The increasing importance of UK healthcare property as an alternate property sector

Graeme Newell (Department of Economics and Finance, School of Business, University of Western Sydney, Penrith, Australia)
Muhammad Jufri Marzuki (School of Business, University of Western Sydney, Penrith, Australia)

Journal of Property Investment & Finance

ISSN: 1463-578X

Publication date: 6 August 2018

Abstract

Purpose

Amongst the alternate property sectors, healthcare property has recently become an important property sector for major investors such as pension funds in the global property landscape; particularly in the UK, and being driven by the ageing population demographics. The purpose of this paper is to assess the significance, risk-adjusted performance and portfolio diversification benefits of UK healthcare property in a UK property and mixed-asset portfolio over 2007–2016. Both healthcare property and listed healthcare property channels are assessed. Drivers and risk factors for the on-going development of the healthcare property sector are also identified.

Design/methodology/approach

Using annual total returns, the risk-adjusted performance and portfolio diversification benefits of UK healthcare property over 2007–2016 is assessed. An asset allocation diagram is used to assess the role of both healthcare property channels in a UK property portfolio and in a UK mixed-asset portfolio.

Findings

Both UK healthcare property and listed healthcare property delivered superior risk-adjusted returns compared to UK property, stocks and listed property over 2007–2016, with portfolio diversification benefits in the fuller mixed-asset portfolio context, but not in a narrower property portfolio context. Importantly, this sees both UK healthcare property channels as strongly contributing to the UK property and mixed-asset portfolios across the entire portfolio risk spectrum and validating the property industry perspective of healthcare property being low risk and providing diversification benefits in a mixed-asset portfolio. However, this was not to the loss or substitution of traditional direct property exposure.

Practical implications

Healthcare property is an alternate property sector that has become increasingly important in recent years. The results highlight the important role of both healthcare property channels in a UK property portfolio and in a UK mixed-asset portfolio. The strong risk-adjusted performance of both UK healthcare property compared to UK property, stocks and listed property sees both UK healthcare property channels contributing to the mixed-asset portfolio across the entire portfolio risk spectrum. This is particularly important, as many investors (e.g. pension funds) now see healthcare property as an important property sector in their overall portfolio; particularly with the ageing population dynamics in most countries. The importance of both healthcare property channels sees healthcare property exposure accessible to both small investors and large investors.

Originality/value

This paper is the first published empirical research analysis of the risk-adjusted performance of UK healthcare property, and the role of healthcare property in a UK property portfolio and in a UK mixed-asset portfolio. This research enables empirically validated, more informed and practical property investment decision-making regarding the strategic role of both healthcare property and listed healthcare property in a portfolio.

Keywords

Citation

Newell, G. and Marzuki, M. (2018), "The increasing importance of UK healthcare property as an alternate property sector", Journal of Property Investment & Finance, Vol. 36 No. 5, pp. 466-478. https://doi.org/10.1108/JPIF-03-2018-0019

Download as .RIS

Publisher

:

Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited


Introduction

The alternate property sectors have taken on increased importance with institutional investors such as pension funds and sovereign wealth funds in recent years. This includes the alternate property sectors of self-storage, healthcare, data centres, childcare centres, education facilities, timberland, farmland and university student accommodation. This has seen the institutionalising of several of these alternate property sectors in many countries, driven by strong property and industry-specific factors. In particular, healthcare property has taken on increased investor interest at a global level.

Healthcare is an important determinant of the well-being of society. This strong social dimension sees significant government involvement in healthcare; in many cases from a national level to local level. In many countries, healthcare is a significant component of GDP; e.g. US (18 per cent), UK (9 per cent), The Netherlands (12 per cent), France (12 per cent), Germany (11 per cent), Switzerland (11 per cent), Canada (11 per cent) and Australia (16 per cent) (CIA, 2017). Driven by the ageing population demographic, this sees strong social, property and investor perspectives to healthcare property internationally. This includes the US, UK and Australia, as well as Europe (e.g. Germany, The Netherlands, France, Italy, Spain, Austria, Finland, Nordic countries) and Asia (e.g. Japan, Singapore). Driven by these ageing population demographics and other healthcare sector-specific factors, this has seen several leading pension funds actively involved in investing in healthcare property. This includes CPPIB and EPF, being leading Canadian and Malaysian pension funds, respectively.

