Healthcare opportunities and challenges in Saudi Arabia

The healthcare sector in KSA is undergoing evolution on the back of rapid advancements in technology, and research and development (R&D) in line with global and regional trends.

October 14, 2019 Mansoor Ahmed, Director (MENA Region) Real Estate, Healthcare, Education, PPP, Colliers International

The Kingdom of Saudi Arabia (KSA) with a current estimated population of approximately 32.6 million is the largest country in the GCC. Under Vision 2030, the country is going through fundamental structural changes in all the sectors including healthcare.

The healthcare sector in KSA is undergoing evolution on the back of rapid advancements in technology, research and development (R&D) in line with the global and regional trends. However, healthcare providers and professionals are grappling with several challenges concurrently, such as patients becoming customers and the patient care transitioning from “fee for quality” rather than “fee for service”. This coupled with new compliance requirements that aim at wellness and prevention plus ensuring better coordination and efficiencies, add depth and complexity to an increasingly competitive marketplace.

Recent trends and industry dynamics require operators in the healthcare sector to make challenging decisions. Whilst the healthcare system has improved across the region including Saudi Arabia, the sector offers opportunities for investors/operators. KSA’s healthcare sector is structured to provide a basic platform of healthcare services to all, with specialised treatment facilities offered at some private and public hospitals.

Colliers International’s KSA Healthcare Overview 2018 (the 8th in The Pulse series) provides an in-depth analysis of key factors impacting the Saudi healthcare sector and its future outlook and identifies opportunities and challenges to operators and investors. Key factors that make KSA’s healthcare market attractive are:

Population

KSA had an estimated population of 32.6 million in 2018, which is expected to double, reaching 77.2 million by 2050, growing at 2.65 per cent per annum. Assuming a more conservative 1.02 per cent average annual growth, as suggested by World Bank, KSA’s population would still reach 45.1 million by 2050.
This increase in population is expected to fuel the demand for healthcare services in the Kingdom. Concurrently, the healthcare system needs to treat emerging lifestyle diseases and illnesses associated with modern and urban lifestyle, partially due to the growing middle-income population.

Changing population profile

The population pyramid in KSA has significantly changed between 1980 and 2015, and it will further change by 2050. This will have a significant impact on healthcare demand in terms of quality, quantity and type of healthcare facilities.

The changing population will have the following impact on demand for healthcare in KSA:

* During 2015-2050, approximately 19 million babies will be born in KSA, creating demand for facilities and services, relating to mother and childcare (obstetrics, gynaecology, paediatrics, etc.) along with the more common prevailing communicable and some non-communicable diseases.

* The age group between 20-39 years is very important for future healthcare planning, as it is common that there is the development of chronic diseases; cardiovascular, irritable bowel syndrome, chronic obstructive pulmonary disease and some types of cancer. With 12 million population in this age group there is considerable demand not only for curative but also preventative facilities.

* An increase in life expectancy in KSA is expected to extend from the current level of 73.1 years and 76.1 years for males and females respectively to 78.4 and 81.3 by 2050. This is expected to create demand on long- term care (LTC) facilities, focusing on geriatric related care, rehabilitation and home healthcare services. Based on current international benchmarks this is expected to reach 41,200 – 61,800 LTC beds by 2050.

Lifestyle diseases

Analysing the demographic trends, it is estimated that KSA’s population will change from Baby Boomers to Generation X, Y & Z. This shift would impact disease patterns and in turn the type of healthcare services required. Lifestyle diseases (also sometimes called diseases of longevity or diseases of civilisation) are diseases that appear to increase in frequency as countries become more industrialised and life expectancy increases due to urbanisation and rising disposable income. A more sedentary, consumption of processed food often leads to increased chronic diseases (diabetes, coronary problems and obesity-related illnesses).

