Healthcare sector in fit shape for investors
Institutional capital is increasingly targeting healthcare in Australia as the sector defies the global economic slowdown
Investors are expanding their portfolios into Australia’s healthcare sector, taking advantage of its growth in an otherwise stagnant global economy.
In Australia, where the sector makes up about 10 percent of GDP, healthcare showed over three percent wage growth in the third quarter, “well above” any other industry, according to the Australian Bureau of Statistics.
With wage growth tied to economic growth, the data reflects strong demand for healthcare services.
“We’re living longer, our bodies need more long term maintenance, and our population is ageing and multiplying faster than ever,” says David Bruce-Clarke, Senior Director, Alternative Investments – Australia, JLL.
“That demand is constant, but the slowdown in other real estate sectors has also contributed to the accelerated interest in healthcare real estate.”
Last year, disclosed deal values in healthcare rose 11 percent to $US447 billion globally, while deal volume increased by almost 20 percent year over year to 316 transactions, according to Bain & Co.
The rising volumes are reflective of a broader shift in the allocation of capital to commercial real estate. Alternative asset classes such as healthcare and student housing, which institutional investors once avoided because of their highly specialised function, are now piquing interest as investors hunt for returns in a persistently low-interest rate environment. They are also encouraged by sustained tenant demand, including greater healthcare spending by baby boomers.
Institutional interest in healthcare cements its status as a mainstream investment class.
One of Australia’s largest institutional fund managers, Queensland Investment Corp, recently announced healthcare will be a single core theme across its asset classes of private equity, infrastructure and real estate as it eyes further expansion into the sector.
The firm’s chief executive officer Damien Frawley said there was a clear gap in the market.
“The government and the weight of aged dependency on the government is increasing, at the same time as the tax base of government is reducing, so what that tells us is there is a gap and an opportunity for investment capital to participate in that sector,” Frawley told The Australian Financial Review.
Earlier, the world’s largest real estate investor Canada’s Brookfield Asset Management acquired Australia’s second largest private hospital operator Healthscope for A$4.4 billion, using a A$2.5 billion sale and leaseback of 22 of its properties to fund the deal.
While industry stalwarts Australian Unity and Northwest continue to lead the sector, the market is widening. Dexus, better known for office investment, is building a A$1 billion North Shore Health precinct in Sydney, due to open in 2020.
Alternatives specialist Barwon Investment Partners, which launched in 2014, added a second fund to its portfolio in 2016, targeting over A$500m in healthcare. While Centuria, which recently purchased a 63 percent stake in Heathley’s A$620m healthcare fund, has also been public about its growth ambitions in the sector.
In a sign that competition is intensifying, major healthcare operators have also been busy consolidating over the past few years in a bid to achieve scale.
Beacon on the horizon
Healthcare compares well against core real estate sectors, says Bruce-Clarke.
”Healthcare offers a greater margin on yield compared to office, retail and industrial assets, yet still presents a stable, long-term investment option with cash flow,” he says. “Typically, lease terms are longer and more secure, downtime is less prevalent and incentives – while they’re still in the market – are less burdensome.”
Other factors driving the sector in Australia are an ageing population requiring greater non-hospital medical care; government-imposed schemes such as the Medicare surcharge and Lifetime Health Cover, which incentivise people to buy private health insurance; and the dwindling number of public hospitals.
Meanwhile, new investment opportunities are cropping up due to the need for modern medical centres to accommodate procedures that don’t require overnight stays, medical data that requires specialised storage, and the growing number of GPs, physiotherapists and dentists cropping up in traditional real estate spaces, such as shopping centres.
As is the case with other alternative real estate sectors, relatively high returns reflect the perceived risk of operating the assets, says Bruce-Clarke.
“Operational considerations have deterred some investors, but those within it have formed a good understanding of their tenants’ businesses and off the back of that, solid operator relationships. It’s a mutual recognition that drives value for both operator and owner alike.”