For clients contemplating making investment in or acquiring healthcare facilities
Healthcare market outlook
Most of the healthcare transactions prior to 2005 were asset acquisition from small-sized operators. Now that some major players have entered the market with the establishment of healthcare REIT, we begin to see new projects amidst the current market heat-up partially due to lack of available investment assets in open market.
We expect an appropriate supply-demand balance to take place as supply volume increases. More focus will be on the transparency pertinent to quality of facilities as the market grows more discriminating with the supply-demand shift for market participants.
This would particularly hold true for those opportunistic funds looking for transparency to ensure value appreciation as a part of their exit strategy. I had the opportunity to meet Mr. Tebura of Ventas REIT, president of a then rapidly growing major healthcare REIT, in 2006. Mr. Tebura, who is also an attorney, informed me that the important factors required for the growth of healthcare REIT is legal compliance and transparency. To some extent, thorough review of finance or legal compliancy is being carried out in Japan.
However, there is no system in place to evaluate the quality of service the operator provides to the users.
Therefore, a scheme for third-party evaluation of social welfare corporations initiated by the Ministry of Health, Labor and Welfare that has already gained social consensus could be construed as an important opinion in healthcare evaluation. As a registered member of in the Institute of Research and Evaluation Standard (IRES) as a third-party evaluator and licenser (the only licensed real estate appraiser to hold the track record), I believe the disclosure of service in details will become the principal guideline. Also from the standpoint of an appraisal institution, we believe the importance of understanding the details of service will be further highlighted that would heavily influence the stability of facility operation. In addition, a much anticipated hospital category entering the REIT market also indicates that the information disclosure on opinions regarding medical services would be expected as the asset category also serves a function in senior housing sector.
We intend to continue to cooperate with these initiatives that would be the core driver for the growth of healthcare REIT.
Shotaro Morii, President
Morii Appraisal & Investment Consulting, Inc.
Real Estate Appraiser / Third-party Evaluator, Social Welfare Corporation (Tokyo Metropolitan Government) / Real Estate Counselor
The supply of healthcare facilities is an unavoidable issue in Japan that faces rapid progress of aging society. The asset class is drawing attentions as it is expected to be an expanding market.
The progress of appropriate information disclosure, along with the market expansion of healthcare facilities, would lead to the growth and enhancement of the transparency of operators. As a result, it can benefit the users while it leads to the reduction of public funds by means by capitalizing on private funds, therefore we believe it has a great social significance.
Not to mention the offering of appraisal reports by the appraisers with extensive experience related to securitization matters, we offer operator evaluation reports to grasp and deeply analyze the operator risks in regards to healthcare facilities, as well as the building engineering reports in a one-stop service in collaboration with specialists such as an independent evaluation agency of welfare facilities or architects.
Real Estate Appraisal
Healthcare facility is a type of commercial property of which its value is largely influenced by its operator's business management competency.
Morii appraisal and Investment Consulting, Inc provides more appropriate and precise appraisal reports taken into account the healthcare-particular risks.
Furthermore, if required, we will provide operator evaluation reports by capitalizing on the third-party evaluation system on welfare service as follows.
Operator monitoring report by utilizing the system of third-party evaluation on welfare service
The operator risk analysis is mandatory in the case of investing in healthcare facilities, however under the current circumstances it is difficult to grasp the risks due to issues involved in information disclosure, etc.
We monitor the actual state of the facilities, which is not necessarily clarified through standard financial due diligence process, with consultants that support the identification and analysis of operator risk, with IRES implementing the third-party welfare service evaluation system.
Prioritized research and evaluation items
- Evaluation items in view of organization management
- Evaluation items in view of services provided
We support the value added strategies of investment assets by providing uninterrupted monitoring service of asset information. Add value!
As healthcare facilities are unique in their nature, a different type of building due diligence is required that is based on different perspective from ordinary properties, such as office.
We provide highly valuable engineering reports in cooperation with medical or welfare building specialists who are well-versed in the field.
What is a third-party welfare service system?
The third-party evaluation of healthcare facilities is the system of disclosing the evaluation results that may serve as a criteria for the facility users with questions such as "What are the characteristics of the business I want to use?" or "At what level is the quality of service positioned?" as well as enabling to understand the business in details.
What is the Third-Party Evaluation Institute?
The "Certification Standards" of The Tokyo Welfare Service Evaluation Promotion Organization are as follows.
(1) Having juridical personality (2) Not providing welfare service (3) Having three or more principal evaluators in the organization
The "evaluators" who actually conduct evaluations are the persons who completed the evaluators’ training course organized by Tokyo Metropolitan Government Welfare Service Evaluation Organization and registered as the evaluator.
"Reference: (Public Interest Incorporated Foundation) Tokyo Metropolitan Government Foundation for Social Welfare and Public Health."
Information provided by: Tokyo Metropolitan Government information website "Fukunavi"
Trends in the healthcare market in Japan
The development of healthcare facilities is a major issue as the society faces aging population.
Trends in the proportion of population over the age of 65 Investment situation to health care facilities J-REIT, of private funds
The ratio of investment in healthcare facilities accounts for approximately 0.3% of total J-REIT investment (as of 2013.1).
The status quo of healthcare REIT in the U.S.
The healthcare REIT in the United States has grown rapidly for the last decade.
- The health care REIT in the United States has grown rapidly in the last decade, with its share accounting for about 12% of all REITs and about 13% of equity REITs’ investment in real estate.
- The market capitalization of major eleven healthcare REIT companies totals approximately 72 billions dollars (as of January, 2013) and the investment balance is 69.2 billions dollars (as of September, 2012).
*11 companies of the major health care in the United States
HCP,Ventas,Health Care REIT,Senior Housing Properties Trust,Omega Healthcare
Iｎvestors,Healthcare Realty Trust,Medical Properties Trust,National Health Investors,LTC Properties,Sabra Health Care REIT,Universal Health Reality Income Trust.
Efforts in Japan
Currently, despite great investment appetite, closing transaction deals is difficult as there is limited supply of healthcare facilities in the market.
We believe the healthcare REIT market will grow as small and medium-sized operators begin to balance off their properties, the number of developer-initiated new facilities increase and the marketability expands as transparency of facilities improves.
Furthermore, if the incorporation of assets such as hospitals into REITs is made possible by amendment of the laws and regulations, the growth path seen in overseas healthcare REITs can be established here as well.
Challenges of healthcare facilities if you invest
1. Legal framework risks
- Business risks involved in revision of legal systems such as Long-term Care Insurance System
- Revision of Long-term Care Insurance plan/insurance premiums and nursing care compensation takes place every 3 years.
- Issues raised in the past revision
(1) Emphasis on homecare
(2) Streamlining and prioritizing benefit payment
(3) Proper adjustment of amount of benefit and cost borne by users
2. Operator risks
- The evaluation approach to understand the operators in details has not been established.
- We need to be informed whether the operator is appropriately managing the healthcare facility or not. For example, we need to know the quality of service provided by the operator, its corporate governance and the degree of implementation of compliance with laws, etc.
3. Building risks
- The cost to properly maintain and manage a healthcare facility, a highly specialized property
- We need to be informed of any projected cost that includes repair cost and CAPEX.
4. Liquidity risks
- Difficulty of conversion due to the uniqueness of building facilities and structure
- As it is equipped with facilities and equipment unique to healthcare facility such as kitchen/dining room, common bath and emergency evacuation slope, converting its use may be restricted or the cost of conversion may be significant.
- The value of majority of the healthcare facilities is generally around JPY1billion, a size slightly small for institutional investors.