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Healthcare is looking toppy

Healthcare infrastructure has shown great investment potential in the past. But as David C Stevenson explains, the sector is starting to look overvalued.

There is one infrastructure sector I'm no longer so keen on the specialist healthcare sector. I've been bullish in the past, but it is starting to look ridiculously overvalued. Three of the main closed-end funds in the sector (Assura, MedicX and Primary Healthcare) are now worth a combined £3bn. That's a lot of money for a sector that didn't even exist a few years ago.

The business itself investing in medical properties still looks good. Ongoing demand for medical services and a squeeze on government spending means there are probably plenty of opportunities for it to grow further (the same goes for the social care and elderly housing sector).

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Unfortunately, share prices are well ahead of the facts. Each of the three funds mentioned above now trades at a premium of around 20%. In other words, investors are paying £1.20 for every £1 of assets in the underlying portfolio. That compares very unfavourably to the already significant 10% premium the typical mainstream infrastructure fund trades at. While most of the rest of the stockmarket has dived by 5%-10% over the last year or so, these healthcare funds are up an average 9%.

That's great if you bought them when I first tipped them, but they've come far enough these price levels are unsustainable. If you've made money, I strongly suggest taking some profits now. Don't get me wrong I'm not saying dump the lot, just scale back your investment. If you feel adventurous, you might even want to switch some profits into the one fund that doesn't look quite so overpriced.

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Target Healthcare (LSE: THRL) invests in well-run, purpose-built care homes. It is now starting to appear on the radar of many wealth managers. It currently yields around 5.5% and trades at a discount of around 5% (partly because it's at an earlier stage of development than its peers in the sector).

This is by no means a risk-free business model there are widespread rumours of distress within the managed care-home market, with talk of bankruptcies among big players who have been hit by rising wages and falling local authority budgets. But while there might be more volatility in the sector, I think Target should continue to prosper and who knows, maybe it will end up trading at an extortionate premium over time too.

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