Why invest in the healthcare property sector?

Kenneth MacKenzie, Manager, Target Healthcare REIT

View the Target Healthcare REIT company profile page

Property is a cyclical business, and is currently in a bull market. With low inflation and lower interest rates, investors across the globe are looking at property assets with good rental prospects, and see property as a safe place to invest. None of us have a crystal ball, and we are neither a prophet nor the son of a prophet, so we at Target Advisers believe that there is always the need to get back to the fundamentals of any particular investment proposition.

Healthcare as part of the "alternatives" asset class is attracting more investment interest from institutional and retail investors alike. The UK's elderly care sector in particular is seeing an increased level of investment activity, benefiting from the favourable underlying population dynamics which are driving demand in the sector. Not only is the number of 85 year olds set to double in the next 20 years, but the average life expectancy beyond retirement age is also increasing rapidly. At the end of the 19th century the average retiree lived for two years post-retirement compared to 20 years today. But as the years advance so does the proportion of dementia increase among seniors, and residential care is the most suitable accommodation for these clients. Approximately 15% of over 85 year olds are expected to make use of residential care of one form or another and to meet this demand the UK's ageing care home stock requires to be substantially upgraded and new facilities built.

As in any service-led sector, there is the potential for reputational issues as a result of poor provision of care which investors must seek to insulate themselves from. The lessons first expressed by Florence Nightingale in the 19th century about ensuring high standards of care, both clinical and social, still hold true today. It is essential that underlying care fundamentals are strong in all circumstances, and flowing from this then financial performance typically follows.

Target Healthcare REIT is well positioned to create stable long term income for investors, as the properties have very long leases, often around 30 years, with no break clauses, and an RPI link with collars and caps. From this flows a 100% covered 6% dividend paid quarterly. The investment manager, Target Advisers LLP, is engaged directly with care providers around the UK, has a deep knowledge of the overall market, is sensitive to the local market conditions and now has introduced eight well-established, quality care operators as tenants to the Company.

Target Healthcare REIT continues to invest around the country, always based on local fundamentals. Effectively all care home businesses operate within local discreet markets, as families wish to have the relative close to hand and easy to visit. Brand is less important, as a family only makes a single purchase of care in its life cycle, so families are always looking for best in class affordable care, according to personal circumstances, close to their homes. When buying assets, close attention needs to be paid to setting an affordable and sustainable rent based on local fee levels and expected occupancy levels, and taking into account future demand, both for numbers of residents and future new builds, and price points.

The care ethos and focus of owners, managers and carers is an important consideration, and assessing span of control is a very important part of the investment decision. Larger operators try to develop systems and processes to enable area managers to operate multiple numbers of homes, but Target prefers to see a strong personal and relational element to the management of care homes. This is a people business that needs best in class care facilities. But, good rents flow from well run and managed facilities, which become homes not institutions.