Why Australia’s healthcare real estate investments are gaining momentum

The country’s high population growth forecasts are one of the key factors.

he healthcare sector is becoming more popular to property investors especially during the pandemic. According to Dexus Research, mergers, acquisitions, and joint ventures are becoming increasingly common in the healthcare sector, as investors contend with a more competitive investment market. 

“Limited available assets are seeing large real estate owners and fund managers work together to increase their buying power. Additionally, there is growing investment in the development of health precincts, with sites being acquired specifically for such developments.”

Here’s more from Dexus Research:

Of note, the recent Centuria and Morgan Stanley Real Estate Investing partnership highlights an alternative method of entry into the Australian healthcare property market - being the recapitalisation of an existing Centuria healthcare vehicle with Grosvenor.

Institutional owners targeting healthcare assets are increasingly focusing their attention in high-growth suburban areas of capital cities. These are areas that are set to benefit from high levels of population growth, have favourable demographics and high levels of infrastructure activity.

Longer life expectancies, a more aged population, growing demand for medical services and increasing government investment into the sector are all proving to be strong tailwinds for investment into healthcare real estate. Indeed, Australia’s population growth forecasts are among the highest of all OECD nations.

This strong investment demand is now reflected in healthcare pricing, with discount rates for healthcare assets now the lowest of all core property sectors; 5.4% for healthcare versus 5.6% for industrial. There is also very little differential between the healthcare sub-sectors, with cap rates for medical centres (4.6%) only marginally higher than hospitals (4.5%), indicating strong competition for all types of assets.

While institutional investors are driving demand for larger assets with development potential, smaller private investors looking to diversify into the healthcare sector, are more active in the transaction of medical centres, driving cap rates lower.

Amid the current competitive environment, quality is becoming even more important, to secure stable long- term income streams. As healthcare becomes more institutionalised, the focus on the quality of tenants is growing, with the most sought after properties being those that are secured by larger tenants who have long-standing and propitious terms with health insurers, in trade areas with favourable demographics. These sorts of businesses usually have high set-up costs that act as a barrier to entry, reducing competition.