Australia’s healthcare sector has emerged as the leader of the pack amongst the real estate sector’s alternative asset classes and the recent announcement, by Dexus, of a new fund which aims to grow to AU$2 billion in healthcare assets under management by 2020 demonstrates the demand for expansion in the sector.
However, in reality, the signs for the sector’s potential have been evident for several years.
The recent Australian Healthcare Real Estate Investment Review from JLL shows healthcare fundamentals are strengthening. Private hospitals currently provide 35 percent of all beds in the country, an increase from 33 percent in 2011. The number of private hospital beds per 1000 people also grew from 1.26 in 2011 to around 1.35 in 2015.
The total number of completed treatments has averaged growth of 3.5 percent per annum since 2011 while the business of healthcare has also grown – 2016 was characterised by ongoing capital growth and tightening yields for related property assets. Yield compression in the sector has been significant, dropping from 8.4 percent in 2013 to 6.6 percent in 2016. At the same time, private hospital net operating margins have risen – day hospital margins grew from 18.9 percent in 2010-11 to 21.4 percent in 2014-15.
“The Federal Government has been attempting for some time to reduce the burden on the public sector by increasing the opportunities that exist for the public sector, through PPPs, operator agreements and the continued encouragement of private health insurance,” says Noral Wild, JLL’s Head of Social Infrastructure in Australia.
“One of the key features of the private healthcare sector in Australia has been its low volatility relative to other sectors. Office, industrial and retail were impacted strongly by the global financial crisis in 2008-09, however the healthcare sector continued to provide positive annual returns.”
“Annualised returns for the healthcare industry have consistently been above 10 percent since 2010.”
“Given the heightened interest from offshore investors, competition for stock with local entities is high.”
Established operators – such as Ramsay Healthcare and Healthscope – grew their Australian portfolios significantly over 2016, either through acquisition or development.
Wild says the hospital and medical market is more resilient to global economic risks than most other asset classes. However, there are still several concerns lingering for the industry, such as possible ongoing changes to the Commonwealth Government’s Private Health Insurance Rebate and pressure on operating costs and margins.
“Our view is that yields in the healthcare market will continue to tighten in 2017, and we classify the sector to be at a peak in its current cycle,” Wild says.
“Smaller medical funds and REITs will also likely attract greater investment levels, enabling them to compete for higher valued assets, and existing AREITs will continue to search the market to expand their portfolios in order to meet retail investor demand.”
Click here to read the most recent JLL Australia Heathcare Real Estate Investment Review