While investments in medical centres, retirement communities and aged care homes are well supported by long term demographic trends, sourcing seasoned operators to manage the asset profitably is proving a challenge for investors.

Real estate strategies in the life sciences and how to mange them was a theme at this year’s Investment Magazine’s Real Estate Conference that was held in Melbourne.

First State Super senior investment analyst, Suzannah Cockerell, told delegates that the superannuation fund was looking to future proof its portfolio by focussing on demographic shifts, including the ageing population.

 “After researching retirement villages and aged care properties to see where we could find the best risk-adjusted returns, we landed on retirement villages since aged care in Australia is subject to regulatory risk and potential reputation risk because of the operators,” she said

First State Super is in the process of merging with VicSuper to create a combined entity with more than more than $125 billion in retirement savings.

In addition to the superannuation fund’s pooled fund exposure, Cockerell said First State was also looking to be more “hands on” by investing directly in joint ventures and platforms and selecting skilled managers to work with. 

 Cockerell said the fund was currently looking at the senior housing assets in the US, where the fund had already underwritten a few deals, and also in the UK where she said there was demand for specialist private pay care accommodation.

She’s also interested in the medical offices sector, a view that jibes with Tom McCarthy, senior managing director of Heitman’s North American private equity business.

He pointed out that growth in healthcare expenditure was fast outpacing growth in the broader US economy. “This is hugely significant for the US$1 trillion healthcare real estate market,” he said.

McCarthy also conceded that sourcing skilled asset managers was challenging as local legislation applied to staffing ratios, qualifications and supervision of care offered. Estimates put the value of the medical office market at about one third of that amount, or US$363 billion.

Only 25 per cent of the sector is investor owned which is a “considerably smaller percentage than most primary property types,” he added.

The private equity specialist agreed that growth in the medial office sector was being driven by demographics as well as the huge pressure for Washington to cut health care costs by shifting medical procedure from hospitals to the medical offices. But he told delegates that it was difficult to gain exposure to the sector. “Underwriting a small deal takes as much time as a larger one,” he added.

McCarthy, whose firm has recently focussed on aggregating private market assets to sell into public markets, said what is important is that the demographic wave is coming. “We’re 10 years from the peak of the wave in terms of the ageing population but these assets are a good diversifier as the demand is needs based, not cyclically driven, and an interesting addition for a portfolio,” he said.

Healthcare is ripe for disruption which he said is why the asset manager’s strategy is to align with the top providers that are best positioned for change. 

 “We think scale is hugely important  to navigate the change that is coming when when the tech giants like Amazon disrupt the health care industry,” he said.

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