Silver lining: Investing in Asia's elderly

At the Ocean Palace Luxury Housing community in Beijing, Chinese real estate developer Sino- Ocean Land is building a neo-classical 60,000 square-foot facility to provide residential senior care services. The project is a joint venture with Cascade Healthcare, a foreign-invested company with ties to US senior living services provider Emeritus.

For Daniel Baty, Emeritus' founder, it also marks the realization of a plan to set up business in China -only 14 years later than planned.

In the late 1990s, Baty, then chairman of senior housing operator Holiday Retirement Corp, built a retirement community outside Shanghai. It never opened, and ended up being converted into a budget hotel. It was a sign of the times: there was far more interest in assets that leveraged China's emerging middle class with its newfound wealth and will to travel than targeting the older demographic.

But foreign investors are looking to China once again, encouraged by a government that recognizes the need for private investment to meet the demands of a rapidly ageing population. According to the UN, almost one-third of China's population, or 438 million people, will be over 60 years old by 2050. That's more elderly than the entire population of the US.

The silver haired segment of the population is also growing quickly in other parts of East Asia, especially in Japan, South Korea, Hong Kong, and Singapore. In 1950, the elderly in Asia numbered roughly 57.6 million and accounted for about 4.1% of the region's population. By 2050, they are expected to number 922.7 million, sending their share to 17.5%. Within the next few decades, Asia will become the oldest region in the world.

"The first real money has been made by people in their 40s and 50s and as they retire elderly care is going to be huge - just like it has evolved in the US," says Chris Alberti, co-founder of Cascade Healthcare, a China-focused senior care facilities provider backed by Emeritus Corp. "But it may take 10 years for the senior housing market to fully develop and for products to adapt to the unique demands."

Well trodden path

Private equity strategies focused on "old economy" opportunities are indeed well established in the US. In 2010, the US Government Accountability Office found that buy-outs of nursing homes had left 10 private equity firms, including The Carlyle Group and Warburg Pincus, with control of nearly 20% of the for-profit elderly care facilities.

The US long term care industry, including nursing homes, assisted living, home care and hospice care reached $259 billion by 2011, according to research firm Kalorama Information. Earlier this year, TPG Capital acquired Assisted Living Concepts, a Wisconsin-based operator of 210 senior living residences, in a $278 million deal.

In another demographic-driven deal in 2008, TPG-Axon Capital provided more than $300 million to develop two of pharma company Eli Lilly's late-stage Alzheimer's drug molecules.

In Asia, rising per capita GDP and consumption levels also led to more goods and services targeted at the elderly segment. At CLSA Capital Partners in Japan, Asia's oldest country with a median age of about 45, 30 million senior citizens present a business opportunity.

"When we say the elderly we don't really think about people who are lying in bed sick. In Japan we have one of the longest life expectancies in the world so many people live to their 90s and remain very active; they like to go on holiday, go hiking, play sports and take up other hobbies. It is the ‘second stage' of life after retirement, and there could be opportunities there," explains Toshitaka Shimizu, a director at CLSA.

The PE firm's investment in Everlife illustrates this thesis. The company makes supplements to ease knee joint pain, which became popular with seniors who prefer an active lifestyle. It was sold to Korea's LG Household and Health Care for $285 million early this year at a valuation of 6x estimated 2013 EBITDA. LG could expand the product into other parts of Asia where the same trend is expected to emerge.

It doesn't stop at medication. Japanese mobile network provider NTT DoCoMo's senior-friendly phones are specially designed to woo elderly subscribers. Called "Raku-Raku," which means "easy" in Japanese, the phones feature voice-recognition software, large buttons and a loud speaker. At Aeon's mall in Funabashi, meanwhile, older shoppers can access medical clinics and avail discounts on pension day.

In an economy that has been on the slide for a decade, the aging population is clearly one area of growth. According to Boston Consulting Group, Japan's elderly make up 24% of the population but are responsible for more than 50% of consumer spending. The largest chunk of this is for care homes and health services.

J-Star, Asian Capital Alliance and Globis Capital Partners have all invested in senior care homes, which generate stable cashflows from government reimbursements. Annual elder care costs in Japan will more than double to JPY19.8 trillion by 2026, the Ministry of Health estimates.

The Antipodean angle

In Australia and New Zealand too, private equity investment is driven by changes in the population profile.

"The three key trends for us from a healthcare perspective are the ageing of the population, the increased incidence of chronic disease - age-related but also lifestyle-related - and the increasing demand on national health budgets due to fiscal consolidation combined with the expansion of older cohorts and more expensive care there," says Alex McNab, investment director at Blue Sky Private Equity.

The firm has invested A$2.6 million ($2.5 million) into health informatics firm Alcidion, which provides a cloud-based care platform for medical personnel to access the health records and share information. In Tasmania, Alcidion has piloted an advanced care system for old people who are in the last period of their life and require care across multiple touch points, including general practitioners, aged care facilities, allied health, hospitals, and emergency departments.

As in Japan, there is also significant PE exposure to care homes. Australia's second-largest private senior care home operator, Regis Group, is owned by the private equity arm of Macquarie Bank. In New Zealand, Quadrant Private Equity assumed control of Summerset, the country's second-largest care home operator, between 2008 and 2010, took it public in 2011 and made a second partial exit earlier this month.

