The resilience of the private healthcare market in uncertain economic times should, in theory, make a compelling case for investment into the sector by property companies.
Yet, healthcare property still remains a relatively untapped market for South Africa’s property sector.
In the US, healthcare funds such as Ventas and Health Care REIT, which each manage investments in senior housing and healthcare properties valued at more than US$15 billion (R207 billion), count among some of the biggest companies listed on the New York Stock Exchange.
While a handful of property counters listed on the JSE’s more than R500 billion real estate sector have exposure to healthcare properties, these are mostly part of larger commercial property assets.
Counters such as Growthpoint Properties, Redefine Properties, Vukile Property Fund and SA Corporate Real Estate Fund collectively hold five properties which are occupied by healthcare groups.
But the healthcare market is piquing the interest of more property players.
Liberty Properties, a wholly owned subsidiary of Liberty Group, recently added healthcare to its range of assets with the development of the R220 million Melomed Hospital in Richards Bay.
Liberty has partnered with black women owned entity Tuscaloosa in co-owing the 10 000 square metre hospital development with 100 beds.
The hospital will be anchored by healthcare group Melomed and is expected to be completed by the end of 2016. Already a 20-year lease has been secured with Melomed.
Stanlib fund manager Alex Phakathi says the healthcare asset balances Liberty’s R30 billion property portfolio from its dominant retail focus with assets such as Sandton City and Eastgate Shopping Centre in Gauteng.
Stanlib’s Direct Property Investments arm manages the Liberty Property portfolio. “We are relatively low in industrial; this hospital will increase our exposure to the industrial sector,” Phakathi says.
He adds that the healthcare asset is ticking all the boxes on a return basis for the Liberty Property portfolio. “The healthcare investment is comparable with the returns that have been achieved by the industrial sector over a five-year period.”
The industrial is the best performing sector, as IPD’s annual South African property index for 2014 suggests. The sector saw total returns of 14.1%, followed by retail (13.3%) and office (12.1%).
Upside to healthcare
Meago Asset Managers director Anas Madhi says Liberty’s deal indicates an increasing awareness by property funds of the opportunities available within the healthcare sector.
“Healthcare properties would usually be single tenant, attracting triple net, long-term leases, with limited maintenance capex and substantial diversification is available in terms of usage, business focus, geography, operator and tenant,” Madhi explains.
Also, an aging population which will require more beds and medical facilities creates fertile opportunities in the sector.
Although long-term leases may be attractive, there is also a risk to this. As Evan Robins, listed property manager for Old Mutual Investment Group’s MacroSolutions boutique puts it: “If you lose a tenant [hospital group] and no other hospital group can open there, you are left with a dud.”
Specialist healthcare Reits
Despite recent talks of the need for specialist real estate investment trusts (Reits), it seems like healthcare-focused funds are a long way from coming into fruition.
The most recent attempt to list a healthcare fund was by Ndabezinhle Mkhize, deputy chief investment officer at Eskom Pension and Provident Fund, who canned the listing of Healthcare Property Fund in 2010 after a property vendor suddenly pulled out of a sizable deal. This jeopardised any chances of getting asset managers to financially back the proposed fund.
In property, size matters in assembling assets for a fund. And healthcare heavyweights such as Netcare and Mediclinic have a tight grip on property assets, as in most cases they are the owners of properties which their businesses operate from.
“Healthcare operators view their property assets as strategic and at this stage want complete control over how those assets are managed and developed,” says Grindrod Asset Management chief investment officer Ian Anderson.
If their attitude changed, then it would provide a platform for the creation of specialist healthcare Reits in South Africa, Anderson adds. “There aren’t enough properties to currently sustain a specialist healthcare Reit.”
The US is considered a mature Reit market, with healthcare funds trading at a significant premium to other property counters – which Madhi says is indicative to the investors appreciating the defensive nature of the industry. “There is also a significantly larger pool of attractive acquisition opportunities available [in the US] including hospitals, nursing homes, retirement homes and day clinics,” he says.
Madhi says property companies must actively pursue the larger hospital groups to unlock shareholder value by changing their property strategy, working closer with independent healthcare operators or working with financial institutions to support new healthcare developments.
The writer was a guest of Stanlib at the launch of Melomed Hospital in Richards Bay last week.