This has seen many property fund managers actively involved in the healthcare property space, in both listed and non-listed vehicle structures. This includes LaSalle, Blackstone, AXA and TH RE, as well as healthcare REITs being established in nine countries, including the UK. As such, it is important to assess the significance and performance of healthcare property in a property portfolio and in a fuller mixed-asset portfolio.

Limited research has been done on healthcare property; largely being US-based and appearing in both the property and healthcare management journals. This has included various healthcare issues concerning healthcare REITs (Brau and Heywood, 2008; Monroe and Peach, 1987; Newell and Peng, 2006; Terris and Myer, 1995), hospital/nursing home markets (Anderson et al., 1999; Benjamin et al., 2007), healthcare infrastructure (Vecchi et al., 2010, 2013), hospital operational/management issues (Dranove, 1988; Dranove and Ludwick, 1999), seniors housing (Eichholtz et al., 2007; Wiley and Wyman, 2012; Worzala et al., 2009) and hospital building sustainability (Brotman, 2016). Industry reports have also assessed healthcare property in an alternate property sector context (IPF, 2015). Healthcare property reports are also produced by the leading property advisory groups (e.g. JLL, CBRE, Colliers, Knight Frank, Savills), at the UK, European and global level; often having established specialist advisory teams in the healthcare property space. From UK healthcare property perspective, this includes CBRE (2015, 2016a, b, c), JLL (2016a, 2017) and Knight Frank (2016, 2017).

No rigorous empirical analysis regarding the risk-adjusted performance and the role of healthcare property in a mixed-asset portfolio has yet been published; this empirical analysis of both UK healthcare property and listed healthcare property channels being the focus of this paper.

As such, the purpose of this paper is to assess the significance, risk-adjusted performance and portfolio diversification benefits of both UK healthcare property channels in a property portfolio and in a mixed-asset portfolio in the UK over 2007–2016. Drivers and risk factors for the on-going strategic development of the healthcare property sector are also highlighted. This sees two specific research questions concerning UK healthcare property as the empirical focus of this research:

RQ1.

How has the healthcare property sector performed on a risk-adjusted basis in UK property portfolio and mixed-asset portfolio?

RQ2.

Do UK healthcare property and listed healthcare property have different strategic roles as healthcare property investment channels in a portfolio?

These research questions RQ1 and RQ2 enable considerable insights into the role of healthcare property in a property and mixed-asset portfolio, and the fuller understanding of on-going strategic implications for major investors as the healthcare property sector becomes increasingly institutionalised at UK and global level, reflecting the ageing population demographics in most countries.

Significance of healthcare property

Healthcare context

Providing high quality healthcare is important in any society; across the various cure, care and operational levels. This is particularly the case where healthcare is mandatory and not discretionary expenditure for most individuals. This sees a highly regulated healthcare system in most countries with strong government involvement from the national to local levels; e.g. the role of the National Health Service (NHS) in the UK.

The healthcare sectors involve primary, secondary and tertiary healthcare across the general practice, hospital, care homes and specialist services aspects of healthcare, and comprising:

  • Primary healthcare: local care; typically first point of contact; e.g. doctor, dentist.

  • Secondary healthcare: acute care; serious, but short visit; medical specialists; e.g. hospital, care homes, disability centres, medical imaging, dermatologist, urologist.

  • Tertiary healthcare: specialised consultative services requiring referral for advanced medical treatment; e.g. cancer treatment, cardiac surgery, plastic surgery, neurosurgery.

