By Chris Smith
As published in the Property Australia March 2011 edition
Healthcare infrastructure in Australia, such as medical centres, hospitals, aged care and retirement villages, is a
fast-growing sector that is continuing to evolve and change at a rapid rate.
The sector already provides significant opportunities for property developers, managers, service providers and
investors, and these opportunities should continue to increase over the next generation at least.
However, there are still a number of challenges despite the strong drivers.
It is well known and understood that Australia’s ageing population will have an enormous impact on the economy
over the next 20 to 30 years. In addition, the ongoing issues of chronic disease and obesity place heavy demands
on Australia’s healthcare system. These demands will need to be met both by government initiatives, and by the
private sector.
Consider some of the numbers:
- Over the next four years, the government is expected to spend $64 billion in the hospital and health system and $44 billion in direct financial support for aged care
- Growth will be driven by the ageing population as well as an increasing demand for health services. Over four million Australians (20 percent of the
population) live with some degree of disability, and more than 50 percent of the population is overweight or obese.
- Private health service providers continue to supply cost-effective services and private health insurance membership continues to increase. Fifty-three percent of the Australian population aged over 15 now has private health insurance, which gives them access to the services provided by private hospitals and medical centres.
These figures underline the potential for growth in the sector, in particular for private operators and, as a result, for property developers and managers.
Hospitals
In the hospital sector, the main opportunities for developers and operators are in private hospitals and facilities providing day procedures.
Private hospitals continue to experience solid growth. Forecasts suggest that by 2021, private hospitals will treat 50 percent of all hospital patients, while day surgery centres are also taking on services traditionally provided by hospitals. Up to 60 percent of all medical procedures are now undertaken as day procedures.
Well-located, high quality hospitals continue to be in tight supply and are highly sought after by wealthy private and institutional investors, providing strong
support for prices.
Yields for hospitals are typically in the range of 8.5 percent for well-located, high quality hospitals, and up to 11 percent for smaller or older hospitals.
Another area where there is strong potential for growth is medi-hotels, which provide accommodation for the families of patients and, in some instances, for patients themselves who need to stay close to medical attention but don’t need a 24-hour hospital bed. Such facilities have enormous potential in Australia, where people in rural areas need to travel to regional centres to receive medical assistance for themselves or their family, and often require somewhere to stay.
Medical centres
Medical centres are now essentially ‘one stop shops’ offering a range of services – medical and otherwise – to the public.
They can provide a valuable community service by offering primary healthcare services that can help reduce the community’s reliance on the public health system.
The concept of the purpose-built medical centre first developed in the mid-1980s, from the traditional individual standalone doctors’ surgeries. Today, they are more likely to be freestanding multi-storey buildings providing a variety of services.
These services can include general practice, pharmacy, radiology, pathology, physiotherapy, psychology, speech therapy, podiatry, orthotics, dental, gymnasium, optician, consulting suites, day hospital, and specialty healthcare-related retailers, including optical sales or mobility aids. They are therefore attractive to a very broad range of potential tenants.
Yields for well-located, high quality medical centres are more closely aligned to the general commercial property sector and are currently at around 7.5 to 8 percent for those valued at under $10 million, and 8 to 8.5 percent for those over $10 million, depending on each property’s characteristics. Medical centres under $10 million often appeal to private investors, which has the effect of keeping yields tight in this price range.
Aged care
Aged care and retirement living services are often lumped together, but they are different sectors and require different treatment by property developers and managers.
Aged care covers assistance and support for the elderly and can include long-term care, nursing homes, hospices and in-home care.The main drivers of the sector include:
- The aeging of the population which increases demand for aged care accommodation
- A decrease in the care of the elderly within the family
- A greater acceptance of aged care housing as an accommodation alternative.
Aged care facilities usually include both high and low care accommodation and provide nursing care for patients who have a continuing need for nursing assistance.
This is an area that requires specialist knowledge and expertise, which can make it a difficult sector to operate in for those without access to the right skills.
However, demand for residential aged care beds continues to increase. At June 30, 2009 there were more than 178,000 operational residential beds in Australia, up from around 175,500 in 2008. This equates to 87 aged care beds for every 1000 people aged 70 years or more. The government’s planning target is 88 beds per 1000 by June 2011.
Retirement living
Retirement villages provide housing or accommodation for those over a certain age, but unlike aged care, does not provide medical or health services.
While most forecasts agree that retirement villages will see major growth over the next 10 to 20 years, this is the area that potentially offers the most challenges for developers and operators. Arguably, the biggest challenge comes from the needs of the potential residents themselves.
Over the next few years it is anticipated that there will be major replacement and construction of new retirement living facilities to meet the needs of the babyboomers. This will include offering on-site facilities such as gymnasiums, spas, libraries, swimming pools, cafes and restaurants, workshops and transport.
The main reasons for people choosing to move to a retirement village include: reduced health and mobility; a desire to downsize; and the attraction of a community and social environment. Increasingly, security and the opportunity to ‘age in place’ are also considerations.
Baby-boomers also require retirement villages to occupy inner-city and innersuburban locations, rather than rural or outer-suburban sites, so they can remain close to family, social networks and entertainment.
Changes to building regulations are also impacting on the developers and owners of retirement villages, for instance, requiring features such as ease of access, no change in floor levels and ease of reach, to better suit residents.
All of the above means that refurbishing existing sites is often not feasible. However, there is a shortage of suitably large sites for new developments.
Other factors impacting on the costs are the need to compete on price with existing sites, and the expectation by residents for larger unit sizes.
Furthermore, amenities such as airconditioning, internet, pay TV and dishwashers are now seen as standard.
Developers and operators that can get this balance right are likely to benefit from ongoing high levels of demand as babyboomers reach retirement age.
Overall, the underlying fundamentals for healthcare infrastructure remain strong and the outlook is very positive. Asset supply will continue to remain tight, meaning that rentals will remain firm, and the valuation yields on hospitals and medical centres are currently conservative.
Chris Smith is head of healthcare & retirement property funds at Australian Unity Investments. This article was originally published in the Property Australia, March 2011 edition.
