An ageing population coupled with an under supply of facilities relative to more developed economies is increasing the demand for more hospital beds in the Middle East. And, as the region’s governments make moves to improve the quality of healthcare in the region, there is a growing opportunity for private investors in the sector.
That’s according to the latest report from JLL Middle East and North Africa (MENA) report which shows that a combination of factors including a lack of hospital beds, lower hydrocarbon prices, and an ageing population have placed significant pressures on the state of the current healthcare system in the Middle East.
According to the report entitled ‘Healthy Returns: Why more private & real estate players are considering the healthcare sector’, 10,500 additional hospital beds are needed across the five major Middle Eastern cities in the next five years just to maintain the current (and comparatively low) provision rate of 1.9 beds per 1,000 persons. This equates to demand for seven new hospitals in Dubai, nine additional hospitals in Abu Dhabi and a whopping 32 new hospitals in Cairo by 2022.
What’s more, reduced government spending on the back of lower oil prices, has contributed to increased pressures on the current healthcare system in the Middle East.
While the region has a relatively young population, the number of people aged over 65 years is forecast to increase from 21 million to 26 million by 2020 over the next five years, an increase of 4.4 percent per annum, more than twice the rate of increase in the overall population, according to the report.
Opportunities for private investors
JLL Head of Capital Markets in MENA, Gaurav Shivpuri, says that a combination of the above factors not only highlights gaps in the current market, but also emphasises foreseeable opportunities for private investors.
“While, historically, healthcare has been predominantly government-funded in Saudi Arabia, current fiscal pressures and growing demand is forcing the government to turn to the private sector for a much needed injection of new capital both in the operation, and funding of, real estate.”
According to Shivpuri, the Saudi government’s decision to privatise 55 primary health centres demonstrates the future of things to come, citing FTSE-listed NMC’s recent majority acquisition of Al Salama Hospital, Jadwa’s investment in UEMSA, Amanat’s minority acquisition of IMC, and recent interest of Dallah Health & Ashmore in the sizeable healthcare sector in the country as a reflection of private investor interest in the sector.
And, as the ownership of healthcare businesses moves to the private sector, there is expected to be more separation of OpCo & PropCo ownership as private investors push for higher returns on equity. This will open up more opportunities for sale & leaseback and build-to-suit transactions for healthcare-related real estate.
Benefits for real estate investors
2018 is set to see a number of these transactions and, according to Mr Shivpuri, private investment in healthcare real estate provides attractive and unique benefits for investors.
“Unlike other core real estate asset classes, healthcare offers more stable returns regardless of the wider economy, particularly in Saudi Arabia. With leasebacks that are usually longer than ten years, these assets provide stable cash flows over the long term” he says.
In fact, as healthcare properties are mostly leased on a “triple-net basis” – meaning that the tenant is responsible for all operating costs relating to the facility including insurance and general property maintenance – investors enjoy a relatively passive position making them ideal for institutional investors.
And, according to Mr Shivpuri, when healthcare real estate is combined within a mixed-use development, it provides an opportunity for investors to tap into rising demands without the significant financial commitment of a large single use premise, such as a hospital facility.
The expected rise of Public Private Partnerships
According to the JLL report, Public Private Partnerships (PPPs) is another avenue that will likely develop in Saudi Arabia to reduce the financial burden on the private sector.
While PPPs in the healthcare sector has so far been limited, their occurrence is set to grow within the next five to 10 years. These will likely come in the form of government offering land on ‘peppercorn’ rents on a long-term duration and/or possible ‘demand take out’ to provide private investors a minimum guaranteed return.
“With increasing pressures on the MENA healthcare system over the next five years and a rise in PPPs, investors can consider healthcare real estate investment as an attractive diversification strategy with foreseeable long-term gains,’ says Shivpuri.