Other ways to get additional funding identified
THE plan to create Malaysia’s first real estate investment trust (REIT) for government hospitals has been officially dropped.
A source close to Health Minister Datuk Seri Dr Dzulkefly Ahmad tells StarBizweek that the ministry has decided not to proceed with the REIT plan, after much deliberation within the Cabinet and among the ministry officials.
“The Health Ministry has identified other ways to get additional funding for its operations,” says the source, although he stopped short of elaborating on the possible new ways to raise cash for the ministry.
In Budget 2019, the Pakatan Harapan administration allocated about RM29bil for the Health Ministry, higher than RM27bil in the previous year.
The ministry’s decision to shelve the REIT plan has effectively put criticisms to rest.
Critics have previously argued that the REIT plan will raise public healthcare costs over the long run and reduce the government’s control in hospitals that are currently run by the Health Ministry.
On the other hand, the investment community has largely welcomed the proposed creation of a government hospital REIT, viewing it as a good investment opportunity.
In September 2018, it was reported that Dr Dzulkefly aimed to raise about RM3bil in proceeds by creating a REIT for government hospitals in Malaysia. The amount raised was expected to be utilised to procure better medical devices and improve the quality of the country’s medical facilities.
However, while Finance Minister Lim Guan Eng has announced the plan to create an airport REIT during the tabling of Budget 2019 on Nov 2, 2018, nothing was mentioned of the government hospital REIT.
Basically, a REIT owns and manages properties that offer the investment trust recurring income. REITs can be either listed on the stock exchange or privately-held.
In Malaysia, REITs are required to pay out at least 90% of their taxable income to shareholders.
If the Health Ministry had proceeded with the REIT plan, it would have to dispose of its ownership in selected government hospitals in return for a certain equity interest in the REIT.
The remaining stake will then be sold into private hands, allowing the Health Ministry to pocket a one-off gain, previously estimated at RM3bil.
Currently, there are two listed REITs in Malaysia that owns and manages hospitals, namely Al-’Aqar Healthcare REIT and Sunway REIT.
Al-’Aqar Healthcare REIT has 22 properties in its portfolio, mostly comprising KPJ hospitals. Meanwhile, a more diversified Sunway REIT owns the Sunway Medical Centre, although most of its properties are hotels and shopping malls.
The decision to “partially privatise” government hospitals in the form of a REIT has been well received by many investors and industry observers, anticipating a strong demand for the investment trust.
With the Health Ministry being the tenant of the hospitals, the REIT is expected to enjoy stable, uninterrupted and long-term rental income.
However, some have voiced opposition to the plan, questioning its financial viability over the long run and the impact on the low- and middle-income earners who depend on public healthcare.
This includes former prime minister Datuk Seri Najib Tun Razak, who alleged that the Pakatan Harapan administration plans to dispose of national assets via the proposed REIT plan.
An industry player in the healthcare sector points out that only hospitals with a sustainable revenue model will be suitable for REIT, in order to pay the dividend to shareholders.
“Government hospitals are heavily subsidised, with 98.5% of the costs paid by the government. With such dependence on taxpayers’ money and very low payment charged on the patients, there is no sustainable revenue model in government hospitals,” he says.
Another critic asked, “Are we seeing the return of Tun Dr Mahathir Mohamad’s privatisation policy similar to the one in the 1980s and 1990s?”
Is the REIT viable?
According to Alpha REIT Managers Sdn Bhd chairman Datuk Stewart Labrooy, the government hospital REIT could be an excellent idea – if the economics work out.
“In freeing up funds for operations, the hospitals can provide a much higher level of service to the Malaysian public. The assets to be injected will have to be the newer hospitals in the portfolio.
“At the end of the day, the Health Ministry will have to budget a rental payment as part of their operating cost. In addition the REIT can build new hospital assets for the ministry on government land and inject them into the trust when complete.
“It will save the Health Ministry the capital expenditure needed for the exercise,” says Stewart.
Amanah Capital Group Ltd chief executive officer Abas A. Jalil concurs that the government hospital REIT will attract the attention of retail and institutional investors, describing it as “a good deal for the capital market participants”.
However, he called the plan “short-sighted”, if the impact on the rakyat’s welfare is taken into account. Instead of forming a REIT, he suggested the Health Ministry raise cash through bond issuance.
“That is more ideal financially,” he says.
Abas, who has also served on the board of AmanahRaya REIT previously, points out that a REIT consisting of government hospitals may potentially raise healthcare costs over the long run.
“REITs’ tenancy agreements can be very long, between 15 and 30 years. It is highly likely that the rent paid by the ministry over this period will exceed the amount it raised from the listing.
“The market would generally expect a dividend yield of about 6%. The Health Ministry must pay this and don’t forget, there is also other administration costs and fees that must be paid,” says Abas.
Concurring with Abas, Stewart says the total rent payable by the Health Ministry will exceed the amount raised via the REIT listing.
“Hence, the Health Ministry should look at investing the proceeds in projects that can provide them an annual return of 10%,” he says.
When asked whether the government could buy back the hospitals under the REIT in future, Abas says it could be done.
“But, the government will be at the mercy of other shareholders and it must propose a fair value for the properties. The value will surely be higher than the current valuations that the government will receive now if it sells the assets,” he adds.