Also in 2013, Archer Capital acquired Primelife Aged Care - one of Australia's top five for-profit aged care operators - from Lend Lease Group and renamed the business Allity. Ben Frewin, a partner at Archer, notes that catering to the new generation of old timers requires additional capital for comforts that go beyond a basic nursing home setup.

"The aging population we have coming through is different to the current aged population," he says. "They've had freedom of choice throughout their lives and won't take well to being told that we can't provide you with a particular service because we can't charge you for it. So we need to make sure we can provide both a quality of product and a quality of service that they're going to expect."

In 2012, the Australian government launched an A$3.7 billion plan to deliver more choice and better care for older citizens. Measures include increased state subsidies for aged care providers to cover people who are unable to meet the cost of their accommodation. This is meant to help more aged care homes to be built or refurbished.

Over time the burden on the state is expected to increase with growing numbers of people needing aged care services, and the total cost to government will have to be carefully managed. One way to solve that problem would be deregulation, according to Frewin.

"At the moment aged care is so heavily regulated that it is difficult to differentially price your product versus a competitor's. Over time the government has to allow for a progressive deregulation of the sector, giving more freedom for operators to charge customers what they are willing to pay for residential aged care", he says.

Back in China, deregulation has also attracted interest from private investors. In its 12th Five year Plan, a broad policy document covering 2011-2015, the government made senior care a high priority issue. The country is one of the fastest-graying in the world as the one-child policy and a rapid fall in the mortality rate saw life expectancy jump from 40 to 70 in only 50 years, compared to 100 years in developed countries.

Such is the shortage of elderly care in China's major cities that there are more than 10,000 applicants waiting for the 1,100 beds in Beijing's No. 1 Social Welfare Home, a government-run facility that costs $110-570 a month.

Jayant Menon, an economist at the Asian Development Bank, believes the intensity of the ageing problem is a function of how important the government is in providing services. "There are two factors that operate: how fast they're ageing and to what extent the public sector is already in a position to play a role and how much needs to change to address that," he explains.

This rapid rate of demographic change means that China is likely to grow old before it grows rich. First, private savings will decline as a share of GDP over the coming decades. Currently, China has more net savers than net consumers, but the population share of people aged 30-50 - typically the highest savers - will drop from 50% in 2010 to 40% by 2030. As the current age group of high savers move towards retirement, the national rate of savings growth should decline and spending accelerate.

The policy response includes the elevation of senior care to "encouraged" status in the country's foreign investment catalogue, which has led to a massive increase in the number of players interested in the sector.

Sequoia Capital, IDG Capital Partners, Fortress Investment Group, Fosun Group and Yunfeng Capital are all involved in projects to cater to the growing need for senior care. EQT Partners-backed Econ Healthcare Group, which runs nursing homes and a hospital in Singapore and Malaysia, is also looking to expand into China with a retirement village.

Howevver, there is still debate about whether investors have found the appropriate model for China's needs. Private investment right now is focused on real estate projects where minimum health care services are provided.

"Real estate developers in China experienced a slowdown that was effectively government-imposed and they switched a lot of their attention to developing senior living properties. But what they started developing a senior lifestyle type of asset. That does not answer the question of how you give aged care to the infirm, the weak and those who are getting much older," says Bromme H. Cole, a consultant on health care and senior care facilities at Hampton Hoerter.

Which model works?

The lack of a successful, workable business model has led to several approaches. A crop of projects have emerged in which a Chinese property developer collaborates with a foreign senior care services operator. Major US senior-housing companies such as Merrill Gardens are expected to use this model.

Cascade used a rental-refurbishment model to deal with the crushing costs of land in the country. It invested$6 million to renovate a five-story hotel building in Shanghai's Xuhui district, to be used as a senior care assisted living facility.

"There's no shortage of housing in China, so do I want to create a product that competes with that, or do I want to go in the other direction and de-risk my investment by going higher acuity?" explains Alberti. "In order to get revenues to support capital investment, you need to move to higher acuity because one thing people will pay for, up to a point, is healthcare."

Foreign ventures are likely to remain focused on the high end of the market. Cascade's Xuhui project, which started operations in October last year, charges RMB10,000-15,000 ($1,630-2,450) per month. Government nursing homes generally cost RMB1,000-2,000 a bed per month, plus RMB 350-400 for food and other fees.

According to consulting firm LEK, an increasing level of household wealth, will enable over one fifth of China's senior population to afford high-end senior housing and care by 2020.

However, tradition and cultural differences are still expected to present obstacles to the growth of the senior care sector. Cole's surveys found that the majority of elderly Chinese don't want to participate in a retirement lifestyle product.

"Chinese aged 65 are the children of the Cultural Revolution," Cole says. "They lived their life from one chaotic episode to another and were taught to be frugal and thrifty. The idea of spending an enormous amount of money on a Western lifestyle is of no interest to them. When their 35-45 year-old children offer to place them, they say they want to stay in their current homes, close to their friends."

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• Topics
• Greater China
• Australasia
• North Asia
• Real estate
• Expansion
• Consumer
• Consumer
• Australia
• Japan
• Real estate
• China
• CLSA Capital Partners
• Archer Capital
• Blue Sky Private Equity