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 - m3property
Rise in Healthcare
Property Investment
The burgeoning demand and
securitisation of Australia’s
healthcare assets
Rise in Healthcare Property Investment - The burgeoning demand and securitisation of Australia's healthcare assets - m3property
Key Investment

                                                                                         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
Rise in Healthcare Property Investment - The burgeoning demand and securitisation of Australia's healthcare assets - m3property
Ageing population and                                                              POPULATION FORECAST (70 YRS +) - ANNUAL GROWTH
1.                           demographic outlook                                                                             35,000

                                                                                                             Annual Growth
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
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.

                                                                                                                                             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%
                                                                                    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%
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

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Rise in Healthcare Property Investment - The burgeoning demand and securitisation of Australia's healthcare assets - m3property

                    Healthcare Fund WALE                  Core A-REIT WALE



                                                        4.4           4.7
                                                                                               Source: A-REIT Annual                             Comparable foreign yields
                   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
                                                              Record low interest rates                                           $6,000
                                                                                                                                  $5,000   $4,500
                                                              are encouraging consistent                                          $4,000                  $3,300           $3,600
                                                              capital growth, coupled with                                        $3,000
                                                              yields offering investors                                           $2,000
                                                              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
Rise in Healthcare Property Investment - The burgeoning demand and securitisation of Australia's healthcare assets - m3property
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
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.

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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
                                                           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 10
Key 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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