Despite huge progress in fighting the global pandemic of Covid-19, healthcare systems around the world still experience various challenges to deliver high-quality and effective patient care. The demographic shift worldwide indicates that populations will continue to age rapidly, as a result of increased life expectancy and fertility decline. Aligning healthcare and medical systems to the needs of the older population remains crucial for long-term integrated care and age-friendly communities.
Speaking to The Edge Singapore, Victor Tan, CEO of the manager of First REIT, shares that emerging trends across Asia indicate a rise in national healthcare expenditure on the back of surging demand. The proportion of elderly individuals across Asia is rising at an unprecedented rate, leading to greater healthcare demands that cannot be met by traditional means alone. This shift has spurred a transformation in how societies view eldercare. Nursing homes are now perceived as critical components of a modern healthcare system, offering professional care and improving the quality of life for many elderly residents.
Tan says: “The healthcare industry is very resilient because people need it whether times are good or bad. The demand is rising. In Asia, many developed countries have ageing populations that will need more healthcare. Japan is already a super-aged society, and Singapore’s population is ageing quickly.
“Even in developing countries that do not have ageing populations, their people are becoming more affluent, and they tend to spend more on their healthcare. This is why demand for such services will continue to increase.”
Tan adds that most nursing homes are staffed with competent healthcare professionals who give round-the-clock care to their residents. Eldercare facilities within the homes may also offer a holistic range of services which includes physiotherapy and dietary services that promote healthy well-being. More families are starting to recognise that eldercare facilities provide essential, specialised care that they may not be equipped to offer.
Growth strategy
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With that, First REIT is carving out a pioneering path with its innovative “2.0 Growth Strategy”. As Asia’s ageing population grows and healthcare spending increases, First REIT is positioning itself to not only navigate these changes but to remain adaptable and thrive within them.
Tan explains: “First REIT sees immense opportunities in healthcare real estate, supported by structural demographic megatrends. To drive sustainable long-term growth, First REIT is actively executing a 2.0 Growth Strategy which comprises four well-defined strategic pillars.” The four pillars are to diversify into developed markets, reshape portfolio for capital efficient growth, strengthen capital structure to remain resilient and continue to pivot to ride megatrends.
“We do not set a fixed completion date for the strategy as we view it to be evolving over the years as we execute 2.0,” adds Tan, who expects the recent interest rate cuts to signal an easing of global financial conditions.
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As part of the plan, the REIT has diversified its portfolio by investing in assets in developed countries. Tan shares that before this strategy, over 95% of REIT’s assets under management (AUM) were in Indonesia, a developing nation. “This carried some geographical and tenant concentration risk, so we moved into Japan,” he says, noting that now over one quarter of the REIT’s AUM are in Japan and Singapore.
While there are no set dates for the completion of the strategy, Tan expects the AUM diversification to be at least 50% in developed markets.
Financially, First REIT has maintained a strong balance sheet including a healthy gearing ratio, which have been instrumental in navigating the high-interest rate and unfavourable foreign exchange environments. With the lower debt obligations, First REIT is also in a position where it can enjoy higher operational flexibilities and be better positioned to swiftly respond to market changes or invest in growth initiatives without having to worry about high debt repayments.
“Operationally, First REIT’s portfolio of high-quality healthcare properties continue to deliver sustainable performance in the first half of 2024. As we execute First REIT’s 2.0 Growth Strategy, we are optimistic that the trust will be able to navigate the challenging market conditions with resilience,” says Tan.
Towards growth and sustainability
The healthcare sector is experiencing transformative growth driven by demographic shifts and increased demand for quality healthcare facilities. This in turn drives the demand for First REIT’s specific real estate. This expansion is underpinned by First REIT’s strategic pillars, which aim to capitalise on stable and predictable investment environments in developed markets.
“Putting foreign exchange fluctuations aside, we expect developed markets to have more stable economies, providing a more steady and predictable environment for investment,” says Tan, adding that these developed markets may offer better access to financing and investment opportunities.
Operating in several markets may pose its own challenges, such as acclimatising to new cultures and environments, but the way Tan sees it, having various healthcare asset classes in multiple countries will lower the geographical and tenant concentration risk for First REIT. This can help mitigate risks associated with economic downturns, currency depreciation or market fluctuations in any one region.
On that note, First REIT is focusing on expanding its presence in developed markets across healthcare assets. Tan adds: “As at Dec 31, 2023, First REIT has approximately $1.14 billion AUM comprising 32 properties across Indonesia, Japan and Singapore. In line with 2.0, we aim to increase our portfolio in developed markets to over 50% of AUM by FY2027.”
Meanwhile, environmental, social and governance (ESG) considerations are increasingly crucial in investment strategies. Tan shares: “With ESG reshaping the financial landscape, stakeholders may seek investments that not only deliver high yields but also operate sustainably and responsibly.” He is of the view that sustainable finance plays an increasingly vital role in attracting ESG-focused investors, as it aligns financial returns with positive environmental and social outcomes. Investors are increasingly pursuing environmentally responsible investments hence it is essential for companies to demonstrate their commitments to responsible business practices.
“By integrating sustainable finance into our strategy, such as the issuance of social bonds, First REIT is well-positioned to appeal to these investors. These bonds embrace long-term value creation and also allow investors to support sustainable initiatives,” adds Tan. First REIT is currently leading with Singapore’s first healthcare social bond, aimed to improve healthcare access and living conditions for the population in Indonesia. Moving forward, the REIT will continue to integrate ESG into its financial and operational practices, while enhancing corporate governance and transparency.
Blueprint for success
As First REIT looks to the future, the focus remains on executing its growth strategy while adapting to volatile market conditions. “We will continue to focus on executing our 2.0 Growth Strategy. To achieve this, apart from acquisitions, we will also look at recycling capital from non-core or mature assets. Some of the divestment proceeds can then be channelled to developed markets,” says Tan.
Developed markets like Australia are also in First REIT’s sight to aid its growth strategy. Population growth across Australia encompassing an ageing population and longer life expectancy would result in rising healthcare and related services expenditure.
Moreover, First REIT is committed to continuing its streak of delivering high returns to shareholders, as evidenced by winning The Edge Singapore’s Centurion Award for the highest returns over three years. “This achievement reflects our steadfast commitment to generating long-term value for our investors, even amid challenging market conditions,” says Tan.
He elaborates that First REIT’s approach has been focused on disciplined asset management, strategic acquisitions and maintaining a robust portfolio. By prioritising sustainability and adaptability in its operational strategies, First REIT has remained resilient while consistently optimising financial performance.
