Mapping opportunities of metro and regional health property investments

Over the past decade, Australia’s healthcare property sector has evolved into a core pillar of the national real estate landscape. As institutional investors increasingly diversify away from traditional office and retail assets, healthcare property and its life sciences subsector have emerged as a compelling alternative.

Entering the next property cycle, investors are expanding their investment parameters and exploring opportunities beyond the traditional metropolitan hubs and into regional markets. Unlike other sectors such as office, where investible assets tend to concentrate in major cities, healthcare properties are geographically dispersed across both metropolitan and regional areas.

This raises a critical question for investors: should regional healthcare assets feature more prominently in their portfolios?

Regional healthcare investment can be an attractive inclusion in portfolios for several reasons. Healthcare demand is non-discretionary and largely government-backed, with regional and remote areas receiving greater per capita support to address access and service delivery charges. For example, Australia’s Medicare Benefits Schedule (MBS) offers higher incentives for general practitioner (GP) consultations in regional and remote areas, which are often nearly double those available in metropolitan centres. This policy reflects efforts to offset workforce shortages and service gaps.

In addition, regional healthcare assets typically offer higher initial yields and face less competition than their metropolitan counterparts. The pricing gap between metro and regional ‘core’ healthcare real estate creates potential value opportunities for investors willing to look beyond metropolitan areas.

Despite the yield advantage, regional healthcare property investments carry inherent risks, predominantly linked to workforce shortages. According to the Australian Institute of Health and Welfare (AIHW), in 2022, major cities had more than twice the number of full-time equivalent (FTE) medical practitioners per capita compared to very remote areas, and about 50 per cent more than remote and outer regional areas. In raw numbers, major cities had approximately 80,000 FTE medical practitioners, while all regional and remote areas combined accounted for just 21,600.

This imbalance directly impacts service delivery in non-metro areas, influencing the credit quality and security of rental income, both critical for property investors seeking stability.

From a valuation standpoint, regional and rural healthcare properties generally trade at wider capitalisation rates than metropolitan assets, typically 50 to 200 basis points higher. This yield spread fluctuates across property cycles. It narrows in robust markets, sometimes to as little as 50 basis points, and expands in softer markets as risk is more acutely priced. From a property investor’s perspective, capital preservation and growth are generally key – this is possible to achieve in a regional asset, however only when the risk is correctly priced at acquisition.

At Barwon, when considering assets outside these core geographies, we apply rigorous scrutiny. Investments in regional locations must demonstrate a compelling valuation gap relative to metropolitan benchmarks and secure tenants with strong credit profiles, often state government entities, to ensure long-term income stability.

This disciplined approach enables for the balancing of opportunity with risk mitigation. As healthcare demand continues to grow across Australia’s diverse regions, it is evident that carefully selected metro and major regional healthcare properties will offer resilient income streams and attractive total returns for investors.

Sophie Bannerman manages the Barwon Healthcare Property Fund

Sophie Bannerman