Property: just what the doctor ordered
Private hospitals are desirable tenants but are hard to come by
STANLIB Direct Property Investments has broken ground for a R220-million Melomed hospital in uMhlathuze, northern KwaZulu-Natal, that will be included in the Liberty Property Portfolio.
The 100-bed, 10 000m² hospital, which will form part of a multi-use precinct in the John Ross Eco Junction near Richards Bay, is expected to be completed by early 2017.
Liberty Property Portfolio fund manager Alex Phakathi said the R30-billion direct property portfolio, which is managed by Stanlib and includes Sandton City, Nelson Mandela Square, Eastgate and Liberty Midlands Mall, has been delivering its promised CPI-plus-5% return for the past 10 years.
“It provides direct exposure to property as an asset class, without the vagaries of the fluctuations in the listed space, and investors should assess it over a rolling five-year period. It’s a long-term investment,” he said.
“It has the characteristics of a sustainable return — predictability with low volatility because of the leases in place, as well as being a hedge against inflation because of the everincreasing income from rental escalations.”
A private hospital — like a private school — would surely be a sought-after tenant. Does this indicate a change in direction for the Liberty direct property portfolio?
“No. We aren’t moving into healthcare. We happen to have a tenant in healthcare while we still have 13 hotels, five shopping centres and a number of office buildings. We now also have this John Ross Eco Junction industrial scheme,” said Phakathi.
“However, it is a rebalancing of our tenant mix. We have had low exposure to industrial tenants and industrial and retail have been doing well lately, so we’re correcting that low exposure by investing in this development.”
Ndabe Mkhize, deputy chief investment officer at the Eskom Pension and Provident Fund, said most listed property companies that already had healthcare assets in their portfolios — such as Redefine, Growthpoint, Vukile and SA Corporate — would like more, but could not get their hands on hospitals.
“There are no more to be had, especially among South Africa’s top three hospital operators — Life, Mediclinic and Netcare. This is mainly because these three operators are cash-flush, don’t see a need for leasing properties and prefer to hold on to their properties.”
According to Mkhize, two listed property companies — which he declined to name — are trying to grow into the private healthcare space by contracting smaller, newer players.
“Obviously the attraction is that over time these operators will mature, but the risk is that the operators may not live as long as the leases they’ve signed. Therein lies the risk of a specialised asset like a hospital, which cannot be used for anything else.”
He said the fact that Liberty had signed Melomed as a tenant, and not one of the big three hospital operators, was telling.
“The only hospitals from the big three still found in the listed space are there due to legacy issues. There are no new ones coming through.”
The sustainability of up-andcoming brands such as Melomed, Libmed and BusaMed was yet to be tested, he said.
“The education space is the same — the Advtechs and Curros still see their properties as something they want to own. It is perhaps only a private equity player who could take over such a company and separate it from its property, but in the normal course I don’t see the listed property companies being able to prise the properties from their hands.”
The alternative, as with healthcare, would be to target smaller, newer operators with less cash on hand.
“In both cases, they’re desirable leases, especially if the tenant is strong and the lease longdated. But the operators in South Africa want to hold on to them, so it never becomes a big
There are no more to be had, especially among SA’s top three operators
part of any property portfolio.”
This strategy, he believes, is missing a trick.
“In Europe, the US and Australia, it’s different. There are a number of hospital operators and we’ve seen leasebacks and sales of properties to pension funds. The properties tend to be owned by different landlords.
“The South African operators could still have the control they need in long-dated leases, and flexibility can be written into lease agreements, particularly if you’re negotiating with a specialist landlord who is willing to be accommodating. Landlords in South Africa, who tend to specialise in retail and office space, might be less willing to listen to the nuanced needs of hospital operators.”