Reits: Health bet about to pay off

Growthpoint Properties’ quest to build a R10bn real estate fund that invests exclusively in hospitals, medical facilities and research laboratories is poised for a big shot in the arm. SA’s first such fund is in talks to secure R1.4bn from the International Finance Corp (IFC).

Growthpoint, which is also the JSE’s largest SA-based property play, launched its health-care real estate investment trust (Reit) just over two years ago with assets of close to R2.2bn.

The unlisted Reit, known as Growthpoint Healthcare Property Holdings, owns four hospitals and one set of medical chambers.

But its pipeline includes the R470m Cintocare Hospital, a state-of-the-art facility under construction in Pretoria that will specialise in head, neck, spinal, neuro and vascular surgery. The fund is also in the process of buying Paardevlei Hospital in Somerset West in a deal worth R250m.

The problem is that until now, finding money to grow the fund hasn’t been easy.

Besides Growthpoint, shareholders in the fund include the Kagiso Trust and a few pension funds and family wealth offices.

George Muchanya, Growthpoint’s head of corporate finance, who has been responsible for getting the fund off the ground, says it’s difficult for unlisted Reits to compete for capital with their listed counterparts.

What’s more, not everyone is prepared to take a bet on an alternative asset class they have had little exposure to.

Muchanya says that given that SA Reits invest primarily in shopping centres, offices and industrial buildings, the market is fairly unfamiliar with health care as a real estate sector. So a lot of education needs to happen.

He believes securing the backing of a global investor such as the IFC will be a game-changer: "It will bring more credibility to the Reit and allow us to further grow our asset base."

The advent of Covid-19 has raised awareness of the potential returns that can be generated by health-care facilities. Muchanya is confident that given increased interest in health care as an asset class, coupled with Growthpoint’s early-mover advantage, the Reit could grow its assets to R10bn within the next five years.

That, he says, "will be an optimal size for a JSE listing".

But who should invest in health-care property funds and why?

Muchanya says health-care Reits are aimed at investors looking for more stable, long-term certainty of income and capital growth than that typically offered by traditional real estate sectors. "Health-care funds won’t shoot the lights out, but you are getting a more predictable return than most office-, retail-or industrial-focused funds," he says.

That’s because the risk profile of health-care funds tends to be lower than that of other property sectors, mainly thanks to their longer lease periods. "The tenant profile is sticky and lease expiries are very low," Muchanya adds.

For instance, tenants at the new Cintocare Hospital — doctors and other specialist medical practitioners — have signed 15-year leases with built-in rental escalations averaging 7%-8% a year. Tenants have the option to renew for another 15 years once the initial lease lapses.

That’s in stark contrast to the average two-to three-year leases that most retail and office landlords have to be satisfied with these days. Muchanya says medical professionals, as well as health-care operators such as Mediclinic, Netcare and Busamed, want the security of long leases so they don’t have to worry about re-establishing a practice or renewing trading licences every time they move to a new premises.

Growthpoint’s health-care fund is targeting an annual total return of 13%-16% of which the dividend yield portion comprises 7%-8%.

The rest is capital growth.

That seems attractive in the current depressed environment, where most listed Reits are struggling to achieve any growth at all.

Though the pandemic has brought attention to the shortage of hospital and intensive-care beds, Muchanya says opportunities for greenfield developments in SA will be location specific and sector driven.

"Sandton, for instance, is probably oversupplied, while most townships have a shortage of good-quality private hospitals."

He sees plenty of opportunity to develop more mental wellness, daycare and senior care facilities.

Health-care Reits may be unfamiliar territory for SA investors, but it’s an asset class that is fast gaining popularity globally.

In a report released last week on the impact of Covid-19 on real estate investment trends, international advisory firm JLL singles out health-care assets, alongside logistics, as alternative sectors to watch, given investors’ renewed search for stable returns amid ongoing economic uncertainty.

Sandeep Sinha, head of health care at JLL in the Middle East and North Africa, says the pandemic has boosted investor interest in traditional hospitals and clinics and "in long-term medical and senior care residences, laboratories, rehab centres as well as pharmaceutical and medical device manufacturing facilities".

Sinha predicts that the health-care Reit sector will see strong growth over the next few years, especially in Europe and Asia as more money flows to the development of new assets.

Health-care companies and operators may increasingly look to list their existing buildings or offload properties from balance sheets through sale and lease-back options, he says.

Meanwhile, property investors who want to share in the health-care boom have about 33 health-care Reits to choose from worldwide, with a combined market cap of close to $130bn.

Most of these are listed on US stock markets. They include National Health Investors, Medical Properties Trust, Welltower, Ventas and Community Healthcare Trust.