THE PROPERTY DEVELOPMENT REVIEW
QLD MARKET OVERVIEW ...Cont’d
health or social infrastructure however may not have the capital to develop the project themselves. Institutional property groups have generated a significant amount of activity within the alternative real estate sector to-date, where do you anticipate the opportunities exist for private investors to begin building their exposure / portfolios to alternatives. The majority of the specialist REITs in the sector are net sellers of existing assets and likely will be for the next 6 months as they reposition their portfolios towards institutional-grade assets and raise equity to fund the delivery of what is collectively a significant development pipeline. This creates an opportunity for private investors to acquire good quality assets being divested by these groups and in an environment where there is less competition from the established healthcare REIT investors. We are regularly seeing new private investors and family offices emerge in our sales processes and educating themselves on the sector. Putting aside the current construction price inflation which affects all property sectors, the real bottleneck on the supply of new healthcare facilities in Australia is not so much the supply of physical real estate however the sup ply of staff – Doctors and nurses for medical facilities and carers in the Aged Care sector. The challenges in staffing new facilities and the long ramp-up phase to profitability provides a floor under the valuation of existing, high-trading assets with stabilised tenancy profiles. Thanks for sharing your perspectives - in closing, are there any other major investment trends or market themes that you’re analysing within an alternative real estate context that are pertinent for commercial property investors. We would encourage investors to maintain a broad lens when looking at healthcare real estate – much like the traditional asset classes there are multiple sub-sectors each with different drivers of the underlying tenant’s businesses. Similarly, we would also encourage investors to be open to acquiring assets in regional areas given the healthcare needs of the population outside the East Coast capital cities are just as critical as those within, and in many instances regional markets have a higher barrier to entry for supply of new facilities on account of availability of staffing and construction costs. When assessing a new opportunity we would recommend investors to focus on the performance of the tenant’s business, in particular throughput volumes, funding model (bulk-billing or co-paymentfor GP’s), private health insurance subscription rates for day or short-stay hospitals, and overall local demographics including age profiles and prevalence of chronic disease. We are aware of a number of high quality, investment-grade assets coming to market between now and Q1 2025 and would be happy to engage with interested investors looking to expand their portfolios and deploy capital into the sector.
I would attribute part of this to a desire for greater sector diversification away from the traditional office / retail sectors which have faced headwinds post COVID, however also the opportunity to follow the macro demographic trends and needs of both growing and ageing populations. There is a particular need of the latter cohort for greater healthcare facilities and accommodation in this phase of life, with these services often underpinned by Govt. funding, and Australia has consistently had an undersupply of real estate to provide these services. Based on your conversations with clients, what are the benefits of investing in alternatives & to what extent has the more defensive income profile & stable nature (portfolio hedging) of these assets been a drawcard, particularly for new investors. Fundamentally healthcare real estate provides an opportunity for investors to gain exposure to an asset class which enables the provision of an essential, non-discretionary service. Unlike retail, where the impact of online shopping has decimated department stores in regional malls, if a patient requires medical treatment or a procedure, in almost all cases a Doctor needs to be physically seen and a clinic or hospital visited - this can’t be substituted. For context the Australian Institute of Health and Wellness (AIHW) lists the annual expenditure on healthcare and related services in Australia for 2021-22 as $241b and approximately 73% of this funding comes from State and Federal Governments. The majority of these services were provided in specialized healthcare facilities, be it your local GP clinic or specialist centre, or in higher acuity facilities as needed. This is not to say that healthcare real estate is recession proof and risk free – there are headwinds on certain types of tenants in the sector who for various reasons are seeing both compression in margins and reductions in throughput, which creates tenancy risk and in some cases has led to tenant insolvencies. From an Australian perspective, alternative real estate assets are still relatively new to the market with a significant amount of maturity to come - what do you see is this sectors’ long-term growth potential. We see significant long term growth potential given the structural undersupply of healthcare real estate and accommodation vs the populations’ needs both now and forecast. With State balance sheets under pressure we see significant potential for private-sector capital, in particular institutional, superannuation or sovereign wealth capital to partner with public-sector health needs under more equitable Public- Private Partnership structures. Previously in Australia PPP’s have typically taken the form of structured financing arrangements which have worked out to the detriment of the public sector stakeholders. Concepts such as a Sandwich lease or Build-Lease-Transfer (BLT) model are proving effective, in particular where underutilised land might be owned already by a State, faith- based or education organisation who are looking to build new
July / August 2024 – 63
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