This post originally appeared in The Urban Developer.
Last year may have been one to forget for Australian REITs but fund manager Real Asset Management (RAM) is bullish about the future of healthcare.
With 35 assets under the $786-million portfolio, RAM’s Essential Services Property Fund (REP) has chalked up a 7.1 per cent like-for-like rise in net operating income for 2023, and the divestment of three assets for above book value.
RAM head of real estate Matthew Strotton said the divestment freed up capital to invest into high-growth assets and enabled the asset manager to reduce gearing from the current 35.7 per cent by the end of this financial year.
“We are actively moving to divest on a subset of the portfolio’s assets in the coming 12 months or so for a value of up to $100 million,” Strotton said.
“This follows the successful sale of three Queensland assets late last year for a combined value of about $30 million.”
These included the Hub at Westlake, the North Lakes Convenience Centre and Windaroo Village, which, Strotton said, transacted for above book value.
“We intend to pursue divestments on the basis that an asset has a weaker value proposition in comparison to the cost of debt and in consideration of the increased number of attractive acquisition opportunities that we are seeing,” Strotton said.
“Many of the assets have been owned for many years and are considered ‘ex-growth’, meaning their value-add journey has progressed sufficiently for the fund. We are pleased with the amount of acquisition opportunities that provide relative value.”
Strotton said they were looking to develop a deeper pipeline in “improving capital markets”. RAM has two deals under exclusivity in the metropolitan Sydney and Melbourne markets that are anchored by premium healthcare tenants.
Strotton said that in addition to recycling capital with accretive acquisitions, the asset manager was reviewing its deal flow pipeline to pursue value-added and development schemes.
These include:
- The Mayo Private Hospital at Taree, where RAM plans to undertake an expansion of its mental healthcare facility;
- North West Private Hospital in Tasmania, which is in line for an expansion of its mental health and cardiac facilities;
- And the Willetts Health Centre in Queensland, which will receive a refurbishment and a new day surgery.
“We are certainly seeing indicators that the market is transitioning into the next phase of the interest rate cycle, with inflation signals easing,” Strotton said.
“Given the revised commentary from central banks and the decrease in inflation, we forecast that cash rates will remain stable throughout the first half of 2024 and then begin to decline in the latter half of the year. The REITs sector is expected to benefit from this stabilisation of interest rates, experiencing positive tailwinds once the rates start to fall.”
The asset manager’s REP REIT offset the effects of rising interest rates with a healthy increase to its net operating income, which Strotton said pointed to a portfolio that was “well-positioned for growth when interest rates adjust”.
The REP’s strategy is to focus on non-discretionary retailers, which has been a “sustainable and defensible strategy”, according to Strotton.
“Supermarkets have demonstrated resilience, and healthcare property continues to be in high demand, fuelled by underlying fundamentals such as an ageing population, chronic illness, and increasing per capita expenditure on private healthcare,” he said.
Recent Moody’s Ratings research indicated the next 12 to 18 months would remain challenging for rated Australian REITs contending with higher interest rates, softer household spending and weakening asset values.
“Buffers for interest coverage will erode further. However, rated A-REITs continue to benefit from good asset quality and favourable lease structures,” the report said.
“Liquidity will weaken from very strong levels … but strong population growth and low new supply of retail space will support rated A-REITs with retail exposure.”