Global Outlook February 2009.pdf - Grosvenor

Global Outlook February 2009
The case for investment in European healthcare property
The healthcare industry is one of the largest
economic sectors, with expenditure on healthcare
ranging from 5% to 11% of GDP in EU countries, the
average being in excess of 8%. Healthcare
expenditure growth is also greater than GDP growth
in most countries. Moreover, the correlation between
GDP and healthcare expenditure growth is generally
very low or negative (Chart 1). The most probable
reason for this is that healthcare spending is driven
by population ageing and an increase in discretionary
medical procedures.
Chart 1: Low correlation between GDP and health
expenditure 1992-2007
25
20
15
10
5
0
-5
-10
-15
-20
Percent
A European-wide trend of lower birth rates and -30
EU-15 France Spain Germany Italy UK
higher life expectancy is resulting in rapidly ageing
Source: Global Insight, Grosvenor Research, 2009
population. In 2005, around 16% of the EU
population was over the age of 65. This figure will be around 23% in 2025 and 30% in 2050 (Chart 2).
Moreover, the fastest-growing segment of population is the one over-85, which puts even more pressure
on the healthcare sector. As healthcare necessities increase as people grow older, healthcare demand
in Europe is expected to grow significantly. Life expectancy is also rising, while the average age at
which people increase their dependency on healthcare services is not increasing. As a result, the period
of healthcare treatment and care is growing.
Chart 2: Over-65 population increasing rapidly
40
35
30
25
20
15
10
5
Percent
2005
2025
2050
The healthcare market mainly consists of the cure
sub-sector, mostly hospitals and private clinics and
the care sub-sector, which is mainly represented by
nursing homes. These subsectors are not in
competition with each other and are sometimes
complementary. Most of these institutions depend
on public spending. As a result of increasing
healthcare costs and dependency ratios, there is a
trend to funding shortfalls. Therefore, few reforms
have been introduced in several European countries
to attract private capital in the sector 1 .
0
The healthcare property market is already
France UK Germany Italy Spain
recognised in the US and Australia 2 . However, it still
Source: US Censes Bureau, Grosvenor Research, 2009
is in its infancy in Europe. Most sourcing stock
comes directly from owner-occupiers, which are now starting to sell-off their portfolios. On the other
hand, there are only a handful of funds that explicitly target healthcare property 3 . Opportunities vary
according to the market size and the degree of regulation and accessibility to stock of the different
countries. Total population, the current and future ratios of over-65 to total population and total and
growth rate of public spending on health are important variables to take into account. Estimating the size
of this market is a rather difficult exercise, as data is scarce. We have tried to estimate the market size
for the five major EU countries, as these are sizeable markets and data for them are of better quality.
Calculations are based on the number of healthcare beds in each country and the average cost per bed 4 .
Based on this, the estimated total market size is in the order of $250 bn. However, as the owneroccupation
ratio in this sector is quite high, the investable market is likely to be much smaller but still
interesting. The largest markets are Germany and France.
-25
1 Healthcare systems are different across EU countries and reforms happen at a different pace. As a result, the
healthcare sector can be more or less regulated.
2 Grubb & Ellis estimates that the size of the US market is around $700-750 bn. About 5% of it is owned by REITs
(Green Street source).
3 Noteworthy names include managers such as ING, BlackRock and Kenmore.
4 The countries selected are Germany, France, Italy, Spain and the UK. The estimates are based on various
assumptions.
Grosvenor Research

Global Outlook February 2009
Chart 3: Germany is the largest market
$ bn
140
120
100
80
60
40
20
0
Spain UK Italy France Germany
Source: WHO, Grosvenor Research, 2009
Compared with standard commercial property,
healthcare property vacancy and rental rates are less
likely to exhibit the peaks and troughs of the property
cycle. Healthcare property can offer attractive
income returns. Although our analysis is limited by
data availability, anecdotal evidence suggests that
yields are relatively high, when compared to the main
commercial sectors. This is hardly surprising, given
the higher risk implied by this type of investment.
Prime yields should range are expected to be
between 7.0% and 9.0% for this kind of product.
Moreover, the healthcare market in Continental
Europe is characterised by long leases and offers
indexation, albeit maybe not at full rate.
As mentioned, investing in healthcare property is not, however, exempt from risks. The sector is still
quite illiquid and lack of transparency maybe an issue as legislation and regulation are rather different
across European countries. A specific risk of this sector is mismanagement risk, as it carries a severe
reputational risk. On the other hand, re-letting risk may be mitigated as a result of government concern
about continuity of services. These types of properties are also generally located in good central or
countryside locations, making it easier to change the use of the building.
This document is for general informative purposes only. The information has been compiled from sources believed to be reliable however its accuracy and
completeness are not guaranteed. The opinions expressed are those of the Research Department of Grosvenor Group Limited ("Grosvenor") at this date
and are subject to change without notice. Reliance should not be placed on the information, forecasts and opinions set out herein for any investment
purposes and Grosvenor will not accept any liability arising from such use. This document is intended for professional and non-private investors only. No
part of this publication may be reproduced in any form without the prior written permission of Grosvenor.