Healthcare Real Estate Outlook – Seizing the Opportunity

It was great to catch up with familiar faces and sample the mood music at the recent Bisnow Healthcare Real Estate Outlook conference. The prevailing sentiment was one of unmistakable optimism for a sector firmly on the up. Here are our key takeaways.

A strong investment horizon?

There was a palpable sense amongst stakeholders that we may be on the cusp of an opportune moment to invest in the healthcare real estate sector, underscored by several compelling factors:

• Supply/demand imbalance - The sector is grappling with a pronounced supply and demand imbalance. Demand is at an all-time high, with many sub-sectors reaching or exceeding pre-Covid levels. With populations across Europe ageing, including the baby boomer generations entering their later years, demand is only expected to intensify further. In a stark contrast, supply is struggling to keep pace. There is a notable shortage of high-quality assets and, with development still recovering from the pandemic-induced slowdown, supply constraints are unlikely to loosen any time soon. In response, investors are increasingly looking to repurpose redundant town centre office and retail assets which are geographically well located to cater to demand.
• Resilient income – The healthcare real estate sector boasts resilient income streams, characterised by long-term leases and high rates of rent recovery comparative to other real estate sectors. Rental growth has also been robust, drawing parallels with the purpose-built student accommodation (PBSA) sector. With the non-elective nature of healthcare services ensuring consistent demand regardless of economic cycle, there was little talk of clouds on the horizon.
• Favourable valuations – While value compression under the weight of recent interest rate hikes has been seen across almost all real estate sectors, investors believe that healthcare real estate has experienced an exaggerated downturn in valuations, particularly in sub-sectors like UK elderly care. With central banks across Europe anticipated to commence interest rate reductions this summer, investors are eyeing a potential rebound for valuations.

Nevertheless, challenges remain. The scarcity of quality stock poses difficulties in securing the right investment opportunities and the elephant in the room was whether interest rates will actually drop as expected. Of particular concern is how robust the US economy is proving and whether (say it quietly) the Federal Reserve may even be forced to raise rates further.

The power of human capital – the critical role of operating partners

Recognising the intense operational demands of healthcare real estate assets, stakeholders fully appreciate the critical importance of partnering with the right operator. As one attendee put it to us “investing in healthcare real estate is easy, partnering up with the correct operator isn’t”. And the stakes are high. With the sector looking after some of the most vulnerable populations within society, stakeholders were acutely aware of the reputational repercussions of getting it wrong.

As a result, investors are becoming increasingly meticulous and thorough in their analysis and selection processes when choosing operators. They are laser focused on comprehensive due diligence to ensure alignment, not only in underwriting and economics, but also across organisational values and culture. This involves looking beyond traditional desktop assessments to get under an operators skin by visiting their existing assets, engaging with their staff, and gaining a deep understanding of how they tick.

The impact of ESG on investment and financing strategies

Environmental, Social, and Governance (ESG) considerations remain at the forefront of stakeholders’ minds when investing in and financing healthcare real estate. 

As expected, there was universal acceptance amongst stakeholders that prioritising environmental considerations is necessary for future-proofing long term assets, with a particular focus on energy usage and operational net-zero targets. Nevertheless, beyond that baseline, it was clear that social impact was high up on the agenda given the sector's unique position as carer for some of the most vulnerable populations.

However, healthcare real estate stakeholders are rarely agnostic across E, S and G and many have a particular primary and secondary focus. Both operators and investors alike were, therefore, keen to stress the importance of discussing and aligning their ESG values prior to embarking on partnerships together.

A final word

There is a clear sense of opportunity amongst healthcare real estate stakeholders. However, when you cut to their core concerns, it’s a familiar story – the power of human capital and the critical role of operating partners in achieving success. By recognising this and taking a thoughtful and deliberate approach to selecting the right partner, stakeholders can capitalise on the opportunities presented as we move into this next phase of the economic cycle. 

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