Al-`Aqar Healthcare REIT Annual Report 2019

Challenges 2019 has shown numerous factors are pushing towards the growth of the healthcare industry which provide challenges to the players of the industry. Going forward, the Manager is in the opinion that the followings are the 3 main challenges for the Fund: Technology Trends In Healthcare Significant consolidation in the healthcare industry over the past several years has resulted in more complex back end technology and systems as networks get larger. The main challenges in adopting technological innovations in the healthcare sector lies in cost and the ability of such innovations to meet users’ needs. Emerging megatrends in healthcare offerings such as mobile health and personalized treatment may shift the way traditional healthcare providers operate within the near future. Implementation of Drug Ceiling Price The Malaysian Cabinet announcement on the implementation of price control measures for pharmaceutical drugs is expected to cascade across the pharmaceutical value chain, affecting clinics, hospitals and pharmacies. Operating profit margin for healthcare operator would be compressed further and indirectly it could affect certain tenant ability to serve their lease obligations to the Fund. However, the Fund’s main tenant is expected to sustain its earning and would be unfazed by the government’s imminent drug price control measures. The Ministry of Health (MoH) has alsoplanned to shift some of its outpatients to the private hospitals at prices agreeable to both parties, given the congestion at public hospitals. Though margins for this business could be lower, it is believed that KPJ would still benefit as this will increase its outpatient volume (25% of the group’s total revenue) and lead to higher utilisation of its equipment during off-peak hours. Royal Commission Into Aged Care Quality & Safety On 16 September 2018, Prime Minister Scott Morrison announced that the government had decided to establish a Royal Commission into the residential aged care sector. While the industry may have been publicly welcoming of the Royal Commission, its formation necessarily creates an increased level of uncertainty for operators. This uncertainty includes the possible impact of the Royal Commission’s future recommendations on the profitability and value of aged care businesses. If the financial services royal commission is any guide, the aged care industry could be on the cusp of suffering a similar fate: (i) destroyed shareholder value, (ii) shredded reputations and (iii) moves towards a more onerous regulatory environment. Prospects Despite the above challenges, the Manager expects the Fund to be able to record stable and resilient earning as the healthcare real estate is alternative specialised asset class that is less reliant on the economy. In addition, the healthcare market is driven by an increase of demand from both local and oversea. Malaysia, with a score of 95 out of 100, has been ranked first in the Best Healthcare in the World category of the 2019 International Living Annual Global Retirement Index. By 2040, roughly 14.5% of Malaysians will be aged 65 and older, as compared to only 5.0% in 2010. The perfect storm caused by an increase in the ageing population has created tremendous opportunities for healthcare and its related sub-sectors. The growth in healthcare tourism bodes well for KPJ’s prospect and brand acknowledgement as the preferred operator through its excellent operational and service standards. Together with KPJ’s strategy to strengthen its presence nationwide through the brownfield expansion plan and introduction of its Ambulatory Care Centres (ACC) facilities, the long-term prospect is positive which eventually will benefit the Fund that is currently looking into other segments of the healthcare industry. After the absence of major acquisitions in prior years, the completion of KPJ Batu Pahat Specialist hospital’s acquisition is seen as the beginning of expansion mode of the Fund. The number of KPJ’s new hospitals and expansion projects that are set to be injected into the Fund for the next 5 years will augur well for the growth of Al-`Aqar. On the Australia aged care market, the establishment Royal Commission was tasked to review the overall aged care industry’s current practices and recommend improvements to the services. The final report is expected to be issued in November 2020. In the meantime, the Commission has issued an Interim Report on 31 October 2019 and found that a fundamental overhaul of the design, objectives, regulation and funding of aged care in Australia is required. Accordingly this may have an impact on the future viability of the aged care businesses. The Managers and Management of Jeta Gardens is currently monitoring the impact of the Royal Commission findings. 03 STRATEGIC PERFORMANCE 44