Property development in the healthcare sector is experiencing significant growth, as governments and the private sector recognise the rising need for more efficient and effective models of care to service medical precincts and suburban areas.
At the same time, investors are increasingly looking for quality healthcare assets due to low interest rates and the long-term, resilient income this sector provides.
Developers and investors are targeting assets in regional and city locations.
There are a large number of stakeholders involved in healthcare property development, all with differing objectives, which makes these projects complex, time intensive and technical.
When it comes to the operating environment, the state-government-run public hospital and health sector is at capacity or beyond. So it’s in the public sector’s interest to pass some of the healthcare load to the private sector.
Private health insurers play a key role. They are incentivised to ensure patients receive high-quality care in a low-cost environment.
The strategic imperative is to reduce the time patients stay in hospital. Within the private sector, property developers and investors want a market-based return on their assets, which are long-term in nature.
Hospital and healthcare facility operators such as Australian Unity and Ramsay Health Care are the other integral stakeholders.
All stakeholders operate in an environment in which the healthcare system is increasingly under pressure as the population ages.
So governments are incentivised to support a healthcare system that takes the pressure of the public system by improving the private system.
Investor demand far outstrips the supply of quality assets in healthcare property development, traditionally an inefficient market from a pricing and project delivery perspective.
The universe of health property assets can be divided into primary, secondary, tertiary and quaternary facilities. Primary healthcare real estate, the GP network, is heavily sought-after by high-net-worth investors, often the doctors themselves.
Investors are also hungry to invest in secondary facilities, specialist consulting suites often located within medical precincts that include hospitals.
“The innovation we’re seeing is operators and investors partnering with clinicians, who want to have an ownership interest in the asset that’s created,” Trevor Cooke, chief executive officer of property development and investment firm Commercial and General (C&G), said.
The firm recently delivered the $345-million Calvary Adelaide Hospital and is the driving force behind the landmark $500-million Australian Bragg Centre, Australia’s first proton therapy unit, which is being built in Adelaide.
C&G’s focus is the tertiary sector.
“You have to have a deep understanding of an operator’s requirements to be successful,” Cooke said.
“Designing a hospital, which is a complex piece of infrastructure, is very different from delivering a great office building, which is reasonably commoditised.
“Your success is underpinned by relationships and competencies.
“You have to sit down with the user groups to understand requirements and the overall direction healthcare is taking so you can forecast requirements into the future to create infrastructure that is fit-for-purpose.
“But no two hospitals are the same and they all have core specialties, especially in the private sector.”
Cooke said less than 10 per cent of the $100 billion in healthcare institutional-grade assets that operate in the Australian market are currently securitised; that is, packaged into investible instruments.
In comparison, 90 per cent of retail, office and industrial assets are securitised.
This demonstrates the large opportunity for institutional investors to acquire healthcare assets in the future.
The need for renewal in the healthcare system, underpinned by technological advancements and changes in the delivery of care, are two other dynamics creating movement in the health property development sector.
“Our ability to treat people is advancing substantially,” he said.
“The built form that has traditionally housed those activities is becoming redundant relative to how it needs to perform, relative to the requirements of today’s modern healthcare operator.
“So you have redundant stock and operators motivated to release assets from their balance sheets.
“Post-Covid, government balance sheets are stretched and we’re going to need private sector health care delivery solutions to meet this need.”
Frenchs Forest Hospital in NSW a prime example. It has a public hospital alongside a private hospital operated by Healthscope.
The underlying incentive is to convert people who walk into the public system to the private system.
But this is just one example and there is a range of operating models in this sphere.
A leading investor in this area is Centuria Capital Group, which in 2019 secured a 63 per cent interest in Heathley Limited and rebranded as Centuria Healthcare.
Managing director Andrew Hemming oversees a 14-strong team that runs three investment mandates.
It’s telling that global insurer AXA is involved in two of them. Centuria Healthcare has 52 assets under management, worth about $1 billion.
The assets are held within three development funds, a wholesale open-ended fund and five closed unlisted funds.
Centuria Healthcare Property Fund, launched in August, 2020, has 10 properties worth $219.9 million including day hospitals, short-stay hospitals and medical centres.
Hemming invests in and develops short-stay hospitals and medical centres, with local demographics often determining assets in which to invest.
He scours the market for assets with allied health facilities suitable for suburbs with an ageing population.
“Through property development, we are trying to improve the models of care in the suburbs,” he said.
“Having said that, we still believe health precincts—be they regional or metro locations—are still important and need to be developed.
“Our pipeline reflects both sets of opportunities—large health precincts and smaller hospitals in the suburbs.”
Orange Base Hospital and Orange Private Hospital are good examples.
Located just metres apart, the latter has a 24-hour urgent GP centre, which is able to take the pressure of the public hospital’s emergency department.
“This is an example of the public system working with the private system to balance out queues and get costs out of the system,” he said.
Hemming said Centuria’s strategy is to work closely with operators such as Nexus Hospitals or Medibank.
“Their strong brands and care models have the ability to attract doctors. That translates into insurance contracts, which means the doctors may not need to charge patients out of pocket,” he said.
But finding sites with the appropriate zoning and floor plate is tricky. For instance, hospitals require a floor plate of around 1000sq m, which means all the theatres can be on the same floor.
This creates an efficient patient-doctor journey, so doctors and nurses don’t have to walk too far, leading to fatigue and mistakes, which leads to cost.
“Of course, the hospital environment is a balance between patient-centred care and improved cost efficiencies, but largely the focus on patients to have a better all-round experience is factored into hospital designs,” he said.
“Patients also want to be handled with care and want to be able to see their doctors. All these elements are factored into hospital design.”
It’s also hard to find good opportunities due to heightened competition between developers to identify appropriate sites.
Commenting on the operating environment, George Websdale, Dexus’s head of healthcare partnerships, said there were few groups that are actively investing in large scale health assets, due to the high barriers of entry for healthcare property investors.
“The specialised nature of healthcare assets and the relationships with operators and governments is crucial to unlocking healthcare development opportunities,” he said.
Groups with scale and specialised healthcare capability are placed at a competitive advantage.
It’s interesting that while there is a huge amount of activity trying to whip Australia’s ageing health care system into shape, the end game is actually to get the health profession into homes.
“People want to age and die in their homes as opposed to in hospitals. So the future is about providing health services into homes,” Cooke said.
“We’re looking at how the residential sector is transformed by healthcare into the future and how you future-proof residential to make it enabled for healthcare services.”