Each of these healthcare sectors has specific property requirements, coupled with the healthcare sector requiring increased expertise and specialisms. Often this sees medical centres with multiple practices in medical office buildings, with sophisticated medical technology and supporting life science laboratories.

Drivers

The list below shows the various drivers of the healthcare property sector. Globally, the ageing population demographic in many countries has been a key driver of the healthcare sector. By 2050, over 65 years cohort globally is expected to increase from 15 to 27 per cent, while the over 80 years cohort globally is expected to increase from 4 to 10 per cent (JLL, 2016b); in most cases, with a lack of suitable aged care and healthcare accommodation. In the UK, with increased life expectancies, over 65 years cohort is expected to increase by 53 per cent by 2035 (to over 15m) and the over 85 years cohort increase by 127 per cent by 2035 (to over 3.2m); in comparison, the overall UK population will only increase by 13 per cent by 2035 (JLL, 2017). This will see the UK healthcare dependency ratio (dependent population/working population) increase from 55.7 per cent in 2016 to 68.6 per cent in 2035 (JLL, 2017). Similar demographic pressures are evident in other major countries (e.g. USA, Germany, Australia).

Healthcare property investment: drivers:

  • ageing population demographics;

  • impact of modern lifestyle;

  • lack of suitable healthcare accommodation;

  • advances in medical technology;

  • need for modern medical centres;

  • long leases for operators;

  • indexed rental income;

  • increased expectations of baby boomers;

  • highly regulated industry, e.g. NHS; and

  • role of both government and private sector.

Sources: Authors’ compilation from CBRE (2016a, b) and JLL (2017).

With this increased longevity, poor health and chronic disease associated with a modern lifestyle are expected to play a more significant role with this elderly cohort. This includes dementia, diabetes, stroke, obesity, heart attack and elderly care. For example, the cohort of over 85 years with dementia in the UK is expected to increase by 143 per cent by 2035 (JLL, 2017). This increased complexity of medical conditions will see home care as a non-viable option for many people and an associated increased demand for dedicated long-term care accommodation and specialist medical facilities; adding further pressure on the UK healthcare system. These demographic drivers see a supportive environment for the growth in private investment in the healthcare property sector.

Further compounding this future outlook is the current lack of suitable care home accommodation in the UK. Often being converted houses, many care homes are now not suited for modern care needs. For example, 23 per cent of care homes are not fit for purpose and 79 per cent are pre-2000; with 80 per cent of care homes not being institutional quality (CBRE, 2016c). Future-proofing this care home sector going forward provides healthcare property investment opportunities.

Importantly, the UK healthcare sector is highly regulated, both at a national and local level (e.g. National Healthcare Service). This sees the NHS as a leading healthcare driver, rather than property market dynamics or investment cycles. Recent regulations such as the Care Quality Commission and National Living Wage have impacted the care home accommodation sector (CBRE, 2015, 2016a, b; JLL, 2016a, 2017). Long leases for operators (often 25 years plus leases) and indexed rental income see consistent returns with low volatility for investors. Advances in medical technology will occur, but the demand for healthcare property will still be evident.

The quality and scale of these healthcare properties now held in major property investment vehicles (REITs and non-listed property funds) reflect the level of investor interest in this alternate property sector at a global level.

Risk factors

The list below details the various risk factors for the healthcare property sector, with both property-specific risks and healthcare industry risk factors in play. Amongst the property-specific risk factors, the lack of quality institutional-standard healthcare property stock is a critical issue; particularly in the care home sector. Over £47bn is required to be invested in new care homes to meet this future demand; expected to be an additional 350,000 care home beds required by 2035 and remedy this lack of quality care homes (JLL, 2017).

Healthcare property investment: risk factors:

  1. Property-specific risk factors:

    • quality of healthcare property stock;

    • obsolescence;

    • operator lease risk;

    • reputational risk; and

    • scale.