Diabetes: The rate of diabetes related illnesses has witnessed an unprecedented increase across the MENA Region. Based on figures available for 2014, there were over 422 million people diagnosed with diabetes in the world and MENA’s contribution was 38.7 million diabetic patients in 2017, which is expected to increase to over 70 million by 2024. In KSA during 2017, the diabetes prevalence rate was 17.75 per cent for age group 20-79 years, totalling to over 3.8 million cases.

Obesity: In 2016, KSA’s obesity prevalence rate among adults was 35.4 per cent, also one of the highest in the MENA region.

Hypertension: The prevalence of hypertension among adults in 2015 in KSA stood at 23.3 per cent, also one of highest in the GCC region.

In KSA during 2017, the diabetes prevalence rate was 17.75 per cent for age group 20-79 years, totalling to over 3.8 million cases.

Demand gap beds  

In 2016, KSA had 2.23 beds per 1,000 population, which was quite low compared to world average of 2.7 beds per 1,000 population. Number of doctors per 1,000 population ratios of 2.83 is quite impressive, however, the Kingdom has high dependence on foreign physicians.

Colliers has projected the demand for total number of beds based on the following scenarios:  

Private sector participation & PPP

The government is encouraging private sector participation in the healthcare sector as the public sector’s role is gradually transitioned to becoming more of a regulator rather than as a provider of healthcare facilities, as highlighted in the National Transformation Programme (NTP) and the privatisation plan. In 2017, Saudi Arabian General Investment Authority (SAGIA) announced that foreign investors can have 100 per cent ownership in health and education sectors. Once implemented this is expected to boost private sector investment in healthcare in KSA.

Government commitment to healthcare is evident as it continues its efforts in developing various medical cities, however, many of these facilities are expected to be operated in conjunction with private sector investment using various Public Private Partnership (PPP) models.

The PPP draft bill released in July 2018 for public debate and comments, is expected to boost private investment in the Kingdom with the concurrent impact on the Saudi economy. The PPP draft bill is the beginnings of the legal framework on which the Saudi government can begin to outsource healthcare provision. The outsourcing is expected to be done through typical PPP projects for a fixed duration and/or selected disposal of government assets. The Saudi government stated its aim is to raise US$200 billion by 2030 through privatisation.

Opportunities  

Based on demand/supply analysis and characteristics of the healthcare sector in KSA, Colliers has identified the following opportunities for investors and operators:

Daycare surgical centres: Due to advancements in healthcare technology (for example laparoscopy) a number of daycare surgeries (treatments/procedures) have significantly increased, resulting in higher demand for daycare surgery centres. The demand for daycare surgical centres has also increased regionally and in KSA, due to increase in prevalence of number of lifestyle diseases such as diabetes, obesity, depression, strokes, cardiovascular diseases, blood pressure, etc., which does not require treatment in traditional hospital set-ups. Dedicated purpose built daycare surgery centres and Centres of Excellence can be part of a large office complex and retail centres; requiring space between 3,000 to 5,000 sqm.

Demand for maternity and paediatrics: Number of private health facilities, especially in Riyadh and Jeddah are focusing on maternity and paediatrics owing to high demand for these specialties. Hospitals such as Dallah Hospital, Specialist Medical Centre and Dr. Sulaiman Al Habib have separate buildings dedicated for mother and child services. As per Colliers research, throughout KSA and especially Riyadh and Jeddah, there is a high demand for maternity and paediatric services supporting a business case for developing stand-alone hospitals or as part of a hospital complex.

Laboratory and diagnostic centre: Standalone laboratory and diagnostic centres are required in KSA to support the increasing volume of outpatient facilities.

Long term care (LTC)/rehabilitation: With the changing age profile, KSA requires a large number of LTC facilities. The government is seeking private sector facilities specialised in LTC to refer their patients requiring rehabilitation and/ or long-term care.

Increased demand for specialised services: Centres of excellence focusing on certain specialties such as ophthalmology, cosmetic surgery, IVF and orthopaedics are expected to grow further, especially in Riyadh and Jeddah. Many General Hospitals have also established dedicated wings to provide highly specialised services in a single specialty and this has often been a key factor for their success.

