[+] Positive Diagnosis Lures Equity to Healthcare

Investors are lining up for alternative assets including quality healthcare real estate as valuations for traditional commercial property asset classes such as office and retail languish. You don’t have to look hard to see it happening—take Dexus’s recent fully subscribed $220-million equity raise for its unlisted healthcare property fund, for example. Dexus Healthcare Property Fund (DHPF) has returned a five-year fund return of 13.6 per cent to investors to March 31, 2023. The fund recently bought 9.95 per cent of Celsus Holding, which, along with Dexus Community Infrastructure Fund and Dexus Core Infrastructure Fund, manages the Royal Adelaide Hospital. Oracle Investment Management portfolio manager Jack Magann notes Dexus has done well to raise capital for this unlisted fund, given property investors Charter Hall and MA Financial recently closed investor redemptions on two unlisted property funds. “Investors are looking for assets that will continue to provide income and capital growth in an uncertain environment,” he says. “While they are likely steering clear of unlisted office and retail funds, healthcare assets can provide more certainty for investors looking to park their capital in real estate.” ▲ Royal Adelaide Hospital, managed by Celsus Holding, Dexus Community Infrastructure Fund and Dexus Core Infrastructure Fund. Australian Unity general manager—healthcare property Chris Smith says recently developed hospitals in great locations are especially attractive assets because they so rarely come on the market. He also notes investors in the healthcare property sector tend to have specific characteristics. “Hospitals grow over time, so owners need to be supportive of tenants’ businesses so they can grow but also stay at the property. What we like to do is buy land in precincts with strong future growth prospects.” Australian Unity owns one of Australia’s largest unlisted healthcare property funds, its $3.9-billion Healthcare Property Trust, which returned 14.59 per cent a year for the five years to the end of June 2023. The fund raised $335 million of equity in March this year. An example of a prime hospital property Australian Unity owns and manages is its Sunshine Private Hospital in St Albans, Victoria, Australia’s first all-electric private hospital. “We’ve recently opened stage one and it has been well received by the community,” Smith says. Australian Unity also recently bought 7.5ha of land directly opposite the new Melton Hospital site, about 50km west of the Melbourne CBD. ▲ A render of the planned Melton Hospital in western Greater Melbourne. “This is an opportunity to partner with a tenant for the long-term,” Smith says. Australian Unity’s healthcare property trust has also just opened a $44-million sub-acute hospital at Kingswood in Western Sydney, directly opposite the Nepean Hospital. Leon Hadchiti, national director for healthcare for commercial real estate business Colliers, says the demand-supply dynamic is supporting investor appetite for properties in the sector. “While acute private hospitals are still highly sought-after, acquisition opportunities are increasingly rare and often at a premium as buyers look for high-quality assets with strong tenant covenant, WALE and potential development upside,” he says. Weighted average lease expiry (WALE) measures the average length of leases for a property or portfolio of properties and is an indicator of how sustainable cash flow is. Another recent marquee transaction was HMC Capital’s $1.2-billion acquisition of Healthscope Private Hospital’s portfolio of 11 private hospitals, completed at a yield of 5.8 per cent. Hadchiti says specialist medical centres, which offer a range of allied health services and are typically in accessible town centre locations, are also sought after as they provide a good level of return on a medium WALE of 5 to 10 years. “They are also at price points that give high-net-worth private investors and small syndicated funds the ability to invest in the sector,” he says. “Also, some of the larger institutional funds are seeking to recycle capital through disposing these smaller assets in favour of private hospitals, life science facilities and development opportunities.” ▲ Charter Hall recently took a 50 per cent stake in the The Victoria Clinic at Prahran. Magann says mental health facilities have been in high demand. A recent transaction is Charter Hall’s 50 per cent acquisition of the purpose-built mental health hospital, The Victoria Clinic in Prahran, in May for $51 million on a 3.99 per cent yield. The property is fully leased to Healthscope on a 20-year lease. Demand drivers Experts say tenant and lease quality tend to determine the attractiveness of healthcare assets. “Tenants normally agree to a triple net lease with a term of 10 or more years. This certainty makes this type of investment very attractive,” Magann says. In a triple net lease, the tenant is responsible for paying the base rent, the property’s operating expenses and insurance, which offers tax deduction benefits. Yields for healthcare properties are sitting in a range of 3.99 per cent to 5.99 per cent. Quality assets such as new and refurbished hospitals are at the upper end of the range and smaller, sub-A-grade assets sit at the bottom of the range. Societal trends such as ageing and a growing population are driving demand for healthcare services and supporting healthcare property values, a dynamic that’s likely to continue. Conversely, listed healthcare asset valuations are being brought down by the general malaise across the property. At time of writing, HealthCo Healthcare and Wellness REIT, which invests in hospitals, aged-care facilities and childcare centres, was trading at a 19 per cent discount to net tangible assets (NTA). “But listed healthcare is still doing better than the office sector, across which funds are trading at an average 31 per cent discount to NTA,” says Magann. And it is a situation—healthcare real estate outperforming office and retail—that seems higly likely to continue for the foreseeable future. You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.

[+] Positive Diagnosis Lures Equity to Healthcare

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