Here’s to our health: Australia’s medical real estate set to boom to 2041

AUSTRALIA, 16 June 2022 – Australia’s private hospital sector, currently worth $25 billion as real estate assets, is a sector that is expected to rise in value by at least 63 per cent during the next 20 years as our population ages, JLL’s research has found.

Government data shows Australia has more than 30,000 overnight-beds in 155 private hospitals, 45 mental health facilities and 35 rehabilitation clinics.

With people aged 65 and over forecast to make up 18.9 per cent of the population by 2041, the value of this sector of highly specialised buildings – together with new hospitals in the pipeline – will be collectively worth at least $41 billion, according to JLL’s new report Australian Healthcare Real Estate Outlook 2022.

Stand-alone medical centres, which are typically occupied by GP clinics, day surgeries or allied services, add another $15 billion in value to the Australian healthcare sector. A key drawcard for investors is the indirect government support for GPs and many allied health service providers through the medicare system, contributing to income stability.

Low volatility, typically long leases and strong demographic tailwinds make healthcare real estate increasingly attractive to both institutional and sophisticated private investors, JLL’s Head of Alternative Investments – Australia, Noral Wild, said.

“Healthcare is a non-discretionary expense, no matter what is happening in the wider economy,” Ms Wild said.

“We saw that during the Global Financial Crisis (2008-09) household spending on health remained steady even as consumers reduced spending in other areas. This has continued during the pandemic, ensuring the resilience of real estate associated with healthcare.

“In Australia, healthcare real estate is equivalent to 25 per cent of the industrial sector and about 10 per cent of the office sector by value. It is no coincidence that healthcare transaction volumes rose when COVID-19 challenged the office and retail markets and investors began looking for safer, more defensive assets.

“Though the ‘investable universe’ is relatively small, based on Australia’s shifting demographic profile JLL estimates that the value of the private hospital sector could grow by 63 per cent to 2041 to $41 billion. Development of new assets will be a key strategy for managers, and those who have existing relationships with major hospital operators will have a significant advantage,” Ms Wild said.

Operators invest heavily in the fit-out of their buildings, whose form is strictly regulated by legislation and often includes specialised construction features such as lead-lined radiation rooms. This means a typical lease is 25-30 years for private hospitals.

Australian Healthcare Real Estate Outlook 2022 reveals key trends of interest to investors:

• Australia had 4.32 million people aged over 65 in June 2021, comprising 16.8 per cent of the population. This proportion is
  forecast to rise to 18.9 per cent in 2041.
  
• People aged over 65 are the most active users of private hospitals (0.67 visits per capita in 2021, compared with 0.17 visits for the whole population in 2021)
  
• Some 2200 extra private hospital beds are in the development pipeline to 2029, currently representing a shortfall in supply
  when demographic shifts are considered
  
• Private health insurance uptake is slowly increasing again, with 45 per cent of the Australian population – 11.5 million people covered by a policy in 2021.
  
• Healthcare workers made up 14.4 per cent of Australia’s workforce in 2021, and forecast to rise to 15.9 per cent by 2031. 
  

JLL’s Director, Alternative Investments – Simon Quinn said about 25 per cent of the private hospital market (by value) was owned by institutional real estate asset managers according to JLL research estimates. The remainder was largely owned by operators and some private investors, but REITs were increasingly showing keen interest. 

“Since the onset of the pandemic many investors have broadened their strategy to include social infrastructure.

“Throughout 2021 we saw investment metrics across the healthcare sector considerably outperform core sectors including office and retail. The acquisition environment has become increasingly competitive over 2020 and 2021, putting downward pressure on healthcare yields.

“Transactions such as JLL’s recent sale of Darlinghurst medical centre continue to reflect low yields by historical standards,” Mr Quinn said.