  2. Healthcare industry risk factors:

    • government regulation of sectors’ operation;

    • reduced budgets: national, local;

    • impact of new regulations, e.g. National Living Wage;

    • skilled staff shortages;

    • increased operator competition;

    • increased healthcare costs;

    • non-financial aspects, e.g. quality of food; and

    • impact of Brexit.

Sources: Authors’ compilation from CBRE (2016a, b) and JLL (2017).

Operator lease risk is also important, with the insolvency of Southern Cross in the UK in 2011 (due to reduced level of local authority referrals) highlighting this issue. This sees major UK investors using a range of operators rather than a single operator as part of their risk management strategy. Major UK care providers/operators include Care Tech, HC-One, BMI Healthcare and Care UK. Achieving scale is also a challenge for investors, with most healthcare properties being £5m–£10m. Reputational risk (via neglect or cruelty) is also a potential risk factor. Amongst the healthcare industry risk factors, the impact of new government regulations is important. Recent UK examples include the Care Quality Commission requiring assets to be inspected (post-Southern Cross insolvency) and the impact of the National Living Wage ruling on costs for the social care sector (10 per cent increase in salary costs; deferred until October 2017). The social care sector is also at risk of severe staff shortages going forward, with an additional 1.22m staff required by 2036 (JLL, 2017). This is also potentially impacted by Brexit, where over 17 per cent of the social care workforce is non-UK (JLL, 2017).

Property investment players

With the increasing investor acceptance of healthcare property as an attractive alternate property sector, there has been increased numbers of property investment players in the healthcare property space. Table I lists the major players, both in the listed and non-listed property investment vehicles provided. Healthcare property REITs are now available in nine countries, including the USA, Japan, Australia and UK, with over 35 healthcare property REITs available in these various countries. Amongst the major property fund managers, the authors have identified over 35 major players with healthcare property in their funds, often across various local and international markets. This includes the USA, UK, Australia, the Netherlands, France, Germany, Spain and Austria, as well as Japan and Singapore.

The significance of the listed healthcare sector (both REITs and property companies) is clearly seen in its important contribution to the listed property space in the global developed markets. Globally, listed healthcare property accounts for 7.5 per cent of the listed property space; being the 5th largest listed property sector. In the USA, listed healthcare property accounts for 12.9 per cent of the US listed property space (3rd largest sector; 5 of the top 20 US REITs being healthcare REITs), in Europe, it accounts for 1.3 per cent (7th largest sector) and in the UK, it accounts for 1.0 per cent (6th largest sector) (EPRA, 2017). In nearly all cases, these are healthcare-specific listed or non-listed vehicles rather than part of a diversified property portfolio.

Healthcare property investment metrics

In addition to the standard property investment metrics, specific healthcare metrics are applicable regarding the “language” of healthcare property investment (JLL, 2016a). These include:

  • POCBD: per occupied bed day; revenue metric.

  • POBD: per operational bed day; expenditure metric.

  • EBITDARM: earnings before interest, tax, depreciation, amortisation, rent and management costs; reflecting operators’ ability to pay rent; typically 27 per cent, with rent cover being a multiple of 1.6–2.0 being deemed acceptable care home industry practice.

Other “qualitative” metrics/parameters used (particularly in care homes) include quality of food, staff (payroll vs temporary/agency), staff shortages, wage cost (per cent), level of private vs public tenants.

The UK healthcare property investment perspective

The UK healthcare property investment space has been active in recent years, with over £13bn in healthcare property transactions over 2005–2015. With £3bn in transactions in 2015 (CBRE, 2016c), major UK healthcare property investors included private equity funds (26 per cent), overseas property investors (23 per cent) and UK property investors (15 per cent) (CBRE, 2016b). For example, in recent years, the major UK healthcare property investors included Target Healthcare, Primary Healthcare, Medic X and Assura, while the overseas property investors included a range of US healthcare REITs (e.g. Omega Healthcare, Ventas, Griffin-American Healthcare), with strategies to acquire high quality UK healthcare property assets. This sees healthcare property being 2.2 per cent of total UK commercial property (Knight Frank, 2016).

