Investment in real estate, including land and building, is a major component of any healthcare investment project and often its biggest constraint. The capital requirement often limits the development of new healthcare facilities, particularly for the private sector and puts additional pressure on the government to cover the gap.
Historically, the responsibility for providing healthcare services in the GCC was on the government. However, with the population growth being witnessed and pressure on the hydrocarbon revenues, the governments are seeking more private sector involvement to ensure that the demand for healthcare, which is estimated to grow at over 10% p.a. and the market which is expected to grow to be worth US$70 billion by 2020, is met.
An Increase in Third-Party Use
In order to support the real estate component of developing a new facility, the region is noticing a trend towards private healthcare operators evaluating using third party capital for the development of the real assets and being its lessors, rather than owners. This allows them to invest their available capital for medical equipment and working capital for new projects, helping them to grow their portfolio more rapidly.
The model typically works based on the healthcare player leasing the custom built (build to suit) facility for a long duration of 20 years plus with the rent reflecting a total IRR of 11-12% to the investor. The lease usually inflates based on inflation and the tenant does not have the option to terminate the lease prior to the end the tenure. Some healthcare operators are also considering sale & leaseback of their existing properties to fund new development or acquisitions. The transaction is typically undertaken on a leaseback for at least 15 years at a Net Initial Yield of 7.5-8% with regular inflation backed rent escalations.
These third party investors are predominantly real estate asset managers, real estate investment trusts (REITs), pension funds and sovereign entities, who are seeking opportunities to invest in real estate, but do not have any interest in its management. A SLB or BTS of a healthcare facility, where the management of the asset remains the responsibility of the operator and the lease is triple net (including maintenance, insurance and property related taxes), is ideally suited for such investors. In recent times, with the advent of the ‘White Land Tax in Saudi Arabia, we are noticing that a number of private family groups holding undeveloped land, are keen to offer their land for development for a number of uses, including Healthcare.
Saudi’s Drive Toward the Private Sector
In Saudi Arabia, where healthcare investment needs are greater than any other country, the government is keen to get the private sector to be involved, both to reduce the pressure on them as well as improve the quality of healthcare. The authorities are evaluating the public private partnerships (PPPs) model, where offering appropriate land on ‘peppercorn’ rents on a long-term duration to reduce the capital investment is an option. In our opinion, the lease on land needs to be at least 50 years so that the projects are financeable through conventional banks. In addition to this, the government should consider some take out of demand, which they can influence, to ensure that the risk is reduced and regional and international healthcare players are attracted to the market.
There is no doubt that, as governments in the GCC attempt to reduce their involvement in providing healthcare services to their residents, the spreading of costs for the development up of new facilities, across the healthcare operators and the real estate investors, is necessary. This will ensure that the region sees the development of the facilities that is required for the growing population, as well as ensuring that the quality of healthcare continues to improve. Our Health Investment Returns report details the opportunity for regional investors.
About JLL: Our expertise covers the full range of healthcare investment related real estate including, sheltered housing, retirement villages and assisted living, hospitals, polyclinics and family health centres, as well as wellness centres and bio-medical business parks and even bio cities. Contact JLL Healthcare team for more information.
Author: Gaurav Shivpuri
Gaurav has over 20 years of experience in the real estate and hospitality sector with extensive involvement in investments, fund raising, advisory and operations of mid and large scale real estate projects.
Thirteen of these years have been spent in the Middle East where he has worked across 15 countries on single asset, mixed used and master plan projects totalling over US$ 20 billion in investment.
Over the past three years, he has been involved in over US$ 2 billion of real estate transactions across the GCC across different real estate assets classes and has advised leading regional and international investors on investments and divestments in the region. Prior to that, he had been involved in three pan-regional real estate funds where he was involved in conceptualising, structuring and raising for over US$ 500 million of fund corpus .
Gaurav holds an MBA from Cornell – Essec, Paris with a speciality in Real Estate Finance.