As part of our coverage on REITs – companies that essentially own or finance income-producing real estate – we take a look at those that target the healthcare industry. We highlight some of the common investments that they encompass as well as factors to consider before investing in them.
As a quick recap, apart from offering liquidity (they are traded on the stock exchange) as well as diversification, REITs are generally managed by professionals who have had years of experience in this particular industry, increasing the potential for higher returns on investments. Healthcare REITs acquire, develop, own, and lease various healthcare-related properties – profiting predominantly by collecting rent from tenants.
Some of the (more popular) projects covered by healthcare REITs span hospitals, senior living communities, as well as medical office buildings.
These investments can be said to be the bread and butter of the medical REITs industry. Hospitals are stable institutions that rarely shut down or fail; the need to procure and efficiently manage such buildings and facilities will remain a priority for several reasons.
Their ability to maintain constant turnovers is bolstered by the fact that countries such as the U.S see them as the cornerstone of healthcare. A mandate decrees that all facilities with an emergency room have to treat anyone that walks through the doors, regardless of whether that person has health insurance or money to pay for the services.
2. Senior Living Communities
Also referred to as old-age homes or retirement homes, these institutions cater to those who reach a certain age and require certain levels of care that their family members are unable to commit to. Many elders decide that their present home is too much to upkeep, and book themselves into such facilities. These communities provide the added advantage of a group of like-minded and similar-aged occupants, and they usually employ trained professionals that are experienced in taking care of the elderly.
3. Medical Office Buildings
Building a medical office from scratch is an extremely costly affair. Doctors who go out on their own into private practice (or create private surgeries) would need to raise considerable capital and therefore usually opt to rent. This has created an opportunity for investors to enter the lucrative market.
Read more: Hospitality REITs
The Draw of Healthcare REITs
Apart from its high barriers to entry due to the sheer cost of medical equipment and infrastructure, it is no contention that the healthcare industry is a burgeoning one – especially within ageing populations such as Singapore. It is also a recession-proof industry since patients will always require medical attention regardless of where they are in life or how old they become.
Other REITs cater to certain demographics and target markets for obvious reasons. This sector of REITs has a low or even negative correlation to the stock market – making this a valuable and vital component to minimise risk in investment portfolios.
Drawbacks of Healthcare REITs
The healthcare industry is highly prone to political pressure. When governments cut reimbursements or subsidies, this also reduces patients’ ability to pay for premium health care facilities – they very often turn to public options that charge much less for treatments.
The industry’s growth also tends to be more stagnant than others in the real estate industry due to the fact that anchor tenants rarely get high rent increases when renewing a lease. In the context of Singapore, medical tourism has also shifted considerably to more affordable regions such as Thailand that offer high standards of treatment for patients at a fraction of the costs, reducing overall profits.
As always, it is imperative that investors take a look at the REIT in particular before parking their money into it – their figures are public and a bit of research on their track record will go a long way in terms of ascertaining their viability as an investment tool.
Read more: Retail REITs