Rise in Healthcare Property Investment - The burgeoning demand and securitisation of Australia's healthcare assets - m3property
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Rise in Healthcare Property Investment The burgeoning demand and securitisation of Australia’s healthcare assets
Key Investment
Drivers
1. 2.
AGEING POPULATION AND FAVOURABLE ASSET CLASS
DEMOGRAPHIC OUTLOOK FUNDAMENTALS
The shifting demographic landscape A historically ‘recession-proof’ sector
is increasing consumer demand for offering high income certainty via long
Introduction healthcare services and requires
continued public and private
WALEs secured by proven tenants,
consistent rental growth and
sector expenditure. minimal incentives.
Relative compression of Australia’s core property class returns
coupled with a ‘perfect storm’ of investment drivers has triggered
unabated demand for local healthcare assets. The healthcare
property sector has stepped into the limelight, offering attractive
yields and low income risk in a market underpinned by a significant 3. 4.
%
driver; our ageing population.
Existing institutional grade investors are capitalising on a traditionally fragmented
market, securitising assets which are increasingly positioned within both passive
and active investment vehicles. Surging demand is primarily targeting quality
investment grade assets including private hospitals, day hospitals, residential aged
LOW INTEREST RATES COMPARABLE FOREIGN YIELDS
care facilities and related medical infrastructure.
AND THE WEAKER DOLLAR
The reduced cost of capital is
Key players: Increasing foreign interest due to
enhancing returns for local and global
» Vital Healthcare/Northwest » Centuria Heathley investors. the attractiveness of local yields
» Australian Unity » Cromwell/LDK Healthcare compared to those overseas and lower
» Barwon Investment Partners » Arena REIT cost of investment due to the weaker
» Dexus » AXA IM/Grosvenor Australian dollar is redirecting a portion
of demand previously focused on
Outlook external markets.
We foresee continued consolidation and development of such assets, with supply to be
driven by existing investors and new market entrants. Positive market fundamentals, an
attractive demographic outlook and high comparable yields are driving domestic and These key investment drivers are discussed in further detail overleaf.
foreign institutional investment into this rapidly growing property sector.
Page 3 | Rise in Healthcare Property Investment
Ageing population and POPULATION FORECAST (70 YRS +) - ANNUAL GROWTH
1. demographic outlook 35,000
30,000
Annual Growth
25,000
Australia’s demographic profile is projected to see 20,000
Australia is forecast to 15,000
further ageing over the next decade, with continued
population growth being heavily skewed toward see population growth of 10,000
5,000
net overseas migration (73.0% of the total increase), 8.6% overall and 19.50% for 0 Source:
rather than natural increase (27.0% of the total
increase) according to the ABS (September 2019).
people aged 70 years and 2017 2027 2037 2047 2057 2066 m3property
NSW VIC QLD SA WA and ABS
over between 2017 and 2022.
POPULATION (MILLION) - AUSTRALIA
Favourable asset class
Overall 70+
2. fundamentals
24.60m 2.60m
Jun 2017 Jun 2017
Existing healthcare assets currently attract service providers, increasing patient treatment
significant interest from institutional investors, and turnover efficiency.
including healthcare focused funds and fund » Healthcare has become a growing substitute
26.73m 8.6%
3.10m
19.50% managers looking to diversify core asset for traditional retail tenancies. Total floor space
Jun 2022 Jun 2022
Growth 17-22 Growth 17-22 portfolios with intent to decrease overall risk and dedicated to health and wellness uses has
boost long-term investment returns. increased over the last three years in 60% of
Australian shopping centres according to Urbis.
» Healthcare assets generally hold a longer
28.77m 7.6%
3.62m
Jun 2027 Jun 2027 16.63% weighted average lease expiry (WALE)
Growth 22-27 Growth 22-27
compared with traditional investment asset
classes. As shown in the chart overleaf long
WALE investments are perceived as being
less exposed to adverse economic conditions
Population Forecast (70 yrs +) - Annual Growth and therefore present with a low risk profile.
Purpose-built developments and fit outs
» The growth of over 70‘s is expected to peak in » The risk to continued growth is underpinned encourage long-term tenant occupation and
2027 before easing for all states, with a further as medical advances result in people living for consistently have a high probability of lease
increase between 2057 and 2066. longer. renewal providing relative income certainty.
