A hospital sold 'as a going concern' to a property fund

Why going concern is the wrong basis here. The fund is buying land and buildings and will receive rent. A going-concern valuation values an operating business: the licence, the clinician network, patient lists, staff, brand, equipment and working capital. None of that transfers with the title. The operating licence is issued to the operator and a new operator must apply afresh; approval is not automatic. The equipment is expressly excluded and removable. Including those items in a property value overstates the security and misstates the fund's actual return, which is the rent.

Valuation of the leasehold interest. Value the contracted rent for the remaining term, then a reversion to market rent to lease expiry.

• Term cash flow at 7.5%: years 1–3 RM3.60m; 4–6 RM3.96m; 7–9 RM4.36m; 10–11 RM4.79m. Present value of the term = RM29.48m.
• Reversion: market rent at review, say RM4.20m, capitalised over the remaining 33 years of the lease (annuity factor 12.1075) = RM50.85m, discounted 11 years at 0.4514 = RM22.95m.
• Total: RM52.4 million.

Adopt RM52 million.

Note the vendor's own arithmetic is wrong even on its own assumptions: at a 5.0% yield the rent is treated as a perpetuity, but the lease has only 44 years to run. Capping the same income over 44 years at 5% gives about RM63.6m, not RM72m - and 5% is far too low for a single-tenant, single-use asset with no renewal option. The RM25.6m gap between RM78m and RM52m is the business value, which the fund is not buying.

Yield drivers

• Covenant and sustainability of rent. The 10% three-yearly escalation is roughly 3.2% per annum. If hospital occupancy and payer mix are weak, the rent may not be serviceable. Obtain the operator's audited accounts, occupancy, average revenue per patient and a debt-service cover calculation. Any hint of stress warrants 8.0–8.5%, which on the term-and-reversion model produces around RM47–50m.
• Single-use building. A hospital is expensive to convert. On re-letting, the pool of tenants is limited to healthcare operators, who will demand rent-free periods and fit-out contributions.
• Equipment exclusion. The landlord's asset is an empty shell if the operator leaves; theatre and imaging fit-out may be worth very little once removed.
• Leasehold. 44 years with no renewal option means the reversion is to the state; the capitalisation is correctly limited to 33 years after the review, but at each review the landlord's bargaining position weakens as the term shortens.
• No renewal option cuts both ways: it gives the landlord a review, but also gives the tenant a clean exit at year 11, which the fund should price.

Default scenario. If the operator fails at year 4, the landlord holds a 40-year leasehold specialised building. Assume 24–36 months void, RM8–12 million of landlord fit-out to make it lettable, and a lower rent; the effective value is likely to fall to RM30–35 million, a loss of roughly a third. That tail risk, not the base-case yield, is what should drive the bid and any lender's loan-to-value.

Sensitivity. A 50-basis-point rise in the capitalisation rate reduces value by about 5–6%, because the term is short; the dominant risk is not yield movement but covenant failure. Say so plainly in the report.

Due diligence

• Title and lease documents: confirm the 44-year term, rent review mechanics, alienation or assignment clauses, reinstatement obligations at expiry and whether the lease is registered.
• The operator's audited financial statements for three years, occupancy statistics, payer mix, debt-service cover, and any covenant or security given to its bankers.
• A copy of the operating licence and confirmation of its conditions, term and transferability.
• A schedule of landlord versus tenant plant and equipment, and the reinstatement/dilapidation obligations.
• Building condition survey, mechanical and electrical report, and fire and life-safety compliance, given the specialised use.
• Confirmation of the approved use and any planning conditions restricting the site to healthcare use only.
• Market evidence of rents for medical suites and comparable healthcare transactions, to test the reversion assumption of RM4.20m.
• Confirmation that the fund's own mandate permits single-tenant, single-use assets.

Report content

State the basis as market value of the leasehold interest, expressly excluding the business, licence, goodwill, equipment, staff and patient records, and state that it is not a going-concern value. Show the term-and-reversion model with all cash flows, the yield adopted and the reasons for it, and the reversionary rent assumption with supporting evidence. Include a default downside scenario and state the value on that scenario. Disclose the source of the passing rent and that it was verified against the lease, not against market lettings. Confirm that no structural survey, environmental or licensing due diligence was undertaken by the valuer. Include the inspection date, valuation date, valuer's registration details, a statement that the fee is not contingent on the figure reported, and a restriction on reliance by third parties. Recommend that the fund instruct separate legal, technical and healthcare-regulatory advisers.