Healthcare property sector poised for a ‘second wind’ of growth

By investing in healthcare property, specialist teams can offer both stable income and the potential for capital growth. But it’s the idiosyncratic characteristics of property healthcare that make it so attractive according to Barwon.

While the benefits of the healthcare property sector are not unknown to investors, a variety of factors are combining to pitch the asset class as one of the most promising alternative property investments in the market.

These factors were highlighted in a recent whitepaper published by Barwon Investment Partners, The Outlook for Healthcare Property, which made the case that healthcare property is experiencing a number of tailwinds poised to drive its competitive advantage over traditional property sectors. These include robust government funding, a growing and ageing population, technological advances and inflationary construction costs which will fuel rental growth.

“The sector is posed to experience a ‘second wind’ of investor demand,” the alternative investment manager put forward, adding that “underlying sector fundamentals combined with macro-economic tailwinds will see continual and increased demand for healthcare property in Australia over the medium term”.

By investing in healthcare property, specialist managers like Barwon can offer investors the best of both worlds; that is, stable income plus the potential for capital growth. In Australia, investment in the healthcare property sector has been relatively subdued compared to other regions, but that has shifted in recent years. Strong healthcare property performance during the pandemic coupled with the structural headwinds experienced in sectors such as office and retail, means there has been a broad shift in sentiment from investors away from the traditional property sectors towards alternatives like healthcare.

But it’s the idiosyncratic characteristics of healthcare property that make it so attractive, the paper explains, with strong government healthcare expenditure front and centre. “Healthcare property benefits from the non-discretionary nature of healthcare expenditure,” Barwon states. “Its defensive nature is driven by the strong public underwrite of health funding provided by Federal and State governments in Australia, [and] not necessarily the economy.”

The Commonwealth Government and programs like Medicare are the major driver of a strong public system, and remains at the core of the Australian healthcare system as the primary vehicle to subsidise health treatment. Over the last 5 years healthcare expenditure has increased 6 per cent per annum (3.8 per cent real growth), and Treasury predicts that expenditure will increase from $4,000 to $9,000 per person in real terms over the next 40 years.

Underscoring this increased expenditure is Australia’s growing and ageing population, with the median age forecast to increase by 4.6 years and the number of Australians over the age of 65 expected to double in the next 40 years.

“This demographic shift will exert pressure on healthcare services across the board, as older people in our communities exhibit demand for health services that is a multiple of the younger members of our communities” Barwon states. “The private healthcare property sector will need to play an important role in the provision of sufficient healthcare infrastructure to ease the impact of increased patient volumes.”

Also fuelling the sector’s “second wind” will be technological advances, which the government is supporting in a number of ways including by providing funding support for telehealth to increase practice efficiency. “Whilst Telehealth is aiding to alleviate pressure on the primary care system, the demand for GP services continues to increase. Telehealth will remain a vital component of the primary healthcare system, complementing traditional GP visits, rather than replacing them. We also see new technological advances in areas such as cancer or cardiac that will require purpose built facilities to accommodate the technologies utilised to gain better patient outcomes”

A final factor the Barwon team identifies is the importance of ever-increasing construction costs, which is predicted to drive rental growth in the medium term. The impact of rising construction costs is heightened in the healthcare industry. Healthcare properties have a high reliance on specialised services such as advanced air-conditioning systems, electricity backup systems and oversized lifts, as well as reinforced structures to accommodate specialist plant and equipment. “With limited cost-effective new-build alternatives to existing healthcare properties, Barwon foresees that ongoing construction cost escalation will drive increases in rental levels in the medium-term, as healthcare operators compete for a small pool of existing quality healthcare assets,” Barwon states.