Fiddich Review Centre
Alternative Investment

Social infrastructure needs to get back to basics, for investors and the people using it

“Although sector fundamentals remain robust, transaction activity has slowed largely due to a mismatch in pricing expectations – a challenge facing many real estate sectors.”

To underline the point, RetireAustralia, the nation’s fifth-largest for-profit retirement village operator with 28 villages under management, was withdrawn from sale last year by owners Infratil and NZ Super, seemingly due to a gap between buyer and seller expectations.

Worse, some managers seem to be taking advantage of private investors’ enthusiasm for, and lack of knowledge about, social infrastructure, particularly specialist disability accommodation – a $2.5 billion sector forecast to grow to $10 billion by 2030.

Ryan Banting, the executive general manager, social infrastructure at Australian Unity, warns of property spruikers selling “badly located, poorly designed and cheaply operated [specialist disability accommodation] property” to retail mum and dad investors on the promise of unrealistic or even guaranteed returns.

He says such offers are a risk for the investors, who face capital losses; for the disabled residents, and for the future of National Disability Insurance Agency funding.

Such schemes are also on the radar of the Australian Securities and Investments Commission. Last year, ASIC deputy chairman Sarah Court told The Australian Financial Review’s Jonathan Shapiro and Max Mason that investors should be aware that such schemes are not government-backed and warned of “unrealistically high returns”.

For JLL, social infrastructure is an $85 billion subset of the alternative assets real estate class. With a focus on “supporting the quality of life and wellbeing”, the social infrastructure sector includes specialist disability accommodation, aged care, private hospitals, medical centres and childcare.

JLL’s Alternative Investments Outlook 2023 argues that institutional investment in social infrastructure is backed by “rising expectations surrounding the quality of essential services and provision of appropriate accommodation for high need groups,” and by enhanced government policy in recent years driven by reforms to aged care, disability care and childcare.

Of course, government involvement in social infrastructure also makes investors captive to changes in government policy.

JLL notes that many investors circling the aged care market have “put acquisition plans on hold due to uncertainty around the impacts of the new aged care funding model” which “may see some disruptions to operations”.

Nevertheless, at a time of change for traditional property investments such as office towers and shopping centres, social infrastructure offers property investments in growth sectors, with long-term leases, and government supported rental occupancies.

“Investors continue to be drawn to compelling demographic tailwinds across the social infrastructure sector, alongside targets to meet the ‘S’ in ESG,” JLL’s Wild says.

Over and above those fundamentals is the added attraction of providing a social good. As the Charter Hall Social Infrastructure REIT puts it, “we believe property should serve the ever-changing needs of society.”

Mostly, the sector has performed well. Arena topped the rankings in the BDO A-REIT Survey 2022 and its rival, the $1.2 billion Charter Hall Social Infrastructure REIT, came in at number nine out of the 47 real estate investment trusts rated by BDO.

Australian Unity’s unlisted suite of unlisted social infrastructure funds tell a similar story.

In a tough 2022 financial year, the $1.2 billion Australian Unity Healthcare Property Trust delivered a 12 per cent total return; the Australian Unity Specialist Disability Accommodation Fund, with a committed pipeline of $226 million, had a 5 per cent total return; the Australian Unity Childcare Fund, with $81 million in the fund or committed, delivered a 4 per cent total return: and the $35 million Australian Unity Retirement Village Property Fund rewarded investors with a 14 per cent total return.

The US, which has long had listed healthcare REITs, provides a balancing view. In calendar 2022, the 15 health care REITs in the FTSE NAREIT All Equity Index suffered along with traditional REITs, delivering a negative 22.8 per cent total return.

So, what are the key factors for investors?

Wild says the quality of the social infrastructure property is more important to operators – and hence the rental – than in traditional real estate sectors.

“Across healthcare assets, the ability to conduct medical procedures is highly dependent on whether standards for particular building and fit-out features are met,” she says. “For childcare, amenities and fit-out style can have a significant impact on occupancy.”

Obviously, the ability to obtain often complex government licences is critical.

Wild also warns that despite the macro-demographic tailwinds, investors need to understand the local dynamics and competition.

“This is why sophisticated investors mostly choose to invest into platforms of funds which include exposure to an operator, or where there is a strong ongoing relationship with experienced operators, as opposed to making individual asset investments,” she says.

The Charter Hall Social Infrastructure REIT aims for further capital growth by acquiring modern assets with limited competition and low substitution risk, in strategic locations with high underlying land values and with triple net lease structures.

(Under a triple net lease structure, the tenant pays for most costs, so capital expenditure on the portfolio is minimised.)

Australian Unity’s Banting, whose Specialist Disability Accommodation Fund is the largest such housing fund in the country, warns that specialist disability accommodation is an institutional asset class and that the direct ownership of individual SDA properties is “risky and not advisable”.

“Australian Unity has employed experts in the asset class to ensure the fund navigates the nuanced scheme, to optimise outcomes, opportunities and manage risks,” he says.

Like all property investors, Banting looks to boost rental, pointing to opportunities in assets such as childcare to add revenue from additional services such as speech pathology, nutritional programs and extra after-hours care.

Robert Harley is a former AFR Property Editor. H can be contacted at rob@rharley.com.au

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