlog. This gives confidence to investors as medical and healthcare tenants can continue to meet their leasing obligations.
Ways to Invest
As healthcare property has come into its own, there has been an emergence of specialist fund providers. Currently, there are two different ways to invest in healthcare assets in Australia, both of which are unlisted on the stockmarket or securities exchange.
1) Unlisted, closed funds
The fund might manage one or several specific assets. An investor can secure units in the fund during its prospectus offer period. The fund operates for a defined period of time or until it completes its objective. Investors cannot withdraw their investment from the fund. Typically, monthly distributions payments are paid to unitholders during the defined period. At the end of the period, the fund manager disposes the asset and capital returns are made to the unit holders.
2) Unlisted, open-ended funds
The fund usually invests in a number of assets. An investor can secure units in the fund at any time. There is no set period for this fund’s operation, but a continuation. Assets can be acquired and disposed within the fund. Investors can buy new units and withdraw their investment at any time, subject to the terms and the liquidity of each fund.
Interest in healthcare property is increasing, particularly among institutional investors, which is a testimony to the robust nature of the asset class and confidence in its performance. Some of Australia’s largest institutional backers in this sector include:
- GIC, which formed a $2 billion joint venture with Northwest Healthcare Properties;
- AXA Investment Manager and Grosvenor Group’s joint $500 million fund mandated to Centuria Heathley;
- HESTA Healthcare Property Trust, a $200 million equity commitment by HESTA to ISPT.
In summary, because healthcare is a staple sector in our society it will benefit from continual demand and growth, which means demand for healthcare assets will continue to grow. Healthcare real estate is an asset class expected to grow in sophistication and dominance in the investment markets.