Many healthy returns

Commercial property investors face unprecedented times as elections set the scene in a post-COVID world.

Total Property - Issue 5 2020

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Learnings from the COVID-19 pandemic will undoubtedly reshape the healthcare industry globally and, as a result, the real estate that underpins it.

Even pre-COVID-19, medical-related property was garnering significant traction in the market.

Healthcare delivery models are evolving resulting in new investment opportunities and, with yield compression in other core asset classes, investors are looking for higher returns.

Private investors, syndicates and institutional investors have seen healthcare real estate morph into an increasingly sophisticated asset class. It’s a segment of the market that seems recession-proof thanks to an ageing population, the generally non-discretionary nature of the provision of healthcare services and other property fundamentals such as higher yields and long weighted average lease terms.

Corporate and community trust ownership structures have seen some general practitioner (GP) remuneration models change, while property trusts and syndicated fund managers have given investors access to diversified healthcare real estate investment portfolios with scale.

New research from Bayleys’ global real estate partner Knight Frank, says in 2019 in the UK, the healthcare asset class performed well relative to the broader commercial property market despite political and economic uncertainty and funding/regulatory issues within the sector.

Average total returns to the healthcare property sector in the UK have averaged 8.7 percent over the last five years.

Proposed major structural governance changes to New Zealand's health system at a macro level and a groundswell of change at the general practice and health asset ownership levels, means that things are interesting in New Zealand, too.

The recently-released Health and Disability Systems Review recommends big shake-ups to district health boards and primary health organisations including new entities and authorities to oversee changes.

General practice (GP) in New Zealand is supported by the Government bulk-funded model with payment directly related to the number of patients on practices’ books and this is driving the acquisition path in the GP sector.

Jayson Hayde, Bayleys national director of business sales, says New Zealand’s multi-layered healthcare system offers a number of investment channels and he’s seeing proactive acquisition trails in the healthcare real estate and medical business operational arena.

“Large healthcare groups with scale and financial stability can offer administrative and delivery-of-care benefits for often overworked and under-resourced doctors who are entrenched in independent private practice,” he says.

“It is a step-change from the traditional model of a sole practice family GP working from a villa in the suburbs.

“We’re seeing broader community health hubs with radiology, laboratory, physiotherapy and other remedial health services all under the same roof with many located within retail and mixed-use precincts for convenience and accessibility.”

Disruptors to the pharmacy sector from “warehouse” and online business means the sole-charge pharmacist working from a retail frontage could also soon be a thing of the past.

Total Property checks up on some of New Zealand’s leading players in the healthcare real estate market.

Flying the flag

NZX-listed Green Cross Health Limited is a New Zealand-owned and operated primary healthcare provider with multi-disciplinary healthcare teams working around the country with an emphasis on collaboration where GP practices intersect with other primary care services.

The group comprises 43 medical centres with most operating under The Doctors brand; 360 pharmacies under the Unichem and Life Pharmacy banners; Access Community Health and Total Care Health Services.

The latest Green Cross Health NZX report talks to “a continued strategy of targeting compelling acquisition opportunities” either as equity partners or owners, with patient rolls a key driver.

David Thompson, Green Cross Health medical division acquisitions manager, says a compelling business acquisition opportunity would demonstrate sustainable business performance, be a natural fit with Green Cross Health and its values, and would demonstrably benefit from being part of a collaborative network.

Thompson says there are any number of reasons for GPs wanting to sell or go into partnership.

“Because every situation is different, we work with owners to build a plan that suits them – be it planning a staged exit strategy, providing much-needed capital investment to grow their practice, or simply relieving the day-to-day operational burden,” he says.

“We offer a tailored partnership complemented by full clinical leadership and governance to provide operational excellence.

“We act as an enabler for practices to grow, provide quality care, meet compliance and health and safety regulations, and have resource in human relations, payroll, recruitment and training.”

Thompson says “lifestyle” is now a real priority for GPs and is a strong reason to reassess their practice responsibilities.

“Having Green Cross medical division as an equity partner or owner allows GPs to get some of their life back.”

Green Cross has a rapidly growing network of medical centres supporting more than 270,000 enrolled patients across the country.

“The Doctors has developed into a strong local brand particularly in Whangarei, Auckland, Tauranga/Mt Maunganui, Whakatane, Napier and Hastings,” Thompson explains.

“The consolidated, established model in these regions means we can provide deeper support and collegiality.

“We are actively looking for new opportunities and would like to develop our presence in the Waikato, lower North Island and the South Island.”

Thompson says the wider health system’s response to COVID-19 has reaffirmed the primary care sector’s ongoing role in healthcare delivery making it an even more compelling place to be doing business.

Vital healthcare delivery

Vital Healthcare Property Trust is the only NZX-listed dedicated healthcare property fund.

It owns 40-plus high-quality medical and healthcare facilities across New Zealand and Australia including private hospitals, aged care, mental health facilities, acute and rehabilitation hospitals.

New Zealand accounts for 25 percent of its asset portfolio and includes Ascot Hospital in Remuera, Kensington Hospital in Whangarei, Bowen and Wakefield Hospitals in Wellington, and Royston Hospital in Hawke’s Bay.

Aaron Hockly, fund manager for Vital, says the removal of ideology around real estate ownership in the health sector would assist growth in this asset class.

“Politics can be a handbrake at both a healthcare delivery level and at a real estate level and I believe the Government focus should shift from ownership to ‘how does the Crown get the best value’ across healthcare delivery, risk and financial returns,” he proffers.

Hockly says private sector landlords – including listed entities like Vital, mutuals like Southern Cross and charitable organisations like Sisters of Mercy – are typically better owners of property than the Government.

“The private sector is well set-up for carrying out due diligence, construction management, reporting to deal with building issues and other responsibilities that come with property ownership,” he says.

“Building failures at Middlemore Hospital are an example where things could have been very different had a reputable landlord been at the helm.

“The Government has already moved away from owning its office buildings with an explicit preference for leasing, and this should be extended to other classes of real estate – including healthcare assets.”

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