How Healthcare REITs Can Safeguard Your Retirement In Singapore

Updated: Dec 12

Despite being the 2nd largest REIT market in Asia and 4th largest REIT market in the world, Singapore is home to only two healthcare REITs.

Regardless of the limited number of choices, as investors, we mustn't neglect the inclusion of healthcare REITs in our portfolio given their long-term stability and attractive growth prospects.

In this article, we’ll explore why you should consider including healthcare REITs in your portfolio and what you should watch out for when assessing healthcare REITs to future-proof your retirement.

The Benefits of Healthcare REITs

The Growing Demand for Healthcare Services

One of the most significant reasons to invest in healthcare REITs is the undeniable growth of the healthcare industry driven by the following factors:

Aging Population
As populations age worldwide, especially in developed countries like Singapore and Japan, the demand for healthcare services is set to increase steadily. Baby Boomers are reaching retirement age, and this demographic shift is fuelling demand for hospitals, nursing homes, assisted living facilities, and medical offices.

The increasing demand for healthcare facilities creates a strong case for stable and possibly higher rental rates for healthcare REITs moving into the future.
Increased Healthcare Spending
As the population ages, governments have no choice while private insitutions are incentivized to invest heavily in healthcare infrastructure to keep up with the rising demand.

As healthcare spending grows, the need for real estate space to house these services increases. This directly benefits healthcare REITs as it creates a constant demand for healthcare properties that will support the valuation of their invested assets.

Key Takeaway:

Healthcare is not just a trend—it’s a long-term, fundamental need. Investing in healthcare REITs allows you to tap into this essential service sector, benefiting from the growing demand and continuous development of healthcare facilities.

This translates to the potential for positive rental reversions and capital appreciations as the demand for healthcare services would translate to higher revenues for healthcare providers which allows healthcare REIT to raise their rental rates as well.

Stability in Recessionary Periods

In addition to the growth potential, healthcare REITs offer a high degree of stability, even during economic downturns thanks to the following factors:

Resilient Sector
Unlike other real estate sectors such as industrial or office spaces, healthcare properties tend to remain in high demand regardless of economic cycles. This is because healthcare is a non-discretionary service and people need medical attention regardless of the state of the economy.

In addition, in times of a healthcare crisis – as we’ve seen in the recent COVID-19 pandemic – the demand and need for healthcare services would only skyrocket. This is unlike other types of REIT, whose operations are often vastly disrupted in such times.

This creates a more stable income stream for healthcare REITs and hence dividend stability for investors, even during periods of recession, market volatility and even healthcare crises.
Long-Term Leases
Healthcare REITs often sign long-term leases with their operators, providing healthcare REITs with predictable and steady rental income.

In the case of Singapore’s listed healthcare REITs, the tenancy contract is often above 10 years with built-in rental reversion pegged to a reference inflation rate. This level of stability is essential for investors looking to secure regular dividends that are inflation-hedged without worrying about the risk of encountering low occupancy rates.

Key Takeaway:

If you’re seeking an investment that offers stability, particularly during economic downturns, healthcare REITs provide a reliable source of stable income. Their long-term leases and the essential nature of healthcare services make them a less volatile option for risk-averse investors.

Things to Watch Out For

While healthcare REITs offer many advantages, such as stability and long-term growth potential, it's essential to recognise the potential risks involved.

Understanding these risks will help you make more informed decisions and ensure that you're investing in the right healthcare REITs at the right timing and valuations.

Here are two key factors to consider:

High Valuations and Lower Dividend Yields

One thing you’ll notice when looking at healthcare REITs is that they often trade at high valuations. This is primarily driven by the strong demand from investors seeking stability and long-term growth in the healthcare sector.

However, the downside of these high valuations is that dividend yields tend to be relatively lower compared to other types of REITs, such as retail or industrial REITs.

As a rough gauge, the current yield of blue-chip REITs for the respective sector is as follows:

Healthcare: 4% to 4.5%
Offices: 5% to 5.5%
Retail: 5% to 5.5%
Industrial: 5% to 6% (depending on the type of underlying properties)

While healthcare REITs offer income stability, the yield you’ll receive on your investment may not be as high as with other REIT categories. This can be a drawback as you will require a higher capital outlay to produce the passive income you need for your retirement should you invest when the valuations are high.

Key Takeaway:

While healthcare REITs provide stability and long-term growth, they may come with lower dividend yields due to high investor demand.

Unless you are contented with the 4% to 4.5% dividend yield, I would suggest that you keep a close eye on the price movements and start a position during times when market volatility is high, and the share price of the desired healthcare REIT suffers from indiscriminate selling.

High Tenancy Concentration Risk

Another risk to be aware of when investing in healthcare REITs is the high tenancy concentration that many of these REITs have.

As healthcare REITs often lease their properties to a limited number of large tenants, such as hospital groups, nursing home operators, or senior living companies, it exposes investors to a high level of tenancy concentration risk.

This high concentration of tenants can pose a significant risk in an event where the tenants face financial difficulties. When that happens, the REITs are often faced with mounting pressure to either re-negotiate their tenancy agreement with the affected tenants or suffer from the impacts of tenant defaults.

We’ve seen this happen to First REIT back in 2021 when their main tenant suffered from financial hardship during the COVID-19 pandemic which had resulted in major restructuring of their ongoing leases.

This resulted in over 40% decline in the distributable income for First REIT followed by refinancing worries. As a result, the share price of First REIT experienced an over 80% drawdown as investors rushed for the exit. Since then, the share price has yet to recover.

Key Takeaway:

High tenant concentration is a major risk in healthcare REITs. If a major tenant defaults or faces financial trouble, it can lead to significant disruption in the REIT's performance and hence your dividend income stability.

Be sure to assess the diversity of the REIT’s tenants and the financial strength of its key lessees.

Conclusion

Healthcare REITs are a powerful tool for building a resilient, long-term portfolio.

They offer stability, consistent income, and growth potential, particularly in an aging society where healthcare demand continues to rise. However, it’s essential to understand the risks involved, such as lower dividend yields due to high valuations and a high tenant concentration risk.

By carefully assessing these factors, selecting healthcare REITs with strong financial foundations and investing when the valuations are reasonable, you can make healthcare REITs a valuable part of your investment strategy while minimizing potential risks.

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