REALX.Global: Healthcare volumes defy the crisis

Stephen Miles, Executive Director, Head of Operational Real Estate Continental Europe, CBRE

There has been one stand-out sector that has outperformed in a year of crisis, delegates heard at Real Asset Media’s Senior Housing & Healthcare presentation, which took place online recently on the REALX.Global platform.

“In a challenging year, when investment volumes fell across the board, healthcare volumes have continued to grow as institutional grade stock comes to the market,”said Stephen Miles, executive director, head of operational real estate Continental Europe, CBRE. “The sector continues to increase year on year and the outlook is stronger.”

Such growing interest from institutional investors, along with the growing supply-demand imbalance, has led to pressure on prime yields, which have compressed from 6.9% in 2013 to 4.5% now, although they are still at a premium to prime offices.

“We’ve seen an expansion of the investor universe as the attractiveness of the sector is recognised,” said Miles. “But institutional investors require institutional quality assets and trusted operators and have strict selection criteria.”

They prefer recently developed, purpose-built accommodation that is compliant with the highest environmental standards and ESG-proof, with good quality communal areas. They also opt for resilient locations, with an increasing focus on urban locations with good transport links.

As far as leases are concerned, investors generally prefer triple-net leases, where all property taxes, maintenance, insurance and capex are borne by the lessee, agreements with a duration of at least 12 years and index-linked rents.

The operator’s track record is most important criterion

“There is a perception of investment risk in this sector, so the operator’s track record is the most important criterion,” said Miles. “Operator excellence is key.”

CBRE recently conducted a healthcare market sentiment survey, asking investors, developers, operators and lenders active in the sector about  the impact of Covid-19 on their business and their expectations going forward.

The results are fairly clear: 92% of investors have said they will maintain or increase their allocation to the sector and 88% agreed that demand will continue to rise and will lead to stable or higher prices.

“The focus of interest is on the less specialised end, on senior housing, with longer leases and stable leverage to reduce risk,” said Miles.

The developers’ survey revealed that 60% had not changed their strategy because of the pandemic, while nearly half (48%) expect to work on more projects in 2021.

“We’re seeing increased activity by specialist developers, as operators focus on existing assets,” said Miles. “Most operators have seen at least a 5% fall in occupancy rates, but they believe that confidence will return and that it will take less than two years to return to pre-coronavirus occupancy levels.”

Lenders are showing confidence in the sector too, with 72% saying they are interested in increasing their level of exposure to the healthcare sector, 93% willing to lend to retirement living and 100% willing to lend to elderly care.