Healthcare will resuscitate Perth’s office market

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PERTH’S office market can wait for a future mining boom to fill up the equivalent of 11.25 vacant Brookfield Places or act now and take advantage of the burgeoning healthcare and medical sectors as well as its enviable proximity to Asia.

Speaking at the Australian Property Institute Western Australia State Conference, Y Research principal Damian Stone said the ageing population, strong employment growth and the flow of private investment will see medical and healthcare property will emerge as a major asset class in WA.

Curtin University vice chancellor Deborah Terry who was also a speaker at the conference talked up the potential of the healthcare sector and the role it can play in diversifying the WA economy.

Terry said Perth could look to Adelaide and see how it is diversifying its economy beyond defence spend and building submarines, by investing $3.6 billion in a new medical precinct.

Terry said another great example is the city of Houston in Texas, United States, which diversified its economy from being oil industry dependent to the medical and healthcare sectors.

The Texas Medical Centre (TMC) is now the largest medical centre in the world, contributing $35 billion to the Houston economy and employing over 106,000 people.

More than 8 million patients visit the TMC each year and international patients are one the main drivers for Houston’s medical economy.

Y Research’s Stone said the mining boom led to over 800,000 sqm of space being added to the office market since 2004, the equivalent to 14 Brookfield Place towers.

There are approximately 1,818,368 sqm of office space across 280 buildings, of which 25.2% or 457,885 sqm or 11.25 Brookfield Places are currently vacant.

Following the end of the mining investment boom, the market has become heavily reliant on the state government, which occupies 292,715 sqm, followed by resources 187,514 sqm and engineering 119,509 sqm.

In contrast, the medical sector only occupies only 10,000 sqm of space.

Stone said using the “Medical Multiplier Effect” – a measure developed by Y Research to rate the impact of each hospital on the surrounding suburbs’ office markets, on average for each of the 5,316 hospital beds in Perth’s major hospitals, approximately 19.7 sqm of office space was occupied by medical space users in surrounding suburbs.

The largest impact is in the Perth CBD and West Perth where approx. 55.6 sqm of office space is occupied by medical users. Nedlands and Fremantle were the next strongest suburbs, each recording approx. 24.1 sqm of space occupied by medical users per hospital bed.

The impact of hospitals on office demand was weakest in Joondalup, where approx. just 5.6 sqm of office space was occupied by medical space users. Claremont, approx. 9.1 sqm of office space occupied, was the only other suburb to record less than 10 sqm of medical led demand.

“The health care sector is an important part of the West Australian economy and, increasingly in the future, an important part of Western Australia’s commercial property markets.

“As a result of this investment, health care now employs more West Australians than any other industry – 166,800 people or 11.9% of West Australians. In comparison, mining employs just 6.9% of West Australians,” he noted.

“For property, nationally significant investment is flowing into the healthcare sector, which is estimated to be worth over $120 billion dollars. A-REIT Dexus just announced a $750 million Heath Care Property Fund. Superfund Australian Unity raised over $170 million in two days for its Health Care Property Fund.

“In Perth, St John of God recently announced plans to divest a $400 million portfolio of properties under a sale and lease back arrangement,”

“Health care is an attractive sector for investors due to strong returns and low volatility compared to office and retail property. Nationally health care property delivered an annual return over 20%. As a result of competition for limited quality assets, yields are tightening to levels comparable to quality office and retail assets.

“Current asking rents for new medical centres on hospital campuses are comparable to Premium Grade CBD office buildings. On average, asking rents for high quality medical centres are 88% higher than office and retail properties advertised for medical use and 50.7% higher than former residential properties advertised for medical use,” Stone said.

Australian Property Journal