» Despite a slight decline in Australia’s overall » Gross value added (GVA) for the healthcare » Increasingly, leases provide for fixed annual Day hospitals are an
private hospital insurance coverage ratio, APRA and social assistance industry is predicted to reviews that typically provide an attractive increasingly attractive
margin above long-term CPI forecast growth.
has reported a steady increase in hospital continue to exceed forecast GDP growth by asset sub-class, becoming
treatment episodes and premium revenues circa 60% when annualised up to the period » Compared with core asset classes, lease
more efficient and in turn
over the FY19. Government has continued to 2023-24 according to IBIS World (March 2019). incentive costs are minimal, which acts to
generate incentives to lift the overall coverage preserve initial investor returns.
allowing higher patient
» Mounting demand for private hospital and
ratio, particularly in the sub-30 year old category, particularly aged care beds, will require » Further cost consolidation, technological
turnover compared to
with the aim to reduce mounting pressure on the significant development outlay to enable advancements and advantages brought on by overnight hospital stays.
public healthcare system. adequate supply in the medium-to long-term. analysis of big data are benefitting operators and
| Page 4 Page 5 | Rise in Healthcare Property Investment
HEALTHCARE FUND WALE VS CORE A-REIT WALE
Healthcare Fund WALE Core A-REIT WALE
20
18.1
15
WALE (YEARS)
14.1
12.6
10
5
4.4 4.7
3.8
Source: A-REIT Annual Comparable foreign yields
4.
0
Australian Vital / Arena Dexus Goodman Vicinity reports June 2019 and
Unity North West REIT (Office) (Industrial) (Retail) m3property and the weaker dollar
Total proposed investment into the Australian countries is likely to encourage increased foreign
healthcare sector recorded by the Foreign investment into Australia and increases competition
3. % Low cost of capital
Investment Review Board of Australia (FIRB) show for healthcare providers and real estate.
healthcare reflecting a significant increase in
the order of $3.7billion between FY17 and FY18.
The FIRB forecasts the health sector to continue There has been a significant
Low interest rates are driving down the cost of
to see significant activity over financial years 2019 firming of yields in the wider
and 2020 according to their latest annual report
debt and enabling investors to pay higher prices
released in February 2019.
healthcare property market,
for assets. For healthcare assets, investors are
able to source all-in-debt at record lows from Canadian investment company Brookfield as increasingly bullish
Australian banks and lower from foreign banks. Business Partners’ takeover of Healthscope transactions are reflective of
ranks globally as the fourth largest healthcare
A consistent differential on the debt component
transaction in FY19 according to Bain & Co.
heightened market awareness
is continuing to present accretive investment
opportunities. Our research indicates the cost of Further weakening of the AUD against other major
and the comparative returns
debt reduced approximately 50 to 100 basis points currencies and low cost of debt in many overseas offered to investors.
over the period between FY15 and FY19. With
another interest rate cut likely, the cost of debt is
FOREIGN INVESTMENT - HEALTHCARE
expected to fall further in the short-term further Foreign Investment - Healthcare
enhancing returns for healthcare assets. $7,300
$8,000
$7,000
Record low interest rates $6,000
$5,000 $4,500
Millions
are encouraging consistent $4,000 $3,300 $3,600
capital growth, coupled with $3,000
yields offering investors $2,000
$1,000
resilient double digit returns. $0
Source: FIRB Annual
reports and m3property
2014-15 2015-16 2016-17 2017-18
| Page 6 Page 7 | Rise in Healthcare Property Investment
Australian
Healthcare Property
Market Overview
Key players and market returns
We provide a current and retrospective view of the last few years and is projected to increase KEY MARKET PLAYERS TOTAL ASSETS UNDER MANAGEMENT
the market’s key healthcare-focused managed further, with recently reported investment (AS AT END FY19) - $6.0 B
funds and trusts, having analysed investment intentions and pre-commitments listed below:
volumes and returns as at FY19. » ISPT has been given a $200 million mandate
to create the HESTA Healthcare Property
» Most funds included in the analysis were seeded
Trust. The fund will pursue investment $122 m $88 m
from circa 2017 onwards, excepting Barwon
opportunities in the residential aged care, $260 m
Investment Partners and Centuria Heathley,
private hospital and general medical sectors.
indicating a surge of recent market entrants. $600 m
» QIC has announced intentions to invest in the
» The funds hold strong intentions to increase $1,758 m
healthcare sector via joint ventures with US
their asset footprint, both for the acquisition
healthcare investment entities.
of existing assets and the development of
purpose-built properties. » Total funds under management by key
market players have increased by circa 210% $605 m
» Market activity has grown significantly over
over the five-year term to June 2019.
