One investment vehicle that should suit SMSF’s is the Australian Unity Healthcare Property Trust, managed by Australian Unity Investments. Established in 1999 with $70 million worth of properties, the unlisted trust now owns directly a portfolio of 25 healthcare properties across Australia, valued at $520 million.
If you want a deep, powerful and long-term trend in which to invest, health ticks most of the boxes. Australia’s growing and ageing population is a formidable demographic and economic force, which is exerting an inexorable pull on investment.
Already, the Australian Institute of Health and Welfare estimates an average yearly healthcare cost for each Australian of $5,881, and a total health spend of $140 billion.
Put another way, according to Deloitte, the Australian government spends 13% of total expenditure on health: this is expected to rise to 21% in 2049/50. For the states, health costs will consume 40% of all spending.
Not surprisingly, healthcare is also emerging as an investment sector – exposure to which can come in a variety of ways, from drug manufacturers, medical device makers, private hospitals, medical centres and aged-care facilities.
In particular, the far-reaching economic and demographic drivers acting on the healthcare sector, and the resulting cashflows, make it highly attractive to long-term income-oriented investors – a category of investor that should include most self-managed super funds (SMSFs).
One vehicle that suits such investors is the Australian Unity Healthcare Property Trust, managed by Australian Unity Investments. Established in 1999 with $70 million worth of properties, the unlisted trust now owns directly a portfolio of 25 healthcare properties across Australia, valued at $520 million.
The trust has been an excellent performer, with a total return of 11.41% a year since inception (as at 31 December 2013), made up of 9.08% a year of income – typically about 50% tax-deferred – plus 2.33% a year of capital growth. However, in the three-year and five-year returns to December 31, the capital-growth aspect actually detracted from the total return, while in the seven-year return the growth contribution was negligible.
“The trust should be envisaged as a more defensive, income-generating investment,” says Chris Smith, head of healthcare and retirement property Australian Unity Investments. “On the one hand, healthcare property can be considered higher risk than commercial or office or industrial property, because of the smaller pool of potential tenants for a major medical facility. But against that, leases typically tend to be longer-term than most in the commercial property sector, and the vacancy risk is low.”
The bulk of the portfolio – just under 60% of the assets – is represented by hospital properties, with 36% medical centres, 3% aged-care facilities and the remainder development sites. Just over 44% of the portfolio is in Victoria, with 34% in New South Wales, 17% in South Australia and the rest in Queensland.
The major tenant by proportion of income is ASX-listed private hospital operator Ramsay Healthcare Limited (RHC), which accounts for 30.7% of the portfolio.
Smith says the trust’s portfolio is characterised by very long-term leases, to hospitals and medical centres: the weighted average lease expiry is 11.5 years. “The medical-centre leases are shorter-term, more in line with the commercial office market, but those tenants tend not to move, even though they are shorter leases – their patient ‘book’ is in the area, they know the building. They tend to renew at existing rents or slightly above.
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Chris Smith
Head of healthcare and retirement property
Australian Unity Investments.
“Our portfolio is 99.4% leased, and that is fairly consistent – the lowest we have been in the last five years is 98.5%. With very low vacancy risk investors have very high prospect of continuity of income,” says Smith.
The portfolio is diversified at several levels, he says. “Having a combination of both the corporate-style medical centres and the private hospitals gives us diversity of revenue source. The private hospital sector is largely funded by the private insurance industry, plus government assistance for, say veterans’ affairs. The medical centre sector is primarily backed by Medicare for revenue, and also brings diversity with pharmacies and so on.
“Some of the medical centre operators, like Primary Health for example, they’re open 8am to 8pm, they have a pharmacy and a café and all the basics. They are almost like a retail property. That’s one end of the medical-centre market, at the higher end are properties like our centre at Lower Templestowe in Victoria which is 5,500 square metres and has a day hospital in there,” says Smith.
The core part of the portfolio is seeing “really healthy demand for space in private hospitals,” he says. In response, Australian Unity Investments has invested in re-developing some of its Victorian hospitals, adding services such as hydrotherapy pools, gym areas, rehabilitation beds and orthopaedic suites, as well as associated car parking.
In recent years, says Smith, the trust has cautiously diversified into other areas of healthcare. “In December 2013 we bought a medical facility in St. Leonards, a couple of hundred metres from the Royal North Shore Hospital, that’s more like a high-tech industrial facility: the major tenant is Stryker, which is a leading global manufacturer and distributor of prosthetics and medical surgical equipment. In the same building is RCPA Quality Programs, which is the accrediting body for pathology labs around Australia. We feel that property is a good fit. We have an IVF clinic/day hospital, also in St. Leonards, that taps into another non-core hospital market.”
The minimum initial investment amount for Healthcare Property Trust Wholesale Units is $5,000. The minimum initial investment amount for Healthcare Property Trust Class A Units is also $5,000: however, most investors enter the Class A Units through a platform, in which case the platform’s minimum levels apply. In many cases, this can be less than $5,000.
Overall, Smith says the trust is designed to provide more attractive long-term returns than other property sectors. “Investors should expect about 1%–2% a year in capital growth long-term, which will come about by capitalising rental increases. But the focus of the trust is on delivering income, with a stable unit price,” says Smith. “We believe that SMSFs are the ideal investors for this trust, because it just continues to deliver income, paid quarterly, that they can re-invest.”
An investment in the trust can also be considered a partial ‘hedge’ against your own personal exposure to rising health spending. If a person anticipates a lot of healthcare needs, and is exposed to the risk of rising healthcare costs, they need something in their portfolio to profit from rising healthcare costs: this trust can fulfil that role, although it is not a perfect hedge.
