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Capitalising on hospitals: REITs’ latest investment strategy

By Ingrid Filmer
29 February 2024 | 11 minute read
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The commercial property sector in Australia is undergoing a strategic transformation as major Real Estate Investment Trusts (REITs) shift their focus towards acquiring hospitals to diversify their portfolios and capitalise on the ever-expanding health sector.

Traditionally seen as essential community services, hospitals have evolved into lucrative investments due to their stable income, long-term stability and high capital status. This shift is further fuelled by the consolidation trend within the healthcare sector, prompting REITs to pursue larger-scale acquisitions, particularly in integrated healthcare complexes, which offer efficiency, adaptability and market dominance.

The evolution of the healthcare industry is driven by various factors, including a growing and ageing population, expanding services and substantial government support. This has positioned healthcare as a resilient and robust investment option, as highlighted by the recent federal budget, which allocated significant funding to health, aged care and sports for the 202324 fiscal year, totalling $580 billion over four years.

Furthermore, the healthcare industry has experienced strong growth, with new health businesses increasing by more than 6 per cent last year.

Burgess Rawson’s Healthcare Industry Insights Report indicates that medical asset yields have stabilised at 6.08 per cent.

Enquiries from potential buyers reflect this stability increasing by 25 per cent this year alone.

As a result of the strong fundamentals, REITs are expanding their market share in the healthcare sector, a trend expected to gain momentum in the short and longer term.

Recent REIT acquisitions supporting the strategic transformation include:

• HealthCo Healthcare & Wellness REIT (HCW): In 2023, HCW announced its intention to acquire a 100 per cent interest in 11 private hospitals located in major Australian cities from Medical Properties Trust. These hospitals, leased to Healthscope, commanded a purchase price of $1.2 billion, marking a significant move towards larger-scale investments within the healthcare sector.
• Dexus Healthcare Property Fund (DHPF): DHPF recently sealed its first transaction post a capital raising period with the acquisition of Southport Private Hospital on the Gold Coast. Valued at $51 million, this acquisition adds to DHPF’s growing portfolio of healthcare assets, further underlining the momentum towards expansive healthcare complexes.
• RAM Essential Services Property Fund (ASX: REP): REP joined the fray by acquiring Eden Private Hospital from Vital Healthcare Property Trust (NZSE: VHP) for $28.5 million on 28 June 2023. This strategic acquisition underscores the enduring value and potential of smaller medical assets in the market, positioning REP for long-term growth and profitability.
• Australian Unity: Launched 24 years ago, the $3.8 billion fund, one of the largest unlisted healthcare property trusts in the country, delivered an 8.8 per cent total return over the past year.


What the trend means for small to mid-tier investors

It's crucial to recognise the enduring appeal of smaller medical properties amid this pursuit of scale.

This strategic shift is not only reshaping the real estate investment landscape but also offering investors coveted opportunities in the medical real estate market. Medical tenants, known for their longer tenures compared to other commercial assets, provide investors with a stable and predictable income stream over extended periods.

Medical assets, spanning all price points, offer investors a reliable income and long-term growth potential, courtesy of their typically extended leases. Acknowledging the intrinsic value of smaller medical assets empowers investors to diversify portfolios and tap into a niche market segment poised for resilience and profitability.

We’re anticipating an uptick in demand in 2024, with investors offered the opportunity to diversify their portfolios and take advantage of the resilient and growing healthcare sector. As this sector evolves, investors can position themselves for sustainable growth and profitability in the ever-evolving landscape of real estate investment.

Ingrid Filmer is the CEO of Burgess Rawson.

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