Financing healthcare’s move to net zero
As Since sustainability moves rapidly up the agenda, healthcare operators are faced with the challenge of financing upgrades to ageing facilities. Changing demographics and social trends have put great pressure on healthcare providers to invest in new healthcare facilities and care housing. This is exacerbated by the requirement from the Paris Agreement to achieve a climate neutral world by 2050. In this article we will discuss the impact that institutional investors can realise in financing the energy transition in the healthcare sector. This article was previously published in ‘Real Assets IMPACT Magazine’.
The sheer size of the Dutch healthcare real estate sector is enormous. In terms of square metres, the total stock is estimated to be larger than the total retail and offices sector combined. Approximately 50% of all healthcare properties in the Netherlands still dates from before 1980. Many of these buildings are aesthetically outdated, often have overdue large-scale maintenance requirements and have an inefficient layout for healthcare personnel. As a result, they do not meet current, let alone future sustainability requirements –meaning that a significant part of the current supply of healthcare facilities does not meet the needs that care providers and residents have in 2021.
Additionally, consider the demand of healthcare facilities and care housing that is both growing and changing. Demand is increasing because of well-known demographic trends. In particular, the ‘double-ageing effect’ plays an important role: the number of people aged 65+ is expected to increase by 1.3 million over the next 25 years, and the number of people aged 75+ will even triple. The need for intensive care increases exponentially the older people will become.
Demand is also changing qualitatively because of a secular social trend. Most people who are now in their 70s are considered to have much more vitality compared with their parents or grandparents. Older people are now able to, and also have a desire, to stay in their homes longer. And that means the type of healthcare facilities needed today is much different than the buildings that were constructed say 30 or 40 years ago. In short, supply and demand are greatly out of balance, from a quantitative as well as a qualitative perspective. This puts a great pressure on healthcare providers to invest large sums in more and better- suited healthcare facilities and housing. As if this were not enough, there is another storm looming on the horizon: the Paris Agreement to achieve a climate neutral world by 2050.
Healthcare providers face multiple challenges in the near future. In its latest Barometer Dutch healthcare 2021 consultant EY sees some important developments in the healthcare landscape, among which are the need to make the sector more sustainable, the increasing importance and influence of ICT, and innovations and increasing construction costs.
‘The type of healthcare facilities needed today are much different than the buildings that were constructed say 30 or 40 years ago.’ Joep Munten, Hartelt Fund Management
EY further notes that the necessary investments in sustainability also result in increased costs, without delivering any direct benefits. Investments to achieve reductions in CO2 do not immediately save money and only a limited amount of savings on energy costs. This puts healthcare providers in a predicament: on the one hand a rising need to invest in new IT systems and rigorous cost control; and on the other hand the need to invest in sustainability measures to meet the net- zero requirements in 2050 of their – often ageing or outdated – real estate properties. Traditionally, the major source of capital for healthcare providers has always been standard bank financing. However, banks have become more reluctant to provide long-term loans to finance investments in sustainability and the energy transition. This is where institutional investors can step in.
Impact of institutional investors
In today’s low or even negative interest rate environment, institutional investors such as pension funds and insurance companies have a keen interest in alternative investments. In particular, stable and income-producing assets are much sought- after and healthcare real estate meets these characteristics.
Institutional investors are also long-term investors and therefore are a natural fit with the healthcare providers. A detailed description of the financing structure of the Dutch healthcare system falls outside of the scope of this article, but in brief, healthcare providers receive much, if not all, of their financing through the government and the mandatory healthcare insurance. As such, they can be considered very stable counterparts.
A possible solution to funding could therefore be a sale-and-leaseback transaction between a healthcare provider and an institutional investor. Depending on the complexity and the scale of the required investments in sustainability, the investor can act either independently, or through a dedicated asset manager. An important part of this long-term strategic partnership is to make clear arrangements concerning the timing and type of refurbishment, the demarcation and the pathway to be followed.
The advantages of this partnership are evident. The institutional investor receives a stable and inflation-indexed direct income by investing in a sustainable building that is or will be Paris-proof. The healthcare provider will be able to provide its residents and personnel with a property that fits its current and future requirements and has clarity of its future housing costs and can focus on providing care and well-being to its residents.
There is a strong natural financial fit between both worlds. On the one side there are healthcare institutions that are in need of a stable source of capital to upgrade their properties to current and future needs. On the other side there are institutional investors that are looking for a source of long-term stable direct returns. But also from an impact viewpoint there is a strong match. Institutional investors are able to realise a significant contribution in the reduction of the CO2 footprint while at the same time creating impact by investing in suitable housing for healthcare providers and the elderly.