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

Equity investment in healthcare is an exciting space right now. The extraordinary technological advances related to research and treatment are producing many exciting opportunities for investors in different asset classes. The medical sector is one of the most innovative and technologically driven sectors globally. 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 sector exposure, one with more certainty in outcome and returns: investing in healthcare real estate.

The link between Australia’s ageing population and what it means for healthcare property.

“The significance of an ageing population will continue to manifest through real estate solutions in Australia for many years. This impact will not be a one-off; but will be felt for many cycles to come. Public and private providers will continue to deliver physical space that handles this continued surge in demand, which will carry through to all sub-sectors in healthcare.

“It’s not just hospital beds. It’s the growing specialisation of healthcare services that will generally have ongoing demand for space which will require real estate solutions,” says Matthew Strotton, Executive Director, Head of Real Estate for Real Asset Management (RAM).

Strotton points out that healthcare is akin to infrastructure investment, but with the delivery of smaller, localised solutions that are driven by outsized growth. By extension, the need for real estate value-add, transformational real estate development is an ongoing investment opportunity. In conjunction with the recent dislocation in real estate markets, the current environment is, in Strotton's opinion, a once-in-a-cycle opportunity to invest in this sector.

In this interview, Strotton discusses the combination of factors that lead to this conclusion and how real estate can offer an alternative and stable real estate exposure in a portfolio, sharing some of the innovative developments in the RAM Australia Healthcare Opportunity Fund (HOF). He also discusses why RAM is 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 somewhat decision moment.

Capitalisation rates (cap rates) – a typical industry benchmark which indicates the projected income return for a property – have shifted as interest rates has moved. This has created uncertainty and has shifted focus toward the sustainability of income, which has affected all real estate sectors.

“At this end of the cycle where there 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 low 5% to high 5% range,” says Strotton.

“Transaction activity has been light. This is particularly the case for higher quality assets as they tend to be more tightly held.

“We anticipate transaction activity to build into 2025 as the outlook for capital markets starts to become clearer. We will be paying close attention to any signs of green shoots emerging in investor demand. This is likely to lead to greater pricing tension which should lead to pricing movement.”

Increasing comfort over the direction and stability of interest rates will support demand in healthcare real estate and subsequently, in healthcare real estate development – even though development hurdles are likely to be higher for a little longer.

“We are pursuing mispriced real estate on the basis that rates will stabilise. This includes assets that provide us with the flexibility to develop over time, at our discretion. Our objective is to place ourselves at the commencement of this next cycle with greater breadth to our development program,” Strotton says.

He argues that investors need to be positioning allocations to assets or portfolios that can deliver value-add and development exposure as this ‘once-in-a-cycle’ opportunity further emerges.

“We anticipate confidence to re-emerge in the following 12 months which will stabilise asset yields. Moving as quickly as possible across all risk assets will present our investors with an attractive opportunity.”

Strotton also pointed out the recent reduction in rate of supply in the sector. The potential for this to sustain pricing will become more evident into 2025.

What's driving demand in healthcare real estate?

Population growth, the ageing population, the shift in healthcare dynamics as the world emerged from COVID, consumer preferences and changing technological requirements support ongoing demand. But supply of new space has been somewhat slower. Construction costs have been rising, particularly due to costs rising in the wake of the COVID pandemic. In discussions with healthcare operators however, RAM is gauging an increase in interest to expand or develop, Strotton notes.

“The past few years have seen the unwinding impact from COVID on healthcare operators in terms of underlying profitability, the take-up of space, stabilisation of revenue and more effective cost management. Operators are focussing more on their future real estate needs,” Strotton says.

The real estate requirements for healthcare are dynamic. RAM is acutely aware of the significant capital requirements for building new or upgrading suitable properties. The need to build strong and trusted relationships, as an originator of real estate opportunities, as a landlord and more importantly, as a development partner, is absolutely critical. RAM has been focussing on building lasting relationships with operating partners.

Interestingly, Strotton feels this transition has gone somewhat unnoticed.

“We have very strong and trusted partnerships in place with several of Australia’s leading healthcare providers.

In all cases, we have been able to jointly cultivate opportunities with our partners due to the pillars of trust, patience, reliability and execution capability. Our objective is to contribute our resources as an effective extension of their in-house real estate team,” he says.

These pillars really translate to providing certainty on origination, execution and a level of personalised support. He cautions this cannot be undertaken inconsistently or without conviction. It is absolutely critical for RAM to develop an appreciation of our partners' needs and concerns so we can jointly deliver solutions and develop trust to build on the future.

The Nundah Medical Precinct (pictured below), one of the seed assets in HOF, exemplifies the importance of building partnerships with healthcare operators.

Purchased by RAM in March 2024, Nundah was a nearly vacant mixed-use development located approximately 8.5 km north of the Brisbane CBD, adjacent to the Queensland Health Nundah Community Centre.

During due diligence, RAM signed a 25-year lease with iMH (a joint venture between Aurora Healthcare and Amplar Health, part of Medibank) for a private mental health hospital and obtained planning approval for the hospital.

Through planning and leasing activities, RAM has added approximately $18 million in value to the asset prior to settlement and is on track to transform it into a thriving health and wellness precinct with over 10,000 sqm of GLA.

Another asset where partnership between RAM and a healthcare service provider has been critical is the Cleveland Medical Hub, also in Brisbane, where Ramsay Health Care 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, it’s 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 HOF 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.

Learn more about the RAM Australia Healthcare Opportunity Fund here.

Managed Fund

RAM Australia Healthcare Opportunity Fund

Australian Property

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