Article | Intelligent Investment

Healthcare real estate under the spotlight

January 27, 2021

By Marcello Caspani-Muto

Healthcare real estate under the spotlight
The supporting demographics for healthcare real estate have long been sturdy and, with a continually increasing transaction volume for this asset class year-on-year since 2014, healthcare investments are rapidly emerging as a starring fixture on the stage of Australia’s commercial property market. 

The events of the past year have acted as a catalyst for investor and developer interest toward the sector, with the phrase: “recession proof” being proved in recent times – given the strength, unwavering operational activity and multiple market defying transactions in the space.

An asset class traditionally appealing to seasoned investors and REITs, investment in the healthcare sector has become popular with a wider catchment of buyers in recent years. Over the past half-decade, press has covered the strength and stability of healthcare assets and a by-product of this increased attention is that investors’ market knowledge has grown and their desires to invest within the sector has risen exponentially. 

Furthermore, challenging conditions across core sectors has seen several high net worth private investors and syndicates shift their investment direction to diversify their holdings. This was evident with CBRE’s final two sales of 2020, both purchased by ASX listed investments funds who traditionally only focused on ‘core’ investments.

Greater Returns Year-on-year

Generating greater returns than several asset classes over multiple years, the healthcare market is far from a short-term success story. The sector is also underpinned by a track record of success, having performed strongly throughout the world’s previous economic downturn, the Global Financial Crisis (GFC). Before the GFC of 2007-2009, cap rates in healthcare assets were around 100 basis points softer than industrial assets and a minimum of 200 basis points above retail and office holdings. 

Fast-forward 13-years and, at last measure (19 December, 2020), average healthcare cap rates were at 5.9%, less than 50 basis points above industrial and less than 100 basis points above retail and office. While updated metrics are yet to have been determined, we expect that a softening of core yields, in combination with an increased popularity for healthcare investments, will see this gap tighten further. Our specialist Healthcare & Social Infrastructure team transacted nine healthcare assets in 2020, at an average yield of 5.4%.

Who Invests In Healthcare?

REITs or Australian real estate investment trusts give investors access to large scale property
investments which, under most circumstances, would be out of reach for individuals. REITs typically appeal to investors who are looking to either diversify their portfolio or benefit from a regular and consistent income stream. Simply, REITs are designed to generate profit in the form of capital growth and rental income.

Owner Occupiers 
With the loan to value ratio on offer from healthcare lenders now up to 100% (in many circumstances) and given the capital intensive and specialised nature of the relevant fit outs, a substantial portion of medical professionals preference the long-term security of property ownership for their businesses. Existing buildings with medical permits, or comparable healthcare sites with approved plans and permits, are proving more popular than ever as a result

Private Investors & Syndicates 
Private investors, either in groups or partnerships, within the past half-decade have shown a marked increase in interest for investments within the healthcare sector. As previously mentioned, large-scale healthcare investments were traditionally only exchanged between REITs, however, the surge in demand for medical real estate has been driven predominantly by private investors and syndicates who have proven more willing to transact at sharper cap rates. Traditionally, private investors have out-bid REITs, showing a willingness to secure assets at sharper cap rates beyond the investment hurdles of funds. However, throughout 2020 the balance of power began to equalise with large-scale groups proving a willingness to sharpen their pencils amidst the lowest cost debt environment the country has ever seen.

To request CBRE’s full 2021 Healthcare Report or further information on upcoming investment healthcare investment opportunities, visit the below link at anytime.