Investment: Healthcare looking strong amid demand for alternative property
With total returns of 7.4% in 2019, healthcare currently ranks as one of the best performing commercial property sectors
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As indicated by the latest MSCI index data, returns for all UK commercial property fell from 6.1% in 2018 to 1.2% in what was broadly speaking a more challenging year. Taking a closer look, most of this can be attributed to dwindling returns in the struggling retail sector and a cooling off in the industrial sector which has been a strong performer in the current investment cycle. Returns for alternative sectors such as hotels, residential apartments and healthcare property held up fairly strong. In fact, the 7.4% returns measured in the healthcare sector now rank the highest of all the commercial property sectors and there are some key reasons for this:
Political and economic uncertainty is fuelling investor demand for defensive asset types. Healthcare property has very stable income streams, supported by long lease lengths of 20-30 years, high occupancy rates close to 90%, and stable trading performance among care operators.
Healthcare, among other alternative assets, is driven by reliable demographic trends rather than economic factors that have been unpredictable in recent years. The UK’s rapidly ageing population is a predictable demand driver for residential and medical care and investors are increasingly aware of this.
Pricing is also beginning to look high in core commercial property sectors. This is especially the case for industrial sector where returns have fallen from 16.4% to 6.9% in the last year as capital growth has softened. Investors are also reallocating capital away from retail as the sector continues to undergo structural changes.
Healthcare has a strong risk-return profile compared to other asset classes, averaging a return of 8.7% over the last five years. Returns of 8.7% may seem moderate compared to the double-digit returns seen in other asset classes, but it is the stability of healthcare returns that is attractive to many investors looking for defensive plays in an unpredictable environment.
For more analysis and insight on the performance of the healthcare property sector, please read our latest report – Healthcare Capital Markets 2020.