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By Hennie Bezuidenhoudt*
Some specialised sectors of the property market have continued to deliver solid returns throughout the Covid-19 crisis. Apart from global logistics and ecommerce, medical office buildings have continued to flourish, as their tenants mostly offer essential services.
This is cheering news for investors who feel strong affinity for property as an asset class. Unfortunately, domestic commercial property investments in general have proven disappointing for South Africans in the last couple of years, after the euphoric returns enjoyed up to end-2017.
In 2018, the JSE’s SA listed property index dropped 25%. In 2019, the total return from the index was 1.92%, well below inflation. In the eight months to end-August 2020, the index has shed 48%.
Although dividends from the listed property sector grew by 8-12% a year between 2014 and 2017, growth slowed to 3.5% in 2019, which again was below inflation. In response to the economic fall-out from Covid-19, most property companies have warned they will withhold dividends this year to strengthen their balance sheets and until they understand the full fallout from the pandemic.
And the data is not looking encouraging. Office tenants are cutting space wherever possible, having learned that their reduced workforces can now work from home. Retail is under enormous pressure across the board, from big brands to smaller tenants, particularly restaurants, which just don’t have the firepower to recapitalise and pay rents in a market where there are still restrictions and the consumer is unable to come to the rescue. For a hospitality business dependent on international business and leisure visitors, there is really no clear path to recovery at all at this stage and the losses will be devastating.
There’s no refuge in residential property, either. The Lightstone residential property index shows national house price growth in SA peaked at 6.25% in 2014 and has slowed since then to a five-year low of 1.7% in 2019. Lightstone expects, despite the recent interest rate cuts, that growth in the residential housing market will slow again in 2020.
Despite the temporary effect of Covid-19 lockdowns in the first half of this year, medical office buildings (MOBs) have proven resilient to the crisis. There has also been a fundamental change in the sector, as lockdowns and ongoing fears of infection have stimulated growth in telehealth and smaller specialised Covid-free facilities.
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In the US, the Covid-19 crisis has hit particularly hard, with over 187,000 deaths by early September. Hospitals under pressure to clear wards and scale up for the anticipated flood of Covid-19 patients had to postpone all elective procedures and turn away patients who were not critical. This dramatically affected the income of all medical professionals who were not directly involved in treating Covid-19 patients, but it boosted income for medical practitioners working outside the hospital system, as patients have sought treatment from doctors working from these independent facilities.
Even medical practitioners who had to close temporarily have benefited from a post-lockdown surge in patient visits. Medical procedures can rarely be postponed indefinitely and there was pent-up demand through lockdown. We have seen strong recovery in the turnover of most medical practices.
According to the Third Quarter 2020 Report (“Beyond the Global Health Crisis”) by Marcus & Millichap of the US, telehealth will help to fill the gap caused in the US by the growing shortage of physicians. “Current capabilities are not a replacement for the majority of office visits, however, sustaining demand for medical office space,” they said.
Marcus & Millichap said that despite the recent turmoil, rental growth in US medical office buildings has maintained an upward trajectory over the past four quarters and now averages $25.22/square foot of space.
Average capitalisation rates (income as a percentage of initial investment) for medical office properties in the US in the 12 months to end June were 7-8%, according to Marcus & Millichap, which is 630 basis points above 10-year US Treasuries.
For South Africans who invested in offshore logistics or medical buildings, the rand returns have been considerably enhanced by the depreciation of the rand against the dollar.
OrbVest now has 20 medical office buildings under management across three US states and, of our 146 tenants, only five requested rental abatements during lockdown. In fact, our overall collections remained above 96% during this period and we are now recovering to over 100% of normal.
Smaller medical businesses often have more cash reserves than other sectors, which has prevented a similar wave of closures to that seen in some other sectors, Marcus & Millichap said. On top of that, revenue is also secured through health insurance – 95% of US families are covered.
The net result of the pandemic on OrbVest’s projected revenue will be negligible and has not affected our ability to pay our normal regular quarterly dividends, which are in the region of 8% a year.
Medical property investment was not an unexpected beneficiary of the Covid-19 crisis. The argument for buying into a building tenanted by medical professionals, especially in the US, makes fundamental sense in the long term. In the US, the ageing population is growing and requiring more medical care. An investment delivering a proven 8% p.a. US dollar dividend paid quarterly, plus a capital gain share at the end of the investment period, is an essential part of a diversified portfolio for South African investors.
- Hennie Bezuidenhoudt has more than 27 years’ experience in commercial real estate with a focus on medical offices. He is the CEO of the Benchmark Group, an international property development company specialising in medical facilitates. He is also the Chairman of the OrbVest Investment Committee where he oversees strategic planning and due diligence for all property partners and proposed investments.
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