All of the above-specific detail concerning UK healthcare property further validates the significance and institutionalisation of healthcare property as an alternate property sector. The following sections will empirically assess the investment performance of UK healthcare property via both direct and listed healthcare property channels, compared with the other UK major assets. The property industry view that healthcare property has low risk and diversification benefits will also be empirically assessed.

Methodology

UK healthcare property series

The UK healthcare property series used was the MSCI healthcare property total returns index (£), available annually over the 10-year period of 2007–2016 (MSCI, 2017a). In December 2016, this UK healthcare property index comprised 1,093 healthcare properties from 37 portfolios valued at £4.98bn. These healthcare properties covered the sub-sectors of primary healthcare properties (931 properties; 21 portfolios; £3.5bn; 69 per cent of index value) and secondary healthcare properties (162 properties; 31 portfolios; £1.5bn; 31 per cent of index value), as well as the regions of London primary healthcare (77 properties; £0.3bn), rest of SE, SW and East primary healthcare (271 properties; £0.9bn), Midlands, North and Wales primary healthcare (509 properties; £2.0bn) and Scotland primary healthcare (74 properties; £0.3bn) (MSCI, 2017a). These healthcare properties were from the portfolios of the major UK healthcare investors. The performance methodology for this MSCI UK healthcare series is consistent with the other benchmark MSCI UK property series to enable an effective comparison of performance. The MSCI UK healthcare property series is one of only three countries where MSCI healthcare property series are produced; this includes France (annual; 2013–2016; 308 properties) and Australia (quarterly; 2006–2017; 85 properties) (MSCI, 2017c, d).

Other data sources

Annual total returns (£) were also assessed over the 10-year period of 2007–2016 for UK direct property, listed healthcare, listed property, stocks, bonds and cash. UK direct property was assessed using the MSCI UK annual direct property index; being the UK benchmark property performance series. In December 2016, this UK direct property series comprised 22,530 properties from 272 portfolios valued at £202.2bn. For the various property sub-sectors, this comprised retail (No of properties=3,789; value=£82.6bn), office (2,306; £53.5bn), industrial (2,509; £34.2bn) and residential (11,201; £12.1bn) (MSCI, 2017b). Equivalent UK asset class series also used were the FTSE 100 UK shares, listed healthcare, listed property, 10-year government bonds and 90-day bills.

Statistical analysis

For the various UK healthcare property, direct property, listed healthcare, listed property, stocks and bond series, risk-adjusted returns were assessed over the 10-year period of 2007–2016; this being the full period for the coverage of the MSCI UK healthcare property series. This 10-year period also captures a full property cycle/business cycle for the various asset classes involved. Average annual returns and annual risk were calculated. Risk-adjusted returns were assessed using the Sharpe ratio. Mixed-asset portfolio diversification benefits were assessed using correlation analysis, as well as the constrained asset allocation diagram used to assess the role of UK healthcare property in a mixed-asset portfolio. As the MSCI UK healthcare property index and MSCI UK direct property index are both valuation-based, these property series were de-smoothed to adjust for valuation-smoothing using the Geltner (1993) procedure. The resulting de-smoothed analyses were subsequently analysed over 2008–2016.

UK healthcare property performance analysis

Risk-adjusted returns

Table II presents the risk-adjusted performance of UK healthcare property with the other direct property sectors over 2007–2016. Healthcare property delivered average annual returns of 5.10 per cent p.a.; with primary healthcare property (7.67 per cent p.a.) outperforming secondary healthcare property (2.06 per cent p.a.). Healthcare property (5.10 per cent p.a.) marginally under-performed total property (5.55 per cent p.a.), with the industrial property sub-sector (7.04 per cent p.a.) delivering the highest property returns.

