Why this fund manager is ditching malls for private hospitals

The 20 per cent weighting to retail will involve assets with a “genuine healthcare and/or social infrastructure component” the fund manager said as part of its full-year results in August.

“It’s been our view that people have been distracted by the noise from health insurers and operators. If you go around and see below the noise, then you can put a case forward for investing in healthcare,” Scott Kelly, group CEO of RAM, told The Australian Financial Review.

“We’ve never had a problem [with our investments]. In relative terms, healthcare is more profitable than most sectors you are exposed to,” he said.

Mr Kelly stressed that most of the troubles were at the big end of town and that there were 18 sub-sectors within healthcare, many of them highly profitable.

“It’s not like we don’t like retail any more, and we’re not completely walking away. But rather than hold supermarket-anchored retail, we’re looking for opportunities that further amplify the capabilities for healthcare,” he added.

Counter-cyclical move

RAM’s counter-cyclical move comes as large private hospital operators demand $1.3 billion of emergency funding to stay afloat amid a battle with private health insurers over who should cover rising patient and care costs.

In December, health insurance giant Bupa offered doctors and medical specialists working at Healthscope hospitals up to $500 if they take their patients to other facilities. The offer came after Healthscope proposed charging customers of Bupa and 29 other non-profit insurers an extra $50, or $100 for an overnight stay, for treatment at its hospitals.

“The big fight is at the top level compared with the relative attractiveness of healthcare subsectors,” Mr Kelly said.

“Day surgeries and mental health clinics have become increasingly profitable,” he said.

With a long track record of delivering strong returns backed by longer leases, RAM argues the healthcare real estate sector is supported by megatrends including an ageing population, rising personal wealth, an increase in chronic illness and growing federal government spending (over a quarter of all tax revenue).

At the same time, negative publicity around private hospitals has created good buying opportunities as other funds and private owners divest.

Unlike some of its competitors, REP has focused on investing in smaller private hospitals in regional locations such as Burnie in Tasmania, where it owns the North West Private Hospital; the NSW Central Coast (Mayo Private Hospital), Dubbo in NSW and Queensland’s Gold Coast. It also owns day surgeries, medical centres and family GP practices.

Over the past six months, REP has divested $92 million of non-core assets, including the Tanilba Bay shopping centre in NSW’s Hunter region and the Yeronga Village shopping centre in Brisbane – both of which sold at premiums to their June 30, 2024 valuations. It’s also struck deals to sell another $93 million worth of assets.

At the same time it has entered into exclusive due diligence to buy two private surgical hospitals on average yields of more than 7 per cent, while assessing other opportunities on both the east and west coasts priced between $35 million and $55 million.

It’s also expanding the $44 million North West Private Hospital in Burnie, in exchange for a 30-year lease reset with major hospital operator Healthe Care.

“Private hospitals on an asset by asset basis have wonderful fundamentals, and we are seeing a shift within private hospitals to diversify income and revenue,” said Sam Wood, RAM’s director of funds management.

Matthew Strotton, RAM’s head of real estate, said there were no concerns about the financial health of tenants across its existing portfolio.

“We do not see any sector-wide issues,” he said.

He said it could take up to two years to divest REP’s remaining convenience mall assets. “We’ll be taking our time,” Mr Strotton said.

Another fund manager, Barwon Investment Partners, is also optimistic about the outlook for healthcare assets, despite its $532 million unlisted Healthcare Property Fund recording hefty writedown in asset values and declining returns over the past few years.

Valuations movements were positive in the final quarter of 2024, with income returns recovering to 4.6 per cent over the full year.

“Barwon anticipates the income return to continue to increase toward the fund’s target range of 5-6 per cent per annum during FY25, with the potential for further upside should the RBA cut interest rates,” Barwon said in its December 2024 update.