Project finance developer Cresco director Robert Futter states that the company’s typical project development approach for the private healthcare market has evolved, to increase efficiency during the project development phase.
Cresco is actively involved in completing feasibility studies for medical facilities ranging from large 250-bed acute care hospitals to oncology wards and other specialist healthcare services.
Futter explains that Cresco’s project development approach needed to evolved because previous projects occasionally resulted in the reworking of major designs to achieve financial viability.
Early stage financial analysis on the project viability for approved hospital licences is now completed before detailed design work, to ensure that the possible technical limitations related to building capital expenditure and phasing are considered.
He adds that this approach supports the commercial and technical teams, who work on the financial and architectural aspects of the facility, respectively.
Futter says that when conducting a feasibility study for a healthcare project, Cresco allows the commercial team to create a scenario that is financially viable, and subsequently allows the technical team to “fill in the gaps”.
The technical team receives a maximum capital expenditure brief, which assists all parties in ensuring that key inputs achieve a timely, viable solution.
“This has been a lesson learned. We want to improve the process, and now the hard discussions around financial viability are done first. Banks are slowly accepting this type of asset class, and the appetite for funding is increasing,” elaborates Futter.
He comments that these private medical projects are not extremely sensitive to changing interest rates, and are more sensitive to capital moratorium periods.
Consequently, he argues that banks and other investors can make beneficial returns by investing in these projects.
“With these projects, banks and investors can, to a certain extent, set the price for the risk they are taking and get higher returns for their asset loss.”
Futter, however, points out that new private healthcare facilities do not operate at full capacity immediately, as it takes time to reach full occupancy. This is different to, for example, an energy project, which usually operates at full capacity as soon as it is commissioned.
He comments that an average equity return for an 80-bed hospital is about 18%, which is “not enough relative to the market risk”.
“The only way to make money in the sector is to get to 25% for your average equity return. This can be achieved by aggregating hospitals, reaching about 1 000 beds in capacity, and then negotiating with the medical aids. Once this is done, you then get economies of scale, but ultimately you make money because of your ability to negotiate with the medical aid. This is what boosts returns in the sector, to the point of achieving something commeasurable with the market risk investors would have taken.”
Futter stresses that Cresco has more success conducting feasibility studies in this sector than in energy and mining.
“The fact that we have more success in this sector than any other means that when promotors come to us with a request for assistance, and they want us to take more risk, we’re more comfortable about the likelihood of a project reaching financial close. This helps us with our risk appetite.”
He, however, points out that the cost of developments for these healthcare projects is significantly higher than projects in other sectors. This means that excessive funds are needed to fund these kinds of medical projects.
He mentions that something else that has helped Cresco is the fact that the company has tried to aggregate several promotors who have been awarded licences into a portfolio. This portfolio could then be purchased by an investor, who could then create scale, and invest in and develop these projects simultaneously.
“In an ideal world, you achieve financial close every two months with a project. Additionally, as this is not linked to a government procurement programme, you can run these things as quickly or slowly as you want to, depending on the financial viability,” he concludes.