"There's nothing sexy about this story, and I don't think there should be." That's how Kenneth MacKenzie, managing partner at specialist asset manager Target Advisers, introduces a new healthcare real-estate investment trust (Reit) to the public market. Target Healthcare Reit will offer reliable, asset-backed dividends rather than speculative upside.
Healthcare property has become one of the most sought after niches of the real-estate industry. One reason is demographics - demand for healthcare is bound to rise with an ageing population. Another is that buyers tend not to be very price-sensitive, whether in the public or private sectors. The property that houses healthcare therefore tends to be let on long leases at rents that broadly track inflation.
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Target Healthcare will own care homes rather than doctors' surgeries - a riskier sector because the rent is paid by private clients and local authorities rather than NHS-backed doctors. Yet its portfolio will consequently offer a higher rental yield of some 7 per cent, allowing Mr MacKenzie to promise covered dividends at 6 per cent of NAV.
There have been a couple of notable care home failures. The most obvious is Southern Cross, and Aim-traded landlord Public Service Properties was also forced to break up its portfolio after struggling to refinance last year. Expensive leases on older buildings, combined with falling occupancy in the face of shrinking local authority budgets, hit both companies hard.
Mr MacKenzie expects to sidestep these problems by letting new-build homes on lower rents to operators that already receive about half their fees from private individuals. "Private pay is only going to increase," he explains.
Target Healthcare Reit is a welcome addition to a low-risk sector. The asset manager already manages an institutional fund, giving it the requisite experience. It also expects to be fully invested after only six months, so cash generation should accelerate rapidly after launch. It's a useful opportunity to buy into a popular sector at book value. Buy.