Charter Hall sees ageing population driving life science property returns
Charter Hall's Steve Bennett says Australia's ageing population and government focus on preventative care will drive demand for life science real estate. The fund manager's A$9.2 billion direct property business recently launched a five-year wholesale vehicle invested in a Brisbane pathology complex
Charter Hall, Australia's largest real estate fund manager, sees life science properties benefiting from long-term demand as the nation's population ages and governments prioritise preventative healthcare, a senior executive said on Tuesday.
Steve Bennett, who leads Charter Hall's A$9.2 billion (US$6.6 billion) direct property business, spoke at the Mingtiandi Australia Forum. His comments came after investors oversubscribed the Charter Hall Direct Life Sciences Fund in August, a five-year wholesale vehicle giving high-net-worth investors access to a Brisbane life science facility.
The asset is a pathology complex fully leased to Sonic Healthcare subsidiary Sullivan Nicolaides, which provides testing and diagnostics. "From a government point of view it's much cheaper to pay for a bulk-billed blood test than have someone presenting with a major illness in a hospital and being holed up there for a number of weeks," Bennett said. "If you look at the demographics right now, it's about one in 5.5 people over age 65. That's going to go down to one in four in the next 35 years."
Australia's aged-care and health systems face a growing demand curve, with the number of people aged over 65 expected to make up almost a quarter of the population by 2066, according to the government, which spends billions of dollars annually on Medicare bulk billing. "I don't care whether you're a listed REIT, an institutional investor or private high-net-worth money, people understand the benefits of the life sciences sector, they love the thematics, the ageing population," Bennett said. "The aim is for governments to save money by getting into that preventative space before illness and major sickness takes hold."
CapitaLand won the tender for the Brisbane pathology facility partly by investing directly from its balance sheet, before transferring the asset to a fund raised from investors keen for a slice of returns from the 20-year, triple-net lease to Sonic Healthcare, with CPI-linked rental increases. "If our offer was subject to capital raising we definitely would have missed out," Bennett said. "We weren't necessarily the highest bidder," he added, noting the fund was quickly oversubscribed.
Bennett saw the life science vehicle as an opportunity to bring an uncommon investment to Charter Hall's high-net-worth clients. He pointed to the quality of the tenant covenant as critical. "You've really got to make sure it's bulletproof, because if it doesn't go well you've got nowhere to hide," he said. Sonic Healthcare's position as an ASX-listed company with a market cap of almost A$10 billion and a 20-year "gold standard" triple-net lease gave Charter Hall confidence. "If we didn't have comfort that Sonic were going to be there for 20 years, paying that lease, paying that rent to us every month, we absolutely would not have done this deal," he said.
The triple-net lease, under which the tenant covers property taxes, insurance and maintenance costs in addition to rent, was also decisive in structuring an eventual exit for investors, Bennett said. "We always give ourselves the ability to exit early," he said. The competitive bidding process, which included international pension funds and Australian superannuation providers, also gave confidence that the asset could be sold after the five-year term. "It gave me a lot of comfort that when we go to sell, that's a very likely buyer," he said. "If you're a super fund, having something with 15-year duration, cash flow term certain to match off against your liabilities, suits their business model and their investment thematic perfectly."
