If you’re looking for a property investment but are worried about a market crash, healthcare could be the answer.
According to the Investment Property Databank (IPD) Healthcare Index, primary healthcare properties — such as GP surgeries — have delivered a total return of more than 7% per year since 2007, with less risk than any other class of property.
The first stock I want to look at today is healthcare property REIT Assura (LSE: AGR), which develops and invests in GP surgeries. Assura earns 84% of its rent roll from the NHS.
Assura now owns 556 properties, out of a total UK market of around 9,000 GP surgeries and medical centres. The company says that this makes it the sector leader “in a highly fragmented market”.
One attraction of this business is that rent payments are likely to be supremely reliable. This compares favourably to retail property, for example, where many tenants are suffering financial problems.
What could go wrong?
One possible downside is that high demand for secure income means that healthcare rental yields are quite low.
In a trading statement issued today, the company said it had paid £108.2m for 39 medical centres and two developments during the first quarter. Collectively, these properties generate £5.5m of rent each year and have a weighted average lease term remaining of 13.3 years.
This suggests a gross rental yield of 5.1%, which seems fairly low to me, given that the group’s debt carries an average cost of 3.3%.
As a contrast, my second stock today has similar levels of gearing and an average debt cost of 2.9%. But it recently announced a £57m property acquisition with a net initial yield of 9.15%.
To sum up, my view on Assura is that investors are paying a high price for a secure income. Given that interest rates seem likely to rise, I think these shares are already fully priced.
One property stock I’d buy
The other company I mentioned above is FTSE 250 property firm Hansteen Holdings (LSE:HSTN). This group owns offices and industrial property, such as warehouses and distribution centres.
Demand for logistics properties is pretty high at the moment, due to the growth of internet shopping. Hansteen took advantage of this strength to sell its Dutch and German portfolios for €1.3bn in 2017. Earlier this year the firm continued to lock in gains on its portfolio, selling £116m of UK property.
Adding value
The proceeds from these sales have been used to fund significant returns to shareholders. Management said it has opted to return capital rather than buy new assets because high prices mean that opportunities for new investments are “limited”.
I like this conservative approach from management. I also like the company’s ability to buy properties and improve them by increasing occupancy and rental levels. This allows Hansteen to create value for shareholders in a way that I suspect may be harder for Assura.
Higher returns
Here’s another way of comparing the two companies. Hansteen generated a return on capital employed of 10.4% last year. Assura generated ROCE of just 4.1%.
Hansteen shares currently trade in line with their book value and offer a forward yield of 5.2%. I’d be happy to buy this stock today, despite the group’s exposure to the UK economy.