Sydney healthcare – just what the doctor ordered?

February 24, 2020 / By  

The Australian commercial property sector has been evolving for several years now. Institutional investors are facing a growing need to diversify their portfolios away from the three ‘traditional’ commercial property sectors of office, retail, and industrial, with headwinds either in place or emerging across these sectors.

In contrast, the Australian healthcare sector will be the primary beneficiary of an ageing population and growth in spending on healthcare services as a result. The proportion of the population above 55 years of age continues to grow – in fact, it has grown by 185,300 persons, on average, per annum since 2010.

Generally, spending on healthcare services begins to rise exponentially once a person reaches 55 years of age. The healthcare sector has benefitted from this demographic trend – healthcare employment growth over the last ten years has risen by 3.5% per annum, double the overall employment growth rate of 1.8%.

Figure 1: Proportion of Australian Population > 55 Years

Source: JLL Research, ABS

Real Estate Investment Trusts (‘REITs’) and unlisted property groups have looked to take advantage of the growth in Australia’s ageing population to diversify their property portfolios. Dexus Property Group’s North Shore Health Hub is a current example. The AUD $225.0 million development in St Leonards, Sydney, which began construction in 2019 and is due to complete in late 2020, is expected to be one of the core assets within the Dexus Healthcare Wholesale Property Fund upon completion later this year.

Anchored by Ramsey Health Care, North Shore Radiology and GenesisCare, the North Shore Health Hub will house a range of healthcare service providers along with specialists and allied health providers. As well, the Hub will be able to leverage the proximity of both the North Shore Private Hospital and Royal North Shore Hospital.

Figure 2: Dexus’ North Shore Health Hub Development

Source: Dexus

In addition to core investments such as private hospitals, the healthcare sector offers a range of core-plus, value-added and opportunistic investments encompassing specialist clinics, smaller medical centres, family practices and clinics in key metropolitan catchments.

Whilst comparisons have been made to the retail sector, more insight can be gained in assessing where the two sectors differ. Healthcare is unique as it offers access to long-term, triple-net leases and a non-discretionary income profile. Healthcare tenants are also often quite ‘sticky’ due to the high fit-out costs associated with these occupiers.

These are asset characteristics that are highly sought after in the present low-inflation and low-yield environment. However, healthcare as an asset class in Australia is still an emerging one. The North American REIT market already has a much more robust listed healthcare offering – there are currently 17 US REITs with a combined market capitalisation of AUD $126.8 billion. The United States market is much larger; however, it does offer insight into the long-term potential for capital appreciation and institutional investor appetite for this sector in Australia.

Figure 3: Median Premium (Discount) to Net Asset Value (%) by Sector – North American REITs

Source: S&P Global Market Intelligence

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