Investing in Healthcare Property
Australia’s ageing population is driving strong demand for hospitals and other health facilities. Known for the defensive chracteristics and long leases, healthcare assets are keenly sought. In this guide we dive into the fundumentals of investing in healthcare property.
The healthcare industry in Australia has continued to grow steadily, increasing in both size and complexity. The industry is comprised of a number of key players from the public and private sector, both of which have continued to increase the level of service provided to patients in line with the rising demands of Australia’s ageing population. Australia’s ageing population is considered a key driver of industry revenue with demand for healthcare services evident as the pool of high risk patients increases. In turn, this creates demand for more beds and better quality healthcare related properties across Australia, supporting ongoing investment in healthcare properties and arguably underpinning the strengthening values of healthcare properties.
Revenue for the general hospitals has grown by an average of 3.4% per annum over the five years to 2016-171. This reflects increasing demand for public hospitals largely due to the ageing population in Australia as well as strong demand for private hospitals as the Federal Government of Australia (“Federal Government”) provides incentives, such as tax incentives, for consumers to invest in private health cover. The Australian healthcare sector is forecast by IBIS World to grow at a compound annual growth rate of 3.2% over the 5 years to 2021-22.
Key factors driving the growth of the healthcare sector and in providers offering quality services are the funding arrangements supporting hospitals (public and private) and the ability of such hospitals to meet demand. The below discussion comments upon the funding arrangements underpinning public and private hospitals and changes in bed (capacity) requirements as factors impacting the future of the sector.
Public hospital funding
The major sources of funding for public hospitals are State/Territory Governments and the Federal Government. In the 2016-2017 Federal Budget, the Federal Government presented that it would fund a significant portion (45%) of the growth in hospital services for the three years from 2017-2018.
Government funding beyond 2019-20 will be dependent upon future agreements negotiated between the government and states. Given recent fiscal pressure, all tiers of government are seeking to ensure that ongoing spend seeks to reduce the strain on the public hospital system through:
- The provision of incentives for general practitioners (“GPs”) to bulk-bill patients
- Encouraging more Australians to obtain private health insurance cover
- State Governments contracting with private hospitals to undertake elective surgeries in order to reduce public hospital waiting lists.
Private hospital funding
The major sources of funding for private hospitals are private health insurance funds and the Federal Government (largely via health insurance rebates). The ongoing profitability of private hospitals is therefore largely dependent upon the Federal Government continuing to support private health insurance which is likely. The breakdown of public and private funding sources is provided below.
Given increasing demand on hospitals, the number of beds available and the length of patients’ stays are key factors influencing the demand for, and thus inherently the value of, healthcare related properties. Broadly, there has been growth in the number of beds but with private hospital growth outstripping that of public hospitals. Based on data from the Australian Institute of Health and Welfare for 2014-15, the number of public hospital beds has increased by an average of 1.1% between 2010-11 (57,800 beds) and 2014-15 (60,300 beds). Over the same period, private beds have increased by an annual average of 2.9% from 28,400 to approximately 32,000. In addition, between 2010-11 and 2014-15, the number of patient days increased by an average of 1.7% each year, from 26.9 million to 28.8 million. For private hospitals specifically, the number of patient days increased an average of 2.8% per year, and the proportion of patient days that were in private hospitals increased from 31.0% to 33.0%.
However, such growth may be offset, at least to some extent, by the use of less invasive surgical techniques following medical advancements which has increased patient throughout and enables faster discharge of patients, thereby reducing demand for hospital beds.
Performance of Healthcare Property funds
Healthcare as an alternative property sector has really emerged to be one of the most sought after sectors both in Australia and abroad. Historically, the performance of investing healthcare property has been strong relevant to other property sectors, with strong investor demand for associated assets and funds, given the strong thematic and typical long leases. The greatest challenge over time has been the ability to acquire assets, as they don’t trade frequently.
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For more information on commercial property in general, read our article Investing in Commercial Property – The Ultimate Guide.