Primary care: Owing to the large population in KSA and high occupancy rates of hospitals, the country requires more primary care clinics and medical centres to meet the demand of the rising population.

The Neom Project

NEOM City, which will cost US$500 billion and was announced in October 2017, will be located on the Red Sea Coast promising a new lifestyle that does not currently exist in Saudi Arabia. The new city is planned to span over a total area of 10,000 square miles (25,900 square kilometres) linking KSA to Egypt and Jordan, creating new markets for many sectors, including healthcare and biotech.

The biotech sector will focus on next-generation gene therapy, genomics, stem cell research, nanobiology, bioengineering plus attracting the talent to research, develop and apply the new knowledge; NEOM will be a new nexus for this vital activity.

Creating healthcare, wellness hub and second homes


In the last few decades alongside the demand for primary accommodation, a second-tier demand for second homes within the residential market has emerged, especially in the Eastern Province. With the development of NEOM city, Colliers expects that the second homes market will flourish in the Red Sea area, not only as secondary homes but also as an investment product supported and driven by leisure, healthcare and wellness. Sustaining high occupancy levels all year round in second home destinations can be challenging. Colliers has witnessed and advised on these challenges in a number of countries.

Often, they can be addressed through introducing healthcare and wellness driven resorts, long-term care and rehabilitation facilities. These facilities can have a positive impact on occupancy levels by attracting not only vacationers but also retired households and those seeking longer holidays within proximity to healthcare facilities. While seasonality is part of the story, it can also be due to the lack of destination pull factors. Complex destination components, alongside leisure and environment include proximity of hospitals, clinics, long-term rehabilitation centres, wellness retreats, fitness/skill retreats and retirement homes.

There is an opportunity within the holiday home market for developers to create destinations by providing essential community infrastructure.

Challenges: The funding options


One of the key challenges faced while establishing quality hospitals in KSA is the high funding requirement. Despite the fact that banks and other financial institutions actively seek investments within KSA’s healthcare sector, they often limit their exposure by only servicing known market participants with proven track records. International or regional operators contemplating entry into KSA’s market often struggle to secure project finance unless there is a recourse to alternative cash flows.

Further, difficulties arise with the terms offered. Healthcare investments are typically long-term investments contradicting a bank’s risk appetite, which typically extends to a tenure that ranges between five to seven years.  

The various options available to operators based on availability of funds are:

  • Outright purchase of the land;
  • Long-term lease of the land;
  • Land as equity investment by the landlord;
  • Long-term lease of the land and shell-n-core structure from landlord/ investor;
  • Creating a JV with the landlord/investor in equity partnership; or
  • Signing a management agreement with the landlord/developer/investor.  

However, each of these options have financial, operational and legal advantages and disadvantages and operators should seek professional advice before entering into any such arrangement.

Healthcare REIT

The Kingdom is moving towards encouraging more private sector participation in the healthcare sector, however; the extent of investment required is significant.

In Colliers opinion, one way of bridging the required investment is by way of creating more Real Estate Investment Trust (REIT) funds. Based on Colliers estimate, REIT funds in the Kingdom can unlock around US$7.5 billion to US$8.5 billion property value from the private sector, thereby playing a key role in augmenting growth in the healthcare sector.

Colliers is currently working with several market participants through traditional and emerging funding options to assist them in their expansion plans.

Conclusions

In summary, the healthcare sector in KSA, especially the private healthcare sector, offers several lucrative opportunities for developers, investors and operators. However, it also possesses a number of challenges, such as high capital cost, difficulties in attracting quality doctors (and especially, nurses) and funding constraints for the new entrants. Colliers International works with a number of market players to assist them in their expansion plans either by expansion of existing brand or attracting international brands to the region. It also assists number of market participants through traditional funding options, such as debt and equity, or emerging funding options, such as OpCo/PropCo, or a Joint Venture (JV) with an investor and REITs.