Is history repeating for healthcare?

20 Jul 2020

By Marcello Caspani-Muto, Sandro Peluso

Is history repeating for healthcare?

What To Expect From The Healthcare Sector In The Next Financial Year

Even amidst one of the most challenging economic environments in Australian history, property within the country’s healthcare investment market continues to transact. A newfound appreciation of medical services for many, coupled with strong, long-term investment trends has made current and future acquisitions across the sector highly compelling.

As social distancing restrictions are lifted healthcare related businesses will be the first to return to regular trading (at least what can be deemed as such for now). For many, comparatively minimal fluctuations to income between April and July have been witnessed.

Personal healthcare is something which can be delayed, however, never avoided and as such the sector will continue to perform strongly, but what are the key investment drivers for the healthcare sector?

Past Performance & Key Investment Drivers

Generating greater returns than several ‘staple’ 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 (2007-2009). 

Image 1: The ‘healthcare’ category is based on the IPD Australia Quarterly Healthcare Index, which provides a broad measure of investment returns for the healthcare property market in Australia and tracks the investment performance of 105 healthcare assets – representing $2.9 billion, MSCI 2019

Key Investment Drivers Include:

Australia’s Ageing Population

A shifting demographic requires consistent and increased government expenditure, for both public and private sectors. Australia is forecast to experience a population growth of 19.5% within the 70+ age bracket by 2022 (Australian Bureau of Statistics, 2020). As a result of the nation’s aging population – and even with a minor decline in Australia’s overall private hospital coverage ratio – Australian Prudential Regulation Authority (APRA) reported a steady increase in hospital treatment episodes and premium revenues in FY19 (Source – APRA 2019).

The economic impacts of an ageing population are further enhanced by consistent global medical advances, increasing average life expectancy. 

Population Growth

Our country’s population is projected to double, totalling 46 million by 2075, while in the shorter term it’s forecasted to reach 36 million by 2050. Setting aside the average age of the population, with a greater number of residents comes a greater need for medical services.

Image 2: Australia’s Population Projections, M3 Property
Government Support

Swells in demand for healthcare aren’t new and have long been monitored by both the government and medical professionals. The already stretched public system is heavily reliant on the nation’s private services to keep demand serviceable. As a result, both sides of government have made clear their intentions to fund the sector and improve the affordability of health insurance, making medical services more accessible.

Currently 86% (Australian Bureau of Statistics) of Australians are utilising bulk billing, meaning a record number of residents have access to healthcare services than ever before.

Image 3: This number of Australian citizens with private health insurance, Australian Bureau of Statistics
Favourable Lease Terms

In most scenarios, healthcare assets typically offer a longer lease term or WALE than more traditional ‘core’ asset classes. For private and institutional groups, this results in decreased investment risk, while also allowing greater flexibility in terms of divestments and acquisitions across what could be a range of economic cycles.

Healthcare leases often feature fixed rental reviews ranging from 3-4% while lease incentives are also viewed as minimal.

Additional Drivers

Other investment drivers include those which are common amongst the country’s broader investment market, including:

  • Record low costs of capital
  • Comparably stronger yields for foreign investment groups given the weak value of the AUD

So, what does this mean for the healthcare investment market in the next financial year?

In a market where commercial and residential sales volume has plummeted and is estimated to be the lowest volume of stock on record since 1991, quality healthcare and social infrastructure investment opportunities are few and far between.

As uncertainty for the what the future may hold will remain healthcare’s essential service status and past performance is likely to see a raft of emerging market entrants who have not traditionally played within the space look to gain a foothold.