Importantly, healthcare property had a lower risk level (12.09 per cent) than total property (22.97 per cent) and below all of the property sub-sectors. This lower risk was most evident for primary healthcare property (9.22 per cent), but also evident for secondary healthcare property (15.27 per cent). This resulted in healthcare property delivering superior risk-adjusted returns (via Sharpe ratio) (0.31) than total property (0.19). Primary healthcare property (0.69) outperformed secondary healthcare property (0.05) on a risk-adjusted returns basis. This analysis confirms the property industry comment that UK healthcare property is low risk compared to the other property sectors.

Table II also presents the risk-adjusted performance analysis of UK healthcare property in the fuller mixed-asset portfolio context. This strong performance of listed healthcare property compared to healthcare property was evident in superior returns (7.24 p.a. vs 5.10 per cent p.a.), marginally higher risk (13.27 vs 12.09 per cent) and superior risk-adjusted returns (0.45 vs 0.31), with both healthcare property and listed healthcare property exceeding the risk-adjusted performance of stocks (Sharpe ratio=0.18). This analysis clearly validates the strong performance of UK healthcare property and listed healthcare property compared to the other major UK asset classes. This sees both channels for UK healthcare property investing as effective formats for healthcare property exposure.

Diversification benefits

The property portfolio diversification benefits of UK healthcare property in a UK property portfolio are shown in Table III. Healthcare property is significantly correlated with all of the direct property sectors (p<5 per cent), reflecting no significant diversification benefits for healthcare property. For example, r=0.97 for healthcare property and direct property. Primary healthcare property and secondary healthcare property are also significantly correlated (r=0.88), as well as primary healthcare property and secondary healthcare property each being significantly correlated with the various property sub-sectors.

While these results may be limited by the short analysis timeframe and the availability of only annual performance data, they highlight the lack of potential diversification benefits of UK healthcare property in a property portfolio. This lack of diversification benefits by UK healthcare property with direct property is different to the current industry perception, even with the healthcare property sector having different drivers to the other direct property sectors.

In the fuller mixed-asset portfolio context, Table IV shows the diversification benefits of UK healthcare property and listed healthcare property. In this fuller portfolio context, the potential diversification benefits of both healthcare property and listed healthcare property are clearly evident. In particular, healthcare property is not significantly correlated with stocks (−0.00), bonds (−0.39) or listed property (−0.02), nor is listed healthcare property significantly correlated with stocks (0.14), bonds (−0.68) or listed property (0.13). This shows clear portfolio diversification benefits in a fuller portfolio context for both healthcare property and listed healthcare property.

The lack of a significant correlation between healthcare property and listed healthcare property (0.48) further highlights the diversification benefits of both healthcare property investment channels; particularly as smaller investors are only likely to be able to get healthcare property exposure via the listed healthcare property channel. In each case, UK healthcare property provided at least comparable diversification benefits to UK direct property with the major UK assets; e.g. stocks (−0.00 vs −0.03), bonds (−0.39 vs −0.38) and listed property (−0.02 vs −0.04).

Overall, this sees healthcare property providing more diversification benefits in a fuller portfolio context than in a narrower property context. Both healthcare property and listed healthcare property provide these diversification benefits, with both channels being effective in delivering healthcare property exposure in different formats. This meets the requirements for larger investors (via healthcare property) and smaller investors (via listed healthcare property) in obtaining effective healthcare property exposure.

