Heated interest in healthcare real estate is being driven not only by the sector’s recession-proof reputation, but an exit from retail property at a time of skinny returns and shaky consumer confidence.
According to property watchers the yield compression evident with retail property assets such as shopping centres has seen investors questioning the returns from this asset class and seeking safer alternatives.
At the same time, the healthcare sector has also caught the eye of local and offshore institutional investors attracted to Australia’s ageing demographic trends and the long-term and stable nature of the tenancies.
“We have seen some quite firmly priced transactions in healthcare,” said Australian Unity executive general manager (property) Mark Pratt.
“There’s certainly a lot more institutional interest in healthcare and given more capital has been brought to bear that has impacted asset valuations.”
CBRE director of healthcare and social infrastructure Sandro Peluso said healthcare sector yields were just starting to compress, which meant buyers were willing to pay higher prices for lower returns.
He said recent transactions for assets such as private hospitals and medical centres were stuck on yields of 5-6 per cent, compared with about 8 per cent five years ago.
In contrast yields on retail assets such as shopping centres have fallen from 5-6 per cent to 3-4 per cent – a return on investment that many buyers were baulking at.
“That’s what’s going to happen with healthcare,” Mr Peluso said. “So there’s a case for getting in before it’s too late and it doesn’t make any investment sense.”
Specialist healthcare investor Barwon Investment Partners concurs that “weakness in the retail sector will see an increase in alternative property sectors such as healthcare.”
Despite the danger of overpaying, deep-pocketed investors have been vying for deals in what remains a highly fragmented sector.
The listed property trust Centuria recently finalised a 63 per cent interest in Heathley Ltd’s property funds management business, to form the Centuria Heathley joint venture managing $600 million of assets.
“Healthcare is a strongly performing, rapidly expanding property sector and a natural fit for Centuria,” Centuria joint-CEO John McBain said.
Centuria Heathley has secured a separate venture with AXA Investment Managers’ ‘real’ assets division and Grosvenor Group, with a targeted $500 million portfolio.
The French-based AXA is not the only offshore giant attracted to Australian healthcare.
Healthcare is a strongly performing, rapidly expanding property sector.
In August last year Canada’s NorthWest Healthcare entered the local market with a joint venture to build a $2 billion fund, seeded with $412 million of assets from the former Generation Healthcare REIT.Meanwhile Barwon’s $500 million institutional fund last month inked a $20 million to develop an adolescent mental health facility in Canberra, along with operator Healthe Care.
Australian Unity operates a 20-year-old healthcare property trust that has $1.7 billion of diverse health care assets, including a component of Brisbane’s Herston Quarter medical precinct (Australian Unity is master-developer of the $1.1 billion project).
Mr Pratt said the fund currently had a preference for brownfield developments with existing patient demand.
“An existing lease generally can give a cap rate that is higher than that of a new buy,” he said.
Mr Pratt said a potential headwind for the sector was the ongoing pricing pressure from government and private health insurers to manage costs and pricing.
CBRE last month transacted the $8.6 million sale of a day hospital in the western Melbourne suburb of Sunshine on a yield of 6 per cent.
Earlier, the firm handled the $5.52 million sale of a Cheltenham day facility (in the city’s south east) on a yield of 5.5 per cent.