Healthcare: More Investment Strategies for 2011 – Health Care Providers amd Medical Office Buidlings

by Gary Shilling for Blogging Stocks

Economist Gary Shilling has agreed to share with BloggingStocks his 18 investment strategies for 2011, beginning with Gary Shilling’s Investment Strategies for 2011. But he will only be revealing them a little at a time, over the next few weeks, so check back often!

My investment strategies for 2011 are driven by my forecasts for the economies and financial markets here and abroad. In my view, the overarching reality that will dominate 2011 and, indeed, the next decade or so is financial deleveraging, as spelled out in my new book, The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation, which was published in November 2010 by John Wiley & Sons.

In the January 2011 edition of my monthly Insight newsletter, I set out 18 investment strategies for 2011: nine on the buy side and nine on the sell side. Thus far, I’ve briefly discussed the first five “buy” strategies (Treasury bonds, selected income-producing securities, small luxuries, the dollar and Eurodollar futures).

My next buy recommendation is for selected health care providers and medical office buildings. Health care is a huge sector, accounting for 16% of GDP and growing rapidly. Two major features of the current system almost guarantee explosive growth. First, most Americans don’t pay directly for their health care, which is financed by employer-sponsored insurance or the government, through Medicare and Medicaid. That, plus the fact that it’s “my life” that’s involved means that except for deductibles and co-pays, there’s no restraint on usage. Second, in paying for service plans, medical providers have many incentives to perform extra procedures because more office visits enhance their incomes. Defensive medicine with more procedures is also encouraged to avoid litigation over mistakes.

In addition, the demand for medical services in the U.S. will mushroom over coming decades due to several factors, including the aging U.S. population; technological advances that are driving patient demand for more medical services; an additional 32 million Americans being covered by health insurance under the new health care law; and an increase in jobs due to the increased demand for medical services in the years ahead .

Furthermore, cost control pressures from government and employers will work to the advantage of big, profitable hospital systems with large campuses and expanding satellite facilities. Hospital-employed physicians will increasingly dominate as medical record keeping requirements, cost containment pressures from government and insurers, constraints on government reimbursements, expensive new technology, the lack of economies of scale and high practice management costs, and lower incomes relative to hospital-employed physicians weigh on small private practices.

I also favor investments in medical office buildings (MOBs) that these increases and shifts in demand will require, including related outpatient facilities such as ambulatory care facilities, surgery centers, ambulatory surgical centers, and outpatient cancer and wellness centers. MOB demand is forecast to expand 19% by 2019, 11% of it due to the new law and the rest from population growth. MOBs are much less volatile than other commercial and residential real estate, as shown by more stable vacancy and cap rates. They will not be plagued in future years by persistent excess capacity, which hinders new construction, as is the case with residential real estate, malls and office buildings.

A seventh entry on my buy recommendation is rental apartments, which will benefit from the separation that Americans are beginning to make between their abodes and their investments. The two used to be combined in owner-occupied houses back when owners believed house prices never fall. So they bought the biggest homes they could finance. The collapse in house prices has shown them otherwise. Further weakness in the prices of single-family houses and condos due to the depressing effects of excess inventories will add fat to the fire. So, too, will further house price weakness even after excess inventories are eliminated due to general deflation.

It will take a surprisingly small shift in housing patterns to make a big difference in the demand for and construction of rental apartments. Today, there are 130 million housing units in the U.S., of which 36 million are rented. If only 1% of total households decided to move to rentals, the demand for apartments would increase by over one million, most of which would need to be newly built, after current vacancies are absorbed. This is a big number compared to new apartment starts of 333,000 on average over the past 10 years. Rental apartments will also appeal to the growing number of postwar babies as they retire, downsize, and want less responsibility and more leisure time.


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