Source: A-REIT Annual reports June 2019 and
m3property
Traditionally core focused investors previously
1 - On completion value,
adverse to alternative assets, are turning their $925 m
2 - Recently seeded fund in JV with Centuria Heathley,
$1,626 m
attention to the healthcare sector, seeking to 3 - Value of healthcare assets only
benefit from secure long-term returns.
| Page 8 Page 9 | Rise in Healthcare Property InvestmentConclusions
Further to the market snapshot provided, we and achieve comparably strong returns on
have undertaken a sample analysis of different investment.
investment vehicles as listed below:
There is a notable positive correlation between
» Australian Unity Unlisted funds under core asset classes and healthcare yields, as
management including retail and wholesale
well as the 10-Year Bond Yield. This means that
trusts.
historically the healthcare sector moves in the Australia’s healthcare asset market is experiencing significant
» Vital Healthcare/NorthWest Healthcare
Properties NZX listed fund comprising
same direction as the core investment sectors and changes, with a raft of emerging market entrants, both local
10-year bonds, i.e. as yields tighten in the other
Australian and New Zealand properties. and international, bolstering a movement towards increasing
sectors so too do healthcare sector yields.
» Arena REIT Diversified ASX listed A-REIT securitisation and consolidation of a traditionally fragmented
containing childcare and healthcare properties. Following recent interest rate cuts and the market.
entailing compressions in the cost of debt, margins
Analysis of listed fund data captured between FY14 between average healthcare asset yields, albeit
and FY19 reflects a consistent trend of sharpening reduced, is spurring ongoing investment activity
yields across the portfolios. As illustrated, steady and confidence. Average healthcare yields have Over the short to medium term we expect:
growth in acquisitions and valuation figures reflect compressed from 6.4% to 6.1% over the
an average year-on-year book value increase of last 12 months. » Further weakening of the AUD, which is likely to encourage increased
circa 15-28% per annum across the analysed funds.
foreign investment.
Yield compression in core asset classes has
resulted in private investors, syndicates and Recent years have seen » The declining cost of capital is set to continue driving transactions of
institutional investors turning to alternative asset significant market player existing stock and a healthy development supply pipeline.
classes on the hunt for higher returns. Yields for
CBD Office, some Shopping Centre types and
activity, with existing » Healthcare returns are expected to remain an attractive alternative to
Industrial assets are projected to continue to investors and new market traditional core asset classes in the short term, with further tightening of
yields expected.
decline to March 2020, before stabilising according entrants eager to acquire
to m3property research. Healthcare assets enable
proven assets. » A continued shift from healthcare historically being an owner-operator
institutional investors to diversify existing portfolios
asset class to an increasingly securitised asset class.
Market Player Snapshot: Capital Value vs Yields » The ageing population, higher yields and long WALEs will continue to
encourage investors previously focused on core asset classes to consider
healthcare as part of their portfolio mix.
Source: Annual Reports
Australian Unity,
Vital /NorthWest and
Arena REIT (June 2019)
| Page 10Key Contacts
Laila Burnet Ross Perkins Joel Ducey
VIC | National Director QLD | Managing Director NSW | Director
+61 3 9605 1024 +61 7 3620 7901 +61 2 8234 8112
laila.burnet@m3property.com.au ross.perkins@m3property.com.au joel.ducey@m3property.com.au
Simon Hickin Alexander Buchmann Peter Bath
SA | Director VIC | Valuation Analyst VIC | Valuation Analyst
+61 8 7099 1812 +61 3 9605 1030 +61 3 9605 1026
simon.hickin@m3property.com.au alexander.buchmann@m3property.com.au peter.bath@m3property.com.au
Jennifer Williams Amita Mehra Casey Robinson
NSW | National Director Research VIC | Research Director QLD | Research Director
+61 2 8234 8116 +61 3 9605 1075 +61 7 3620 7906
jennifer.williams@m3property.com.au amita.mehra@m3property.com.au casey.robinson@m3property.com.au
m3property.com.au /m3property
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