UK healthcare property in the mixed-asset portfolio

This stronger performance of UK healthcare property highlights the potential for UK healthcare property to play a significant role in the mixed-asset portfolio. Figure 1 shows the constrained asset allocation diagram for the mixed-asset portfolio for UK healthcare property, direct property, listed healthcare property, listed property, stocks and bonds over the 2007–2016 period. A constrained asset allocation analysis was conducted to assess the practically implementable portfolio weightings for UK healthcare property, direct property and the other asset classes. In this constrained asset allocation analysis, healthcare property was constrained to a maximum level of 5 per cent in the mixed-asset portfolio, direct property limited to a maximum level of 10 per cent in the mixed-asset portfolio and listed healthcare property and listed property each constrained to a maximum level of 5 per cent (see Figure 1). This resulted in UK healthcare property playing a significant role across the full portfolio risk spectrum; in most cases, at its maximum level of 5 per cent. Listed healthcare property was also seen to play an important role across the full portfolio risk spectrum; in most cases, at its maximum level of 5 per cent. An important role for UK direct property and UK listed property was also evident across most of the portfolio risk spectrum (except at the lower risk levels), with a more significant role for UK stocks also evident in this constrained asset allocation at the higher risk levels. This asset allocation context for UK healthcare property over this period reinforces the added-value role of UK healthcare property in both the direct and listed channels in the UK mixed-asset portfolio; being at their maximum level across nearly the entire portfolio risk spectrum. Importantly, this inclusion of UK healthcare in the UK mixed-asset portfolio was not to the exclusion or substitution of direct property from the fuller mixed-asset portfolio; further highlighting the role of both healthcare property (as an alternate property sector) and direct property in the UK mixed-asset portfolio.

Overall, while past performance is no guarantee of future performance, this analysis presents a positive context for UK healthcare property and listed healthcare property moving forward. As such, in terms of the original two research questions (RQ1 and RQ2) in this paper, this empirical analysis confirms the performance and significant role of both UK healthcare property and listed healthcare property as healthcare property investment channels in the UK property portfolio and mixed-asset portfolio, as well as the important roles of direct property and listed property. It also validates the property industry view that UK healthcare property is low risk and provides diversification benefits in a mixed-asset portfolio, although this diversification benefit is not evident in a property-only portfolio. A longer timeframe for this analysis will hopefully further validate the robustness of the strategic contribution of healthcare property (via both the direct and listed channels) in a UK property context and UK mixed-asset portfolio context, as well as the continued momentum of the acceptance of healthcare property as an alternate property sector for investors.

Property investment implications for healthcare property

This paper has addressed two key research questions and empirically highlighted the added-value role of UK healthcare property; particularly in the risk-adjusted performance and diversification benefits of UK healthcare property and listed healthcare property compared to direct property, stocks and listed property. This saw a significant role for both UK healthcare property channels in a UK mixed-asset portfolio across the full portfolio risk spectrum and validation of the UK property industry view that healthcare property is low risk. Importantly, this inclusion of healthcare property was not at the exclusion or substitution of direct property.

This performance analysis of UK healthcare property has provided a very strong investment context for healthcare property as an alternate property sector. This is particularly in the context of the increased interest in healthcare property as an alternate property sector by leading pension funds globally, driven by the ageing population demographics in many countries. For example, this strong UK healthcare property performance (8.7 per cent p.a. over 2014–2016) was also evident in the healthcare property markets in France (10.8 per cent p.a.) and Australia (18.2 per cent p.a.) over this recent three-year period of 2014–2016 (MSCI, 2017c, d). This sees UK healthcare property as an important alternate property sector going forward for both the healthcare property and listed healthcare property channels. Critically, this exposure to healthcare property is not seen at the expense of direct property exposure.

Importantly, the healthcare property sector dynamic is strongly supported by the key drivers of ageing population demographics in most countries and investor demand, with both property and healthcare industry factors at play. While there are risk factors and operational issues (e.g. impact of increased medical technology on property demand, need for private funding, staff quality/skills issues, new NHS partnership operating models, impact of BREXIT, availability of sufficient high quality healthcare property assets), the strong investor appetite for healthcare property at a UK and global level is expected to continue to see the further institutionalisation of healthcare property as an alternate property sector for both small investors and large investors. This demand for both healthcare property channels is not expected to be at the loss or substitution of traditional direct property exposure.

