A once-in-a-cycle healthcare opportunity is available right now

Healthcare is an exciting space to be right now. The extraordinary technological advances we are watching emerge for treatment and cures to a range of medical concerns is hitting stride. Many an investor has paid careful attention to trials and advances to charge up their portfolio.

But perhaps they are overlooking a different kind of healthcare opportunity, one with more certainty in outcome and returns: the link between Australia’s ageing population and what it means for healthcare services.

“The ageing population will be a concern for many cycles and providers will need to handle an uptick in demand for healthcare services across the spectrum. That’s not just hospital beds. It’s specialisation in healthcare provisions that will require more demand for space and better utilisation of space,” says Matthew Strotton, Executive Director, Head of Real Estate for Real Asset Management (RAM).

Strotton points out that it is akin to an urgent infrastructure requirement across both the public and private sectors and the need for real estate development and transformation is a long-term investment opportunity. All in all, the current environment is, in Strotton's opinion, offering a once-in-a-cycle opportunity to invest in this space.

In this interview, Strotton discusses the combination of factors creating a once-in-a-cycle investment opportunity in healthcare real estate, how real estate can offer an alternative and more stable healthcare exposure in a portfolio and shares some of the innovative developments in the RAM Healthcare Opportunity Fund. He also discusses why he’s ready to invest more aggressively in this space.

A unique opportunity where the timing is right

Strotton views the timing for healthcare real estate as particularly attractive at the moment – it’s at a turning point.

Capitalisation rates (cap rates) – that is the rate of return on a property – have moved out across all sectors.

“At this end of the cycle where this is relatively lower investor demand for stock, there is greater spread in the cap rate pricing. We are still seeing cap rates for healthcare real estate in the 5-5.5% range,” says Strotton.

“There hasn’t been a significant number of transactions in the quality space because real estate and high-quality options are tightly held. We are starting to see green shoots that investor demand will move back into the area and then cap rate spreads will tighten and move inwards.”

Increasingly comfort over the direction and stability of interest rates will support growth in healthcare real estate demand and development – even though it will mean softer yields.

“There is a strong proposition to get into mispriced real estate today on the basis that rates will stabilise. Now is the time to get ahead of the curve and into the cycle early in a development program,” Strotton says.

He argues that investors need to be aggressive in their approach now – it is a ‘once-in-a-cycle’ opportunity to set up a strong real estate portfolio for the future.

“The following 12 months will see a further softening on existing asset yields and presents an opportune time to acquire and assemble generational healthcare assets.”

There’s been a reduction in supply too, and Strotton notes that there is the potential to underwrite higher cap rates of 5.75% at this point in time for a quality asset with a long-duration lease rather than the standard 5% he’s seen in recent months.

What's driving demand in healthcare real estate?

The ageing population and changing technological requirements is supporting ongoing demand. But the supply is still highly constrained, particularly due to construction costs in the wake of the COVID pandemic. It also hasn’t been a focus for healthcare providers in the process of recalibrating from the pandemic, but Strotton says that is starting to change.

“The past few years has seen the unwinding impact from COVID on healthcare operators in terms of underlying profitability, the take-up of space, recognition of gross revenue and cost management. These all contribute to the financial health of healthcare systems. We are starting to see this wash through, and profitability re-emerge. Operators can start to focus on what the future of servicing patients looks like, including real estate needs,” Strotton says.

The real estate requirements of an ageing population are increasingly sophisticated compared to the past, and this means that there are significant CAPEX requirements when it comes to building suitable properties. In the wake of this, Strotton is starting to see a trend towards large-scale providers, such as Ramsay Health Care, being more open to working with third parties for their real estate solutions.

Interestingly, Strotton feels this transition has gone somewhat unnoticed.

“Ramsay Healthcare is the largest healthcare operator in the private sector with a long track record of owning, operating and developing real estate themselves.

In just a few years, they’ve started to actively work with third parties instead of simply buying new property themselves and that’s actually a material development in real estate,” he says.

It’s a shift he anticipates playing out across the sector, building continued demand and opportunity for businesses like RAM to step in with personalised support. He cautions it has been absolutely critical for RAM to develop a deep understanding of healthcare provider needs and concerns to flexibly work on the right solutions and develop trust for future acquisitions.

The Nundah Medical Precinct (seen below), one of the holdings in the Healthcare Opportunity Fund, is a critical example of the importance of working as a partnership with healthcare operators.

Nundah was a mixed-use development in Brisbane located in close proximity to private and public hospitals, and adjacent to a mental health community centre. RAM has converted it into a health and wellness hub in partnership with anchor tenant iMH (an integrated mental health service provider) and Lumus Imaging.

Another holding where partnership between RAM and a healthcare service provider has been critical is the Cleveland Medical Hub, also in Brisbane, where Ramsay Healthcare has pre-committed to a 25-year lease of a day surgery in the precinct. By careful planning to suit Ramsay’s needs, RAM has been able to develop the facility in a way to encourage interest from other health providers with complementary services to Ramsay.

Healthcare exposure could provide consistency and stability

Investments in healthcare can come with substantial volatility, but Strotton argues that investing in healthcare real estate can offer exposure to the significant growth in the sector while affording more stability. As he puts it, its supporting essential services and becomes more of an infrastructure-style of investment.

Healthcare real estate offers long-duration contracts with consistent yield, when compared to other real estate sub-sectors. It also offers more certainty when compared to direct investments in healthcare equities.

“Operators in healthcare have a demonstrated tendency to consider and sign longer duration leases which provides lower volatility and greater certainty of yield for investors,” Strotton says.

He adds that invariably these can be under triple-net leases – where tenants pay all expenses like real estate taxes, building insurance and maintenance in addition to the cost of rent and utilities. Such an arrangement removes the risk of unexpected property expenses for the landlord and supports consistency of income, but can also be a positive for tenants who want brand uniformity.

A bullish outlook for healthcare real estate

Strotton is bullish on the future of healthcare real estate and passionate about working with healthcare service providers to build out real estate infrastructure. He’s already eyeing off up to six new deals he’d like to include in the Healthcare Opportunity Fund in coming months.

“Don’t underestimate the evolution of real estate in this country based on the needs of an ageing population today and tomorrow. 

It’s not going to stop and this is a sophisticated wealthy and growing population needing a greater depth of requirements in their healthcare services than ever before,” says Strotton.

Healthcare real estate is a multi-cycle opportunity. But as Strotton reminds investors, now is a particularly good time to be setting up your portfolio and capitalising off poor supply and growing demand ahead of a changing interest rate cycle.