Healthcare property - an emerging trend for investors

By Annabelle Aland, Peter Brennan, Rosanne Meurling
Dealmakers & Investors Environment & Planning Healthcare Private Capital Property & Development Real Estate

Unique aspects mean unique legal risks 5 min read

With traditional real estate asset classes like office and retail under pressure from long-term macro-trends such as the move to remote work and online retail, institutional investors are increasingly looking at so-called 'alternative' assets. With long-term demographic tailwinds in the form of an ageing population and consistently strong government investment in the sector, healthcare property assets are expected to be a major beneficiary of this trend.

While investing in healthcare-related property is generally similar to investing in other classes of property, in this Insight we explain some key differences and risks that investors need to be aware of.

Key takeaways

  • Healthcare property is a sector that is predicted to keep growing.
  • Although transactions in the sector have many similarities to transactions in other real estate sectors, investors need to be aware of the unique aspects of healthcare property.
  • These unique aspects give rise to unique legal risks that investors must take into account when investing, or considering investing, in the healthcare property sector.
  • Taking a 'master planned' approach to larger proposed healthcare projects can increase investment and partnership opportunities while de-risking the project.

What makes investing in healthcare property unique?

Investing in healthcare property has many similarities to investing in other classes of property such as commercial, industrial and retail. However, there are three key differences. Broadly, they are:

  • a higher level of government and public scrutiny;
  • highly bespoke and capital-intensive facilities; and
  • a higher degree of operator risk.

These unique factors give rise to specific legal risks that must be taken into account before finalising any potential investment in a healthcare real estate asset.

Government and public interest
Bespoke facilities
Operator risk
  • Often dealing directly with government or quasi-government organisations that have similar drivers to government.
  • Heavily regulated sector.
  • Strong public interest in healthcare means that, even in the absence of express regulation, there are heightened reputational risks to be aware of.
  • Highly bespoke facilities that can't easily be converted to alternative uses.
  • High level of upfront capital expenditure required, with input from specialist design and construction consultants.
  • High level of capital expenditure required over the life of the facility, to meet legal and community expectations.
  • Shallow pool of operators with the finacial capacity and expertise to operate.
  • Important to have appropriate restrictions and processes around the operator's/tenant's right to assign.
  • Need for an appropriate security package, to secure operator performance and protect investors in the event of default.

Key issues

Development – design and construction

An owner/investor in healthcare facilities will typically want to have a largely passive role (not wishing to be directly involved in the development or operation). However, especially where investing in development opportunities, it is important that the owner/investor have appropriate rights to review and approve the design. Particular care should be taken to ensure:

  • the owner/investor has rights to review and approve any development proposals (including any proposed variations during the application process and after an approval has been granted);
  • the developer is obliged to carry out the development in accordance with all relevant approvals, including the approved plans, and is responsible for the payment of all infrastructure charges; and
  • the developer carries all risk in terms of ensuring that the development is compliant with all regulatory requirements applicable to the relevant healthcare facility.

Redevelopment and expansion

Given the long-term nature of healthcare-related leases and high public standards around health service delivery, there will often be a need to expand, redevelop or renew the facility during the term of the lease. When negotiating a lease of a healthcare-related facility, careful consideration should be given to:

  • Approval rights: An owner/investor in a health facility will usually want a fairly broad discretion to approve any major works proposed to be done to the facility.
  • Funding: Similar to approving the actual works, an owner/investor will typically want to maintain a broad discretion to elect whether or not to fund any redevelopment works.
  • Rentalisation: To the extent that an owner/investor does fund redevelopment works, this should be reflected in a higher rent paid by the operator. There will need to be a mechanism for determining how the rent is increased. This could be an agreed rate (eg 5% of the cost of the works), an amount to be agreed as part of the process of the landlord approving the business case and agreeing to fund the works, or an amount determined by a third-party valuer.

Securing performance under the lease

Given the bespoke facilities, high upfront costs and the smaller pool of potential operators in the sector, it is important that owners and investors secure operator performance and protect investors in the event of default by the operator, by negotiating an appropriate security package with the operator. This may include bank guarantees, corporate or personal guarantees, financial reporting obligations and KPIs, or any combination of these.

Planning – securing the most appropriate approval

Given their public purpose, there will usually be a choice of planning approval pathways for developing healthcare facilities. The owner/investor should work with the developer to identify the best pathway for the type of facility proposed – preferably, a streamlined process that is not open to third-party challenges. If the healthcare facility is to be developed in stages, consideration should also be given to obtaining a 'master plan' approval, which either approves staged implementation of the healthcare facility or allows subsequent stages to follow a shorter approvals pathway.

Considerations in developing healthcare precincts

Development of larger healthcare precincts requires considered, and early, planning. Taking a 'master plan' approach to the development, including in terms of planning approvals, tenure structuring and governance mechanisms, will assist with the implementation (and integration) of appropriate complementary uses to ultimately maximise investment potential.

Appropriate tenure structuring can assist with de-risking a project, by allowing developed (or undeveloped) components within the precinct to be individually transacted, creating collaboration and partnership opportunities.

What next?

Given the unique nature of investing in healthcare-related property, every deal can be different, and the types of risk will vary significantly. Should you need to discuss your investment in more detail, please contact us below.