Healthcare real estate is a highly sought-after asset class, attracting interest from a globally diverse mix of institutional investors, perhaps drawn by its strong infrastructure characteristics, writes Andrew Dawber
Reflecting the appeal of its long-term liability matching and diversification characteristics, and de-correlation from macroeconomic factors, the percentage of investors looking to deploy capital into the sector has increased from 19% in 2023 to 35% in 2024, according to a recent report from Co-Star.
It is a sector that has benefitted from growing investor appetite for the defensive characteristics that it, and other private asset investments, can offer in volatile periods.
Data from Prequin suggests that the inclusion of private real estate and infrastructure improved risk and return for asset allocations across the risk spectrum from 2008 to 2023.
Healthcare real estate as an asset class has a central focus – supporting individuals of all ages to achieve their best possible outcomes and personal independence, particularly the ability to live within community settings.
This is particularly so for those individuals with higher acuity needs and/or life-long behavioural health conditions, whether it is mental health, learning disabilities, autism or a physical disability.
This also includes special SEN schools that deliver bespoke education to children who are unable to participate in mainstream schooling.
In all cases, these are bespoke, adapted assets where demand significantly outstrips supply, driven by COVID and the impact of inflation on building costs and supply chain, as well as the availability of suitable funding.
Commentators such as the National Housing Federation predict this mismatch will become ever greater by the end of the current decade, leading to very high unmet demand.
Individuals with higher acuity, long-term needs receive funding that is ultimately sourced from central government, and which meets their care and accommodation costs and supports leases that are typically indexed, ensuring rental income keeps pace with inflation, further increasing their attractiveness to investors seeking predictable, secure cash flows.
A resilient diversificatoin play
Coupled with its strong and increasingly well understood social and environmental credentials, and benefitting from very high occupancy, the sector offers institutional investors a compelling and resilient diversification play.
Properties are either new build and dedicated for healthcare usage or adapted and retrofitted with a requirement to meet high environmental standards, achieving significant ESG accreditation, including meeting energy efficiency standards and reducing carbon footprints.
Given the growing emphasis on ESG investing among institutional investors, healthcare real estate aligns well with the broader goals of responsible investing.
Social impact
There is also a social impact element that goes beyond financial returns.
By investing in healthcare properties, institutional investors can contribute to meeting the increasing demand for high-quality healthcare services in local communities, while simultaneously ensuring that their investments generate consistent returns.
This dual benefit has made healthcare real estate attractive to impact-driven investors.
Real estate or infrastructure?
One of the questions we often find ourselves discussing with investors is whether healthcare real estate falls into the real estate or infrastructure categories. Both can be long duration assets offering an inflation hedge and providing diversification and generating yield.
However, the income profile and how the buildings are used suggests more of an infrastructure play.
Healthcare assets that benefit from government funding share many characteristics with more traditional economic infrastructure assets, namely the provision of non-discretionary essential services.
The stability of the income, particularly properties leased to high-quality, experienced providers, generates income streams that are typically more stabilised and consistent than commercial real estate assets, which in recent years have been severely impacted by changing consumers and technological trends.
Healthcare real estate is a structurally supported, in-demand sector. Governments across Europe are committed to supporting healthcare funding and investment.
With its strong social impact and stable income characteristics, institutional investors – from global sovereign wealth funds through to local government pension funds – are recognising just how compelling an asset class it can be.
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