“The secret is in the tenant” healthcare and medical centres (MOBs) have quality tenants with recession resistant income ensuring payment of rent (return to investor)
Which asset class to invest in?
Investors always seek the highest return with the lowest risk. Logical! However, investing in traditional assets, equities, bonds, and cash provides differing risk profiles and reward. And is making investors poorer as investors are faced by volatility and under performance.
The volatility of markets and investor disappointment by traditional asset classes is a prime cause for seeking alternative investments in this uncertain and disrupted world. Real estate, classed as an alternative investment has been the foundation of most wealthy families but the high barriers of entry has precluded many investors from commercial real estate.
However, with innovative technology and digital administration processes plus reduced barriers of entry, more and more investors are turning to property as it has many desirable characteristics that provide a more balanced risk and reward ratio.
Why do people invest in commercial property?
Commercial properties offer higher returns than residential properties. Aside from greater management focus, there is market risk, vacancy risk, and interest rate risk.
So why is commercial real estate better?
Higher return on investment: Commercial properties tend to perform better than residential properties over time, both in terms of income and capital appreciation. It’s also easier to add value to commercial properties, enabling rental escalations.
What global and local factors affect commercial property?
Economic & political outlook: The current performance and outlook of global, local, regional, and national economy affect the value of commercial real estate. Economic indicators include GDP growth, inflation-adjusted wage growth, job growth, interest rates, currency strength and unemployment rates. Stable political systems underpin economic outlook.
What are the categories of commercial real estate?
Five main categories:
● Offices.
● Retail-retail stores, shopping centres, shops.
● Industrial-warehouses, factories.
● Leisure-hotels, pubs, restaurants, cafes, sport facilities.
● Healthcare-medical centres, hospitals, nursing homes.
Why is commercial healthcare real estate considered robust and market resilient?
This category is driven by the demand for quality of life as primarily the western world experiences an aging population. People are living longer and longer. In addition, healthcare property is largely immune to economic and political stresses.
Which country has the biggest economy and an affluent society?
The USA is the largest economy in the world with an affluent society. Affluence, meaning the financial ability of “patients” to access private USA healthcare services being a key component for investing into USA commercial healthcare or medical centres, known in the USA as MOBs, medical office buildings. The GDP per Capita (Average earnings of individuals) is $70 248pa (2021) By comparison: Canada $51 987pa, South Africa $19,375pa, China $12 556pa.
179 million people enjoy private medical care benefits, 54.7% of the U.S. population.
Factors driving the demand for USA healthcare services
● People are living longer
– Due to lifestyle changes
– Medical technological advances
● Aging population
– 10 000 people turn 65 everyday
– Over 65s visit the “Doctor” 6x more than under 65s
The dawn of the 100-year life is upon us. “It’s accepted that we will outlive our parents by 10 years and that our children will outlive us by 20 years!” – Lynda Gratton. People are repurposing their careers and retirement outlooks as they embrace this new reality; and a key component is access to quality healthcare to enjoy a quality life!
Where do we invest in healthcare and medical centres in the USA?
There are 52 states including Washington DC with a total population of 336 million
● Focus is on USA States & Cities?
– Where economies are outperforming the national average
– Where population is migrating for lifestyle or economic advantage
– Where the population can afford medical care
What are Healthcare and Medical centres?
Medical office buildings, often referred to as “MOBs”, are properties that have been designed specifically for healthcare providers such as doctors, dentists and other clinicians. These buildings are typically structured with patient waiting areas, exam rooms, and specialized building systems and materials. For example, given concerns about doctor-patient confidentiality, MOB offices will usually have especially high-end soundproofing. The buildings may also have specialized HVAC(aircon) systems to ensure proper air ventilation needed to accommodate various medical devices, like MRI and other very expensive high tech imaging equipment.
MOBs during the pandemic gave peace of mind to patients as COVID treatment was not involved. The pandemic also has highlighted the resiliency of MOBs.
Medical office properties are usually characterized as either “on-campus” or “off-campus”. On-campus buildings are usually located on a hospital campus or immediately adjacent thereto. These MOB facilities will usually have some sort of affiliation with the hospital, even if that affiliation only pertains to the doctors’ referral networks.
Off-campus MOB properties are usually located further from hospitals and are more likely to be found in suburban and rural areas. These properties, sometimes referred to as “ambulatory care” facilities, bring health care services closer to the areas where patients live and work.
Historically, many physicians would own and operate their own off-campus MOB buildings. However, as more real estate investors look to buy MOB facilities, many physicians are selling their real estate (often leasing back) and turning over day-to-day property management to more professional and specialized real estate investor groups.
How do we select Healthcare & Medical centres? (MOBs)
● Medical buildings must be cash flow positive Day 1
– Rental income
● There is room for adding value
– Tenants quality
– Lease terms & renewal
– Minor renovation
● Suitable local partners available
– Daily management of the MOB.
How are potential medical buildings evaluated?
● Minimum Criteria
– Must generate US$ 6% pa rental or more upfront to be considered
– The targeted income to investors is US$ 7-8% pa
– Projected total return (IRR) min US$ 10%pa
– Ability to sell the MOB investment after 4-7 years
(To maximise return to investors before there is capital expenditure for maintenance)
● Funding
– Loan to value must not exceed 65%
– Typically, only interest payment 1-3 years
– Interest rates are fixed for the term of the loan
● Approved by Independent Advisory Board
– Every potential project must meet the agreed minimum criteria
Why are MOBs recession resistant investments?
Irrespective of economic conditions or political uncertainty, healthcare is a fundamental human need and thus people do not hold off or delay on seeking healthcare. While some people may temporarily delay elective procedures, those who are sick and need medical treatment will continue doing so whether the stock market is up or down. This is evidenced by the sector’s strong rent collections that have exceeded 95 percent even during the depths of the pandemic.
Examples.
Surgery for cancer followed by radiotherapy or chemotherapy
Learning to walk with a protheses after a car accident.
In summary:
► Patients are needing “have to” medical care
► To get treatment and medical care patients have to pay the Doctor-Healthcare worker
► With private medical benefits and cover, the patient has the financial means
► If the tenant, the Doctor-Healthcare worker is paid
► The tenant, the Doctor-Healthcare worker can pay the landlord (The Investor)
“The secret is in the tenant” healthcare and medical centres (MOBs) have quality tenants with recession resistant income ensuring payment of rent (return to investor)-Costas Souris
Investor Benefits
► Invested in USA Medical Buildings
► With direct ownership in buildings
► Low minimum investment amount: $5000
Income paid as tax efficient dividends
► Annual dividends US$ 7-8% pa
► Paid quarterly in arrear
Final dividend paid as a lump sum
► Paid on sale of building (±5 years)
► Calculated at US$ 3-5% pa. i.e. 15-20% of invested value
Total return (IRR) US$ 10-11% pa
Reinvestment option
► Can reinvest dividends (No min. applies)