REITs – real estate investment trusts – allow people to invest in all kinds of commercial assets in real estate. An interesting specialization of the REIT is healthcare real estate.
One of the first things to note about investing in healthcare real estate is its very low risks and potentially high rewards. So you can build on this ground and try to know more about this kind of investment before going ahead with it.
This article discusses the most important things you must know about healthcare real estate investment, why this is an excellent long-term investment, and what REITs do.
Why Should You Put Your Investment In Healthcare Real Estate?
REITs could continue their tremendous growth in the next couple of years, which would boil down to two primary reasons.
Firstly, the demographic trends in recent years have been positive. There’s a fast growth rate within the older part of the population. The generation of baby boomers is going into their retirement age. By 2050, it is expected that the population of 65+ people would double. Also, the expectation for the 85+ population is that they would also double with 20 years.
It is common knowledge that older people in America use the healthcare facility more than others in the general population. They also tend to spend more money than others when they use this facility. According to the National Health Expenditure data, the average amount that average Americans spend on healthcare in a year is $7100. This amount also includes the insurance amount paid on behalf of patients.
People in the age group of 65-84 spend an average of $15,900, which is more than twice what the average American citizen pays. However, for the faster-growing 85+ age group, the average amount spent on healthcare annually is about $34,800.
From this data, it is evident that as a population starts to age, there will be an increase in demand for healthcare services (and, in many cases, healthcare properties). Moreover, this is a trend that is going to continue for several decades.
Secondly, healthcare real estate is at the early stage of its REIT consolidation. This means that only a tiny part of the current healthcare real estate in the US is owned by REIT. However, more than 40% of hotels and malls are REIT-owned. The healthcare properties in the United States have a total worth of $1.1 trillion, and not up to 15% of this is owned by REIT.
So, the opportunities for growth in this market are tremendous, especially for outpatient medical facilities. About 65% of these are owned by the physicians or health systems that are occupying them.
How the Healthcare REITs Hold Themselves Up During Tough Economies and Recessions
Like every other investment, there are some risks to investing in healthcare real estate. However, it remains one of the most significant defensive property investments within the industry. Two things must be considered to understand why it’s like this. The first of these is the economic sensitivity or cyclicality with the healthcare industry. The second one is the least structured of most healthcare properties.
There are very few industries that are as recession-proof as the healthcare industry is. One could easily cut down on their expenses such as shopping trips and vacations when hard times hit. You could even cut back on the housing and other things. However, irrespective of what the economy is saying or doing, people always need healthcare. Even when the economy is at its extreme difficulty, hospitals, physician practices, and many other healthcare businesses still succeed.
Another thing to know is that most of the healthcare properties owned by REIT are on long-term leases. Typically, tenants sign leases that have no less than ten years as their initial terms. The renewal rate for these leases is usually excellent too. So it is not often that you find doctors changing their offices.
If you don’t think this is enough, you should also know that leases within the healthcare industry are mostly triple-net. With this, tenants take responsibility for most maintenance expenses, building insurance, and property taxes. These are some of the factors that make investing in healthcare real estate a good choice.
Risk Associated With Healthcare Real Estate Investment
Unlike most other types of real estate investment, there isn’t much risk involved in healthcare real estate. However, it is not risk-free either. According to some paper writers on the website, some of the most significant risk factors that you have to consider if you are going to buy a healthcare REIT are:
- Interest rate risk
It is impossible to talk about REITs investment without any mention of interest rates. Generally, the stock prices of REITs reduce are interest rates rise. However, there are risk-free yields, such as treasury securities, and investors expect to get a similar yield increase from an income-focused investment such as REITs.
There’s an inverse relationship between price and yield. So when the rates rise, REIT tends to go lower. An excellent indicator for REITs is the 10-year treasury notes. So, expect that your REITs will dive when there’s a spike in the 10-year yield.
- Leveraging/Financing risk
It is common for many REITs to finance their operation with some level of dents. This is one of the best ways to boost the total returns while avoiding excessive risk if it’s done responsibly. However, there are many other ways in which financing becomes a risk factor.
The borrowing cost will likely become more expensive when the rates rise. Similarly, when the profit falls, the company with lower leverage will be more equipped to scale through the challenging period than others with higher leverages.
- Oversupply risk
As the population of senior citizens continues to grow, there will be an increase in demand for healthcare properties. However, there is a possibility for oversupply problems if newer healthcare properties are built much faster than the rising demand.
For instance, if the demand for housing units for seniors grows by 100,000 and there are 150,000 new units built to meet this need. Then there will be 50,000 units that will be left unoccupied. This isn’t a hypothetical situation. It is a common occurrence in many other senior housing markets and remains a risk in healthcare real estate.
- Tenant risk
The tenants are a primary factor that healthcare REITs rely on. However, some REITs depend highly on a few tenants’ successes. Imagine a situation where a healthcare provider takes up to 25% of the rental income of a REIT. If the tenant runs into a difficult financial crisis, the REIT may also struggle financially.
How Healthcare REIT Make Money?
Like many other REITs with properties, healthcare REITs build or buy properties and lease them out to tenants. Then, they rent these properties to tenants operating different healthcare businesses.
Healthcare real estate has different types of properties under its umbrella. Some REITs specialize in a particular type of property, and some others invest in various property types. As stated in a recent thesis writing service, some of the most common types of investment in healthcare real estate are:
- Hospitals (outpatient and inpatient)
- Life science offices
- Medical offices
- Skilled nursing facilities
- Senior housing or assisted living
- Wellness centers
There are healthcare REITs that don’t use the conventional landlord-tenant model for their healthcare real estate properties. For example, it is common to find skilled nursing facilities, assisted living, and senior housing facilities operated as partnerships. In this case, the facility operator and REIT both get their share of the operating profits from the business.
Investing in healthcare real estate is one of the best investments to make, not because it is the most profitable, but because it has very minimal risks compared to other types of real estate investment. There are basic things that you need to be informed about regarding healthcare real estate investment, and this article takes care of that.
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