Landlord-tenant model affects expansion, says Narayana Health COO

Anil Urs Bengaluru | Updated on April 04, 2021

Viren Shetty, ED & Group COO

Hospital chains or owners in the last couple of years are looking for operators on a landlord-tenant model with rental expectations to match commercial real estate yields. This has affected many corporate hospital chains in their expansions.

“Asset light models are highly suited for any company at any point in time, with caveats. Running a hospital on an asset-light model should not be an exercise in balance sheet vanity,” Viren Shetty, Executive Director & Group COO, Narayana Health, told BusinessLine.

“The hospitals that Narayana Health used to operate on an asset-light basis were distressed assets not operating at full capacity. Their owners, who considered the initial investment as a sunk cost, were willing to have us manage the operations on a pure revenue share basis and were partners in the real sense of the word. But this is becoming rare as owners’ expectations to match commercial real estate yields is high,” he added.

The change in business model meant that Narayana Health had to invest in building upgradation, which defeated the entire purpose of being asset-light operators.

“Since we don’t own the asset, we can’t even collateralise the land/building to borrow against it. Having 10-plus years of experience running asset-light hospitals, we are not as confident that this is a sustainable model for the long term. Hospitals are long-duration assets that require frequent repairs, upgradation, and expansion. Some of the best hospitals in the world are more than a century old and are large enough to have their own pincode. This means that over a 30+ year duration, an owned hospital will always have superior returns,” he explained.

Talking about the company’s capex plans, Shetty said: “We restricted the normal capex spend for FY21 to pay part salaries when our hospitals did not have any patients. FY22 capex will be a combination of last year’s unspent capex and regular capex spend on equipment replacement and infrastructure upgradation. FY22 capex will be much higher than our normal spend, which ranges between ₹100 crore and ₹150 crore annually.”

Higher operational costs

On the challenges faced by the company and healthcare sector, Shetty said: “Private health insurance companies are co-ordinating their actions and bargaining with hospitals to get government rates for their white collar workers while continually raising premiums year on year.”

“Also here the government will be under tremendous fiscal pressure and will not be able to fund their health reimbursement schemes and a national vaccine programme at the same time. Healthcare input costs will increase because of a decoupling from China and a slow switch to other, more expensive suppliers. Procedure costs will increase to account for greater precautions needed to keep immune-compromised patients safe in the hospital.”

Published on April 04, 2021

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