Lucrative Australian healthcare assets pique investors’ interest

The healthcare sector has offered attractive risk-adjusted returns over the past 15 years.

Healthcare real estate assets proved to be defensive income streams since it has been resilient to cyclical economic movements. According to Dexus Research, the institutionalisation of the sector has continued as both listed and unlisted institutional investors have increased their exposure. 

“There has also been a notable increase in merger and acquisition activity and portfolio acquisitions, as demand outstrips investment opportunities.”

Here’s more from Dexus Research: 

Uncertainty about inflation and the current economic environment has investors chasing the embedded income growth that comes with healthcare real estate, inherently tied to the longer WALEs and exposure to tenants providing essential services. Over the past 15 years, the healthcare sector has offered attractive risk-adjusted returns. 

The strong structural thematics of healthcare (such as a rapidly ageing population and increasing healthcare spending) will likely continue to attract investors to the sector. Investors’ hurdle rates appear to be falling as they recognise the strength of cash flows and acknowledge healthcare’s place as the largest ‘alternative’ real estate sector. The low correlation of returns between healthcare and traditional sectors like office and retail, provides investors with diversification benefits at a portfolio level. 

This flurry of investor interest and increased demand, combined with a reduction of required returns has driven yields down, making the transaction market more competitive. Additionally, in the current low interest rate environment, the low cost of debt is still a big driver for yield compression.

There is evidence of healthcare assets being transacted at yields comparable with prime office and industrial assets. Indeed, recent acquisitions by Centuria have been transacted at yields of 4.1% (Perth Clinic, 21-29 Havelock Street) and 4.5% (Sunbury Medical Centre). There is also increasing interest from foreign investors, which will add further pressure to yields. In October, New Zealand listed Vital Healthcare (controlled by Canadian NorthWest Healthcare) transacted on Tennyson Centre in Adelaide at a yield of 4.7%.