Property recovery is underway yet healthcare is still catching up

After two and a half years of rising capitalisation rates and suppressed transaction volumes, the unlisted property market has turned. For healthcare real estate specifically, the entry point may be narrower than it appears. 

The signals are accumulating. The December quarter produced the first positive capital growth reading in the unlisted property index since 2023. Transaction volumes came in at around $26 billion. Charter Hall reported strong results off the back of renewed institutional appetite. The market, in short, has turned. 

Tom Patrick has seen this before. Managing Partner and Head of Healthcare Property at Barwon Investment Partners, which manages around $3.5 billion predominantly in healthcare real estate, was speaking at a recent Inside Network event when he made the case for why the next 18 to 24 months matter more than most. 

“Property values go up the stairs but down the elevator,” he said, citing the industry’s well-worn observation.  

What most investors miss, he argued, is that healthcare real estate has yet to experience the cap rate compression already working through industrial and retail. The lag is not a problem; it is the opportunity. 

“This vintage, we believe, is going to be one of the better ones over the next five years.” 

Why replacement cost changes the rent equation 

Part of the thesis rests on a dynamic that rarely features in client conversations: replacement cost. Construction inflation has pushed the price of steel, concrete and trades labour up between 20 and 30 per cent in some categories over recent years. The result is that building a new asset now costs materially more than buying an existing one. 

Quantity surveyors have assessed Barwon’s portfolio at roughly a 30 per cent discount to replacement cost. For any competing developer looking to attract tenants away from an existing building, the arithmetic is straightforward. They would need to charge around 30 per cent more in rent just to make a new development viable. 

Patrick draws the implication directly. “Anyone that’s got an existing portfolio right now should be looking at that and saying: great, given where we are, we can drive outsized rent growth through the next cycle.” 

Healthscope was a private equity story, not a sector one 

For advisers fielding client questions about Healthscope, Patrick’s answer is unambiguous. The collapse of Australia’s second-largest private hospital operator was a private equity story, not a hospital or healthcare one. Brookfield took the business private, loaded it with leverage through a sale-and-leaseback of its assets and left it exposed to a cyclical adjustment in private health insurance pass-through rates.  

The structure failed, the sector did not. 

Ramsay Health Care’s recent results make that distinction clear. The structural picture is undisturbed. Australia spends $224 billion annually on healthcare, representing around 11 per cent of GDP. Wait lists for elective surgery in NSW public hospitals now exceed 365 days for category three and four procedures. 

Barwon’s portfolio has not dropped below 98 per cent occupancy, and lease renewal rates over the past decade sit at nine and a half out of ten. “It’s not a systemic issue,” Patrick said. “If you go back to the fundamentals, we don’t have tenants in arrears. We don’t have tenants going broke.” 

Where the portfolio is positioned 

The portfolio concentrates on primary care, medical centres, GP practices and allied health. The part of the system Patrick sees as best positioned to absorb demand that would otherwise fall on hospitals. That positioning matters both for income durability and for liquidity. 

Approximately 80 per cent of leases in the fund are directly linked to CPI. Medicare underpins most tenant revenue. Assets are predominantly sized between $4 million and $20 million, creating a buyer pool deep enough to support liquidity when it is needed.  

When a meaningful redemption in the Fund came about last year, Barwon returned that capital within nine to twelve months. That outcome has not been universal across the unlisted property sector. 

Credit does not compound 

On the credit-versus-equity question that continues to shape portfolio construction conversations, Patrick was measured. Private credit has performed a useful role, but he noted that some products sold as low-risk first mortgage positions carried mezzanine or stretch senior exposure, and that regulatory scrutiny has added noise to the sector.  

The more fundamental point is simpler: credit does not compound. For clients with a generational time horizon, it has limits that equity does not. 

What the return profile looks like 

Patrick’s return expectations are deliberately grounded. Eight to ten per cent in a normal environment, ten to twelve in a stronger cycle where rental growth and cap rate compression align. 

The profile he describes combines inflation-linked income, government-backed tenants and low correlation to the economic cycle. It is not designed to be the most exciting allocation in a portfolio. It is designed to be the most reliable one. 

The window exists because institutional capital has been slow to return. But that is changing. When it moves in full, the entry point moves with it.