Private hospital real estate has outperformed: CBRE

Private hospital real estate has outperformed: CBRE

6 July 2018

Like retail, office, hotels and many other sectors, Australia’s healthcare industry is evolving to adapt to changing demographics, technology and consumer expectations, according to CBRE’s latest Retirement and Healthcare report.

15% of Australia’s population is aged over 65 and forecast to grow to 18% of the population by 2027 and 20% by 2037. This is significant as admissions to aged care centres and hospitals increases rapidly after age 70, placing great pressure on healthcare services.

Consumers’ expectations are changing with the advent of technology. Newer operating models will emerge across the broad healthcare categories over the next decades. There is great pressure on stakeholders to provide and fund healthcare and the impact on real estate is expected to be significant.

cbre retirement and healthcare

 

As the share of population over 65 increases over the next two decades, it will place pressure on stakeholders to provide and fund healthcare. The impact on real estate is expected to be significant. Healthcare is a large part of the economy, with Australia’s health expenditure close to 11% of GDP in 2017, comparable to the United Kingdom (~9%), Canada (~11%) and New Zealand (~11%), but much lower than the United States (~17%).

The CBRE report highlights that hospitals are an essential part of Australia’s healthcare landscape. In 2016 there were approximately 10.6 million hospitalisations and over $62 billion spent on hospitals, equating to ~4% of GDP. The pace of hospital spending has far exceeded GDP growth over the past five years at 5.2% p.a. versus 2.5% p.a. respectively. Hospitals are labour intensive, requiring an average of 4.5 staff per bed. The forecast population growth and ageing population will continue to drive spending on healthcare infrastructure and necessary labour costs.

In terms of private hospital real estate investments, the CBRE report commented that private hospital real estate investments have returned on average ~16% p.a. over the last decade, outperforming the three core property classes: office, retail and industrial. Last year’s performance was particularly strong with hospitals achieving a 25.4% total return, while the office market (the best performer of the core sectors) recorded 13.4%. Capital growth has been the primary driver of the double-digit growth, especially in the past three years, driven by rising investor interest in the sector and lower borrowing costs.

CBRE

 

The report also provides several compelling reasons to invest in hospitals, including an ageing population and reforms in the industry which saw a re-rating of healthcare assets. There is also an opportunity for redevelopment/value-add investments, given that Australian hospitals are ageing and present opportunities for newly built and modular designs that meet higher technology requirements. Finally, during periods of heightened economic instability – like the fundamental market risk re-pricing during the GFC – the hospital sector exhibited the most stable total return profile compared to office, retail and industrial. During the GFC, hospital yields didn’t expand as much as office and industrial.

Click here to read the full report.