Going forward, the range of healthcare properties in healthcare investor portfolios is expected to increase, to include care villages, dementia villages, specialist medical services, integrated seniors housing, learning disability care and childcare; providing full coverage to all aspects of this critical community social infrastructure dimension of this important alternate property sector.

Figures

Healthcare property asset allocation diagram: 2007–2016

Figure 1

Healthcare property asset allocation diagram: 2007–2016

Examples of healthcare property fund managers: listed and non-listed

REITs
USA: Welltower, Ventas, HCP, Senior Housing Property, Omega Healthcare
Japan: Nippon Healthcare, Healthcare and Medical, Japan Senior Living
Australia: Generation Healthcare, Arena
Singapore: Parkway Life, First, RHT
Malaysia: Al-Aqar Healthcare
UK: Target Healthcare
Canada: Chartwell Retirement Residences, NorthWest Healthcare Properties
New Zealand: Vital Healthcare
France: Icade, Gecina
Property fund managers: global
LaSalle BlackRock Blackstone
M&G Medic X Assura
Lonestar Legal & General AXA
TH RE Quercus Kayne Anderson
Harrison Street Montreux Bridge International
Internos Knight Frank IM Realstar
GEFCARE Threestones Capital Castella
Northern Horizon Carestone Achmea
Four Seasons Primary Health Prop. Ashley House
Castlerock Deutsche Wohnen Primonial
ECF Corpus Sireo

Sources: Authors’ compilation from EPRA (2017) and property fund manager websites

Risk-adjusted performance analysis of UK healthcare property: 2007–2016

Asset Average annual returns (%) Annual risk (%) Sharpe ratio
Healthcare 5.10 12.09 0.31
Primary 7.67 9.22 0.69
Secondary 2.06 15.27 0.05
Total property 5.55 22.97 0.19
Office 6.81 24.99 0.22
Retail 4.47 22.51 0.14
Industrial 7.04 23.05 0.25
Listed healthcare 7.24 13.27 0.45
Listed property 4.47 16.69 0.19
Stocks 4.37 16.73 0.18
Bonds 2.97 0.95 1.77

Source: Authors’ compilation/analysis

Diversification benefits of UK healthcare property: 2007–2016

Healthcare Primary health. Secondary health. Total property Office Retail Industrial
Healthcare 1.00
Primary health. 0.96* 1.00
Secondary health. 0.97* 0.88* 1.00
Total property 0.97* 0.96* 0.91* 1.00
Office 0.97* 0.92* 0.93* 0.99* 1.00
Retail 0.96* 0.97* 0.90* 0.99* 0.97* 1.00
Industrial 0.93* 0.93* 0.87* 0.97* 0.97* 0.95* 1.00

Note: *Significant at p<0.05

Source: Authors’ compilation/analysis

Diversification benefits of UK healthcare property vs other major assets: 2007–2016

Healthcare Total RE Listed healthcare Listed property Stocks Bonds
Healthcare 1.00
Total RE 0.97* 1.00
Listed healthcare 0.48 0.49 1.00
Listed property −0.02 −0.04 0.13 1.00
Stocks −0.00 −0.03 0.14 0.99* 1.00
Bonds −0.39 −0.38 −0.68 0.01 −0.01 1.00

Note: *Significant at p<0.05

Source: Authors’ compilation/analysis

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Further reading

Gaynor, M. and Anderson, G. (1995), “Uncertain demand, the structure of hospital costs, and the cost of empty hospital beds”, Journal of Health Economics, Vol. 14 No. 4, pp. 291-317.

Lynk, W. (1995), “The creation of economic efficiencies in hospital mergers”, Journal of Health Economics, Vol. 14 No. 4, pp. 507-530.

Corresponding author

Graeme Newell can be contacted at: g.newell@uws.edu.au