Whilst populations in developed countries are generally aging, the aging rate in Japan is the highest in the world, and people over 65 years old are expected to comprise approximately 33.3% of the entire population in Japan by 2036. The Japanese government aims to secure hospital and healthcare facilities to accommodate the expanding elderly population. Meanwhile, the population of regional areas is decreasing overall due to a low birthrate and movement of the younger generation into mega cities, such as Tokyo. As the gap between big and small cities is widening, real estate planning, including positioning hospital and healthcare facilities in the right place, is becoming more and more important in Japan.
With this background, the importance of taking advantage of private capital has come to be recognised. Financial resources in the public sector is limited to some extent, although the Japanese government announced its policy of increasing housing for the elderly (e.g., nursing homes). Accordingly, investment in hospital and healthcare facilities by private funds is encouraged. Some hospitals in Japan also may consider receiving money from private funds for specific reasons, such as for the purpose of renovation.
In order to invest in hospital and healthcare facilities, three types of investment structures are usually utilised; the GK-TK structure, the TMK structure, and the REIT structure. The former two structures are mainly used when an investor or a small group of investors invest in specific real estate, whereas the latter is generally used when many investors make an investment in a number of items of real estate in the long term. A REIT is a going concern vehicle which asset portfolio becomes bigger as its investment period continues. There are now 59 listed J-REITs, including two healthcare J-REITs investing mainly in the healthcare sector.
Non-recourse real estate finance arrangements may be procured as finance techniques become more advanced. Under non-recourse finance arrangements, the value of target real estate is evaluated only by financial institutions, and investors have no recourse, which makes it easier for investors, including foreign investors who do not necessarily have high credibility in Japan, to invest in Japanese real estate. This non-recourse finance arrangement can also be applied to investments in hospital and healthcare facilities.
Listed REITs are a good indicator of the real estate investment market. According to a recently published statistical reference, Japan is the world’s third largest market for REITs. The size of the J-REIT market is approximately 11.2 trillion yen. However, the total asset value of hospital and healthcare facilities in which J-REITs have invested so far is not very large, unlike the US-REIT market.
Relatively low penetration of private investments in hospital and healthcare market may result from unique features of hospital and healthcare investment. Hospital and healthcare properties are typical operational assets, meaning that the ability and experience of the operator in charge of such facilities is a significant factor, not just the location and quality of the building. It is hard to replace an operator, even if medical or healthcare businesses operated by them worsen. Thus, handling of investments in hospital and healthcare properties is considered to be difficult. In addition, governmental policy regarding medical and healthcare insurance, which may change occasionally, affects business performance. Investment in these facilities requires skills and expertise in the medical and healthcare sector, which is different from real estate market itself. Further, market liquidity of healthcare facilities have been considered to be low.
However, the factors associated with investment in hospital and healthcare facilities do not necessarily indicate that the volume of investment in these facilities by private funds, including through REITs, will not increase in the future. Hotels are also a representative of operational assets, yet many hotels have already been incorporated in asset portfolios of investment vehicles, despite these assets being highly influenced by external factors, such as the economy and the seasons. Private funds, including J-REITs, may be able to support the facilitation of hospital and healthcare transactions, improving market liquidity.
In recent years, public-private investment funds have been set up to push investment in healthcare assets. Also, guidelines for J-REIT investing in hospital and healthcare have been published by the relevant authority in 2014 and 2015. Under these circumstances, in 2017 a J-REIT acquired a rehabilitation hospital that treats convalescent patients. This was the first instance of a J-REIT investing in a hospital. Amid strong demand for restructuring of the medical and healthcare system, including demands for development of healthcare facilities, it is expected that private funds will play a more active role in the medical and healthcare industry.
Shinroku Wakayama will be at MIPIM 2018 to discuss the investment opportunies in an ageing Japan.
Join the discussion here!
Top photo © ponywang/GettyImages