May 14, 2020 3 min read
Institutional investors are looking to healthcare real estate for stable, long-term returns, as the COVID-19 pandemic accelerates fundamental changes in Australia’s healthcare sector towards a more US-style private system.
Public and private property funds have been sinking money mainly into day hospitals, a section of the health industry promoted by insurers as a quicker, cheaper way to do elective surgeries.
“Insurers are preferring now to try and use day hospitals’ structures as opposed to admitting people into general hospitals,” says Guy Hedley, former Macquarie Bank CEO and now chairman of Atlas Advisors, an institutional investor.
“Intuitively it feels like that there’s going to be a much greater focus on efficiency in the healthcare sector.”
Australian private health insurers claim it’s 23 per cent cheaper to do elective surgeries in a day hospital than a private hospital, Northwest Healthcare Properties REIT chief executive Craig Mitchell said at a Sydney conference last year.
That’s because patients can be in and out in under a day and there are a wide variety of colocated medical services on the menu.
A whole range of funds have invested in this sector over the last six months, and it’s been increasingly popular for several years.
Institutional investors include Elanor Healthcare Real Estate Fund, in which Atlas Advisor is a new investor, Arena REIT (ASX:ARF) which expanded into day hospital real estate in February, and industry super fund HESTA Healthcare Property Trust.
Healius’ (ASX:HLS) day hospital arm is one of two better performing divisions. It plans to focus on these and IVF once it sells off all other parts of the business.
Pent up demand
Non-urgent surgeries restarted at the end of April after operations were stopped in March to free up space, equipment and personnel for future COVID-19 patients.
South Australia has restarted all elective surgeries, but Victoria and WA have still only allowed half of operations to go ahead and the other states have not started yet.
A massive backlog means there will be considerable pent up demand.
A paper by the COVIDSurg Collaborative, a global research collective, estimated the number of elective operations cancelled during the six-week period when non-urgent surgeries were postponed at over 400,000.
These cover simple surgeries such as skin cancer removal and cataract surgery, to more invasive operations such as knee and hip replacements.
The shopping mall of surgery
Private day hospitals are like a shopping centre of medical professionals: an anchor tenant, akin to a JB HiFi or a Coles in a mall, forms the basis of the site and other specialists such as physios, dentists and occupational therapists who don’t need to be in a hospital move in to benefit from co-located patients.
There are about 300 of these centres in Australia now.
Hospitals are “under threat” and the move to day hospitals is a trend happening in places such as Hong Kong, Singapore and the US, Morgans Financial analyst Scott Power says.
These kinds of property plays could be the new “fortress asset” as shopping centres struggle to attract shoppers and continue tough negotiations over rent with tenants.
Hedley believes Australians are getting more used to the concept of private hospitalisation.
Many are forced to pay for health insurance by Australia’s income-based big stick incentive and those that aren’t, because they don’t earn over the Medicare levy threshold or are aged under 31 years, are dropping out in droves forcing insurers to demonstrate more strongly they can provide value.
Faster elective surgeries combined with technology that can bring down costs is accelerating a fundamental shift towards the day hospital sector, Hedley says.
“It we look at the US market, HMOs [health maintenance organisations] are the largest part of the market. Health maintenance is a huge aspect in the US and I think Australia is heading down that path as well which is why we’re doing things like investing in health technology.”
Insurers are funding tech companies that offer software and devices that can prevent, for example, repeat heart attacks by monitoring a person at home rather than forcing them to come in for lengthy and onerous follow-up checks.
Then they’re linking that technological side to face-to-face service delivery.
“The current predicament of COVID-19 has accelerated the most important ingredient which is consumer adoption,” Hedley said.
“Previously there’s been a lot of work done around from the providers… on getting people engaged on accessing technology… But there’s been a lack of buy-in by the consumer.
“That’s changed. People are now much more willing and see the benefit of accessing healthcare through technology.”
Hedley believes some of the best IPOs over the coming years will be built around healthcare.
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