This article originally appeared in The Australian Financial Review.
Fund manager RAM expects to add up to a $1 billion-worth of assets to its real estate platform over the next 12 months as it ramps up its exposure to the rising demand for healthcare property, a sector it believes has been unfairly maligned by equity investors.
RAM has acquired a private hospital on the Sunshine Coast and a medical centre in outer suburban Perth as part of an $80 million development play that it hopes will tap into an undersupply of healthcare services and growing demand from retirees in those markets.
RAM head of real estate Matthew Strotton said the firm, which also manages the listed RAM Essential Services Property Fund (REP), was working on another five healthcare-related real estate deals.
Like other real estate investment trusts, the Essential Services Fund, split between private hospitals and convenience malls, is trading at a steep 35 per cent discount to the value of underlying assets, implying a re-rating of its portfolio in the wake of higher interest rates.
But Mr Strotton said there appeared to be an unjustified “disconnect” between listed and unlisted healthcare asset values in a sector benefiting from numerous positive tailwinds, including an ageing population and the increasing take-up of private health insurance.
“We firmly believe the listed market has overshot the mark [in terms of valuations and capitalisation rates],” Mr Strotton told The Australian Financial Review.
“All sectors [of the REIT market] are being painted with the same brush.
“A capitalisation rate north of 7.5 per cent is implied by the [share market] pricing. We’re 150-200 basis points below this mark. The market is pricing a doomsday scenario.”
An REP update provided to investors last week highlighted positive leasing spreads of 7 per cent, high occupancy rates, stable valuations, and a re-affirmation of its full-year earnings guidance of 5.7¢ to 5.8¢ per security.
Upcoming asset sales, as part of plans to recycle capital into new developments, will re-affirm valuations, REP said in its briefing to investors.
While its latest acquisitions – the Eden Private Hospital near Noosa and the Woodbridge Family Practice in Perth – are not for the listed vehicle but for separately managed accounts, they show the confidence RAM retains in the sector despite “playing defensive” with investors during the current cycle.
The Eden Private rehabilitation hospital was acquired for $28.5 million from the New Zealand-listed Vital Healthcare Property Trust. Vital Healthcare paid $23.8 million for the hospital – operated by Aurora Healthcare – in December 2017.
It comes with an approved scheme for a $20-million expansion, which RAM believes will tap into demand from the growing local retiree population.
The Woodbridge Family Practice in Cooloongup, an outer southern suburb of Perth, was acquired for $6.6 million from investor Neil McGregor and local GPs Edward Pleydell-Bouverie and his wife Nicola Wood.
It acts as an overflow facility for the nearby Rockingham General public hospital, currently running at over-capacity,
RAM intends to spend $30 million expanding the property to take advantage of the high unmet demand in the area.
Another five deals, all in the healthcare space, are being pursued by RAM, of which three could be suited for the listed REP trust.
Now holding $1.6 billion of real estate across retail, healthcare and office assets, Mr Strotton said RAM would look to acquire between $500 million and $1 billion of new assets over the next 12 months.
“We are long-term believers in healthcare real estate,” he said.