Riyadh, Saudi Arabia—Saudi Arabia will need 19,000 to 20,000 additional hospital beds by 2030, which calls for an investment of $33.8 billion to $35.6 billion, according to a recent study published by Colliers, a Canada-based diversified professional services and investment management company.
However, high capital costs, difficulties in attracting quality and skilled doctors and nurses, land costs and limited funds available for capital expenditures (especially for the construction of hospitals) are hindering the growth of the kingdom’s healthcare sector.
The largest market of the MENA region is going through fundamental structural transformations driven by KSA’s Vision 2030 reforms as a strategic shift away from economic dependence on oil, which includes healthcare also.
Demographics and opportunities
The growth is also spurred by demographics: the kingdom’s population should increase from 35 million in 2020 to 43.7 million in 2030.
“The Crown Prince Mohamed bin Salman announced that Riyadh would become one of the top ten cities in the world. Its population may grow from 7-8 million to 18-20 million people in the next 10 years,” said Mansoor Ahmed, Colliers Executive Director Middle East & Africa (MEA), in an interview with TRENDS.
He said cities like Riyadh or Jeddah also attract a lot of expatriates in the 25- 45 year age group. Although 75 percent of the Saudi population is under 35, the number of people over 60 has been increasing.
“So there will be a strong demand for more doctors and beds. Today, we have around 78,000 beds and we need to go up to 98,000 beds,” Mansoor said.
In addition to population growth, visa restrictions have been eased. At the same time, Saudi is investing billions of dollars to promote the kingdom as a general tourist destination—not merely a destination for religious tourists. This is evident in projects like AlUla and Read sea.
“And that will attract people,” said Mansoor.
With the introduction of several legal and economic incentives, including 100% ownership, healthcare is one of the most attractive sectors in the country, the Colliers report said.
The kingdom is moving towards encouraging more private sector participation, scaling its market share from 35-40 percent to 65 percent.
Foreign expertise
In the last few years, KSA’s healthcare has seen tremendous growth and it continues to be one of the few sectors that have not been affected by economic fluctuations, according to Collier’s experts.
“Although the Covid-19 pandemic had a negative impact, slowing down investments, like in other countries where nobody was willing to take the risk for 18 months to two years, new projects are coming up quickly since Q4 2021, and especially in 2022,” said Mansoor Ahmed.
Opening the economy to foreign investors and operators has completely changed the landscape of the market, with several newcomers, like the King’s College from London, which opened its branch in Jeddah, or Mediclinic, opening in Riyadh, Mansoor added.
“We are working on a couple of investors. Some other big traditional names are willing to open their hospitals in Saudi and they are in the advanced stage of negotiations. There are also a lot of new projects focusing on medical wellness. We are working on a couple of them that should be ready in the next few years,” he said.
The kingdom wants also to reduce its spending on medical care abroad. Currently, a large number of Saudis travel to the US, Europe to South East Asia, due to the lack of good quality healthcare services inside the country, spending between $2 to $3 billion on treatment.
“the idea is to bring the same operator or the same specialty from abroad to Saudi Arabia so the saved money can be reinvested in the country on healthcare infrastructure,” Mansoor said.
Costly real estate and REIT funds
A recent law allowing the separation of the operating structure from the owner of facilities has eased entry into and operation in the market.
However, the extent of investment required in projects is still significant. The cost of land in Riyadh has almost doubled in the last two to three years, Mansoor said. High construction costs are another limiting factor.
According to Colliers, due to the large ticket size of the investment, typically a minimum of $50 – 70 million for a 100-bed hospital, only institutional investors or large family houses have access to these funds. Retail investors will not be able to benefit from the opportunities.
In the last few years, sale and leaseback have gained popularity as an option for several operators who own the facilities but want to expand their operations.
“In most of the cases, hospital operators want to operate the hospital and not merely be landlords,” Mansoor said.
Colliers recommends expanding REIT funds, as these would benefit the kingdom’s economy capital markets by offering investors more diversification, transparency and greater accessibility to local real estate.
“REIT funds in the kingdom can unlock around $59 – $63.4 billion property value, playing a key role in growth in the healthcare sector. That would provide $25.2-$27.8 billion which can be used to upgrade the existing hospitals,” said Mansoor.
Currently, there are four to five major REIT funds and more are expected to be listed soon. This is happening in the education and retail sectors also,” he added.
In 2021, the government announced a formal law for public-private partnerships, ensuring greater involvement of the private sector.
Before, the Ministry of Health was building all its hospitals. Now, the construction will be carried out by the private sector, Mansoor said.
The private sector will also be renovating several large hospitals that are 20-30 years old. Under the new arrangement, the Ministry will become like a tenant and pay the private sector rent.
But according to Colliers experts, the growing prevalence of lifestyle diseases such as diabetes and obesity drives the demand for centers of excellence, not big hospitals.
“We highly advocate the development of specialized clinics for maternity, urology, cardiology, etc. We also advise focusing more on daycare surgery which is very cost efficient: a daycare surgery costs half or one-third of a regular surgery,” said Mansoor.
According to Colliers’ estimates, the return on investment EBITDA ranges between 20 percent and 30-35 percent for a quality hospital.