The Kingdom of Saudi Arabia (KSA) is one of the largest markets in the region and the biggest in the GCC. With a population of 35 million, the Kingdom has the largest population base in the GCC. Combined with Vision 2030, the country is undergoing fundamental structural changes in all economic sectors, including healthcare. With the introduction of several legal and economic incentives, including 100 per cent foreign ownership, the healthcare sector is amongst the most attractive sectors in the Kingdom, offering numerous opportunities for private sector operators and investors.
Based on Colliers’ estimation, the KSA will require approximately 195,000 additional beds by 2030. However, two of the biggest factors hindering the growth of the KSA healthcare sector are high land cost and the availability of funds for capital expenditure, mainly for the construction of hospitals. The opportunity, therefore, lies within unlocking existing value within the sector to support expansion programmes or as alternative funding sources for new developments.
Key healthcare indicators
The author highlighted: “Unlocking the real estate assets through capital markets/REIT funds or sales and leaseback in the Kingdom can potentially unlock current US$59.0 to US$63.4 billion only from property values against the required investment of approximately US$32.6 to 34.0 billion to establish around an additional 19,500 beds by 2030 within both public and private sectors. The unutilised US$26.4 - 29.4 billion can be used to upgrade the existing hospitals.”
The Other Government Sector (OGS) or Quasi-Government healthcare facilities are hospitals and health centres operated by the MoH and predominantly catering to employees of government organisations. Some Quasi-Government Facilities include the National Guard, Ministry of Defense and Aviation, Ministry of Interior, Royal Commission, ARAMCO, etc.
Source: SAGIA, Ministry of Health, the World Bank, Colliers Analysis 2022
Capital Financing: one of the key factors hindering the growth of the healthcare sector
A key challenge while establishing quality hospitals in KSA is the high funding requirement. Even though banks and other financial institutions actively seek investments within KSA’s healthcare sector, they often limit their exposure by only servicing known market participants with proven track records. International or regional operators contemplating entry into KSA’s market often struggle to secure project finance unless there is a recourse to alternative cash flows.
Further difficulties arise with the terms offered. Healthcare investments are typically long-term investments contradicting a bank’s risk appetite, which typically extends to a tenure that ranges between 8 – 12 years.
For the first time, entrants to KSA’s market, who don’t have enough financial resources or are unable to make significant financial commitments due to a variety of reasons, ultimately end up searching for private investors to enter into a licensing and operating agreement, from which they will extract a management fee. Alternative options include operators forming and owning the operating company (OpCo) with the investor investing in the land and property (PropCo) and creating a Joint Venture (JV) with an investor. The various options available to Operators based on the availability of funds are:
- Outright purchase of the land;
- Long-term lease of the land;
- Land as an equity investment by the landlord;
- Long-term lease of the land and shell & core structure from landlord/investor;
- Creating a JV with the landlord/ investor in an equity partnership; or
- Signing a management agreement with the landlord/ developer/ investor.
However, each option has financial, operational, and legal advantages and disadvantages, and Operators should seek professional advice before entering into any such arrangement. The Kingdom is moving towards encouraging more private-sector participation in the healthcare sector. The extent of investment required is significant.
1 Based on Rent as 40% of EBITDA for Public Sectors (@ 7% yield) & 25% for Private Sector (@ 9% yield) Hospitals
2 Based on Rent as 10% of Revenue for Public Sectors (@ 7% yield) & 12% for Private Sector (@ 9% yield) Hospitals
Source: Colliers Analysis 2022
Healthcare REIT: A tool to fund the development of healthcare projects and capital market in KSA
Although healthcare developments are traditionally considered as social infrastructure, healthcare assets are legitimate asset classes in their own right. Given the ongoing fractious and often volatile economic conditions, traditional real estate and local bourses have offered limited scope to the private investor and regional funds.
Historically, healthcare projects supported by the strong demand demographics rapidly attracted funds and private investors looking towards new avenues of investment. Naturally, as liquidity has fallen, so has the availability for healthcare investment. In the last few years, the healthcare sector has seen tremendous growth and continues to be one of the few sectors that have not actually been adversely affected by economic fluctuations.
This perceived immunity to economic cycles has made some view these sectors as being ‘recession-proof’.
Normally healthcare assets are considered as traditional ‘defensive (inflationary) plays’ in many institutional global markets, offering low but firm yields. In the MENA region, the benefit is that these sectors retain their relative safe haven status while providing returns that would usually fall in the opportunistic category.
Source: Colliers Analysis 2022
The Kingdom is moving towards encouraging more private-sector participation in the healthcare sector. However, the extent of investment required is significant. In the last few years, sale and leaseback have gained popularity as an option for several existing operators who own their facilities but want to expand their operations by creating PropCo and OpCo structures, extracting value by selling and leasing back the real estate asset into a PropCo.
The PropCo or asset would then typically be sold to mainly institutional investors, with the property subject to a typical 25-year lease agreement. However, due to the large ticket size of the investment, typically a minimum of US$50 – 70 million for a 100-bed hospital, only institutional investors or large family houses have access to these funds, with retail investors not able to benefit from the opportunities. In Colliers’ opinion, one way of bridging the required investment is by way of creating more REIT funds.
Based on Colliers’ estimate, REIT funds in the Kingdom can unlock around US$59.0 - 63.4 billion property value from the private sector, thereby playing a key role in augmenting growth in the healthcare sector.
Further, the unitisation of the physical assets also increases the size of the potential size investor base. The expansion of REITs in KSA is expected to benefit the Kingdom’s economy and capital markets by offering investors more diversification, transparency, and greater accessibility to local real estate.
Moreover, it is expected to provide an opportunity for retail investors who are looking for predictable income streams from real estate assets. Further, the unitisation of the physical assets also increases the size of the potential investor base attracting new sources of capital.
Source: Colliers Analysis 2022
Funding requirement by 2030 and conclusions
In summary, the healthcare sector in KSA, especially the private healthcare sector, offers several lucrative opportunities for developers, investors, and operators. However, it also poses a number of challenges, such as high capital costs, difficulties in attracting quality doctors and especially nurses, and funding constraints for new entrants. Private sector and capital markets/ REITs can continue to play a significant role in the growth of the healthcare market by providing much needed capital investment to fund the needed new hospital by 2030.
Colliers’ healthcare team is working with a number of market players to assist them in their expansion plans, either by expanding existing brands or attracting international brands to the region. Colliers is also assisting some market participants through traditional funding options, such as debt and equity, or emerging funding options, such as OpCo / PropCo, or a Joint Venture (JV) with an investor and REITs.
Mansoor Ahmed is the Executive Director Middle East & Africa (MEA) and Healthcare & Life Sciences, Education & Public Private Partnership (PPP), Colliers
This article appears in the latest issue of Omnia Health Magazine. Read the full issue online today.
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