The Australian aged care sector is experiencing a period of rapid change, with new regulatory reforms, evolving business models and breakneck consolidation in 2014.
With the dawning of 2015, we have identified five emerging trends that will be a key focus for many aged care players this year.
1. IMPROVED PRODUCT OFFERINGS
The recent Living Longer Living Better reforms have been a boost for many aged care operators, giving them flexibility to charge different rates for accommodation for the first time.
More flexible pricing structures are leading to more choices for residents. Some new developments already offer gyms, pools, shops, cinemas and restaurants with flexible dining options. Pharmacy services and on-site medical and allied health services will also become common.
Many new aged care developments will look more like resort-style facilities than the traditional, hospital-like, nursing homes.
More product offerings will give operators more opportunity to diversify revenue streams and maximise occupancy rates. It will also encourage people to relocate to aged care facilities earlier than they otherwise might have, increasing the overall size of the market.
2. CONTINUED M&A CONSOLIDATION AND IPO ACTIVITY
The rapid sector consolidation in 2014 was driven by operators looking for acquisition opportunities to achieve economies of scale, in many cases as a step towards listing on the ASX.
There are substantial scale benefits from consolidation, with the country's top aged care providers being significantly more profitable (on an EBITDA per bed basis) than smaller players: a result of factors such as higher occupancy rates, investments in technology, efficient administration systems, lower procurement costs and more flexible staffing rosters.
Compared to other business acquisitions, a new aged care facility can be relatively straight forward to integrate: proven standardised processes and capabilities can be rolled out by acquirers to improve profitability and bolted-on to the wider group without disruptive and risky integration steps.
This creates an environment where facilities are worth more in the hands of larger players than small operators, thereby leading to M&A activity. The highly fragmented and highly regulated nature of the market accentuates the need for consolidation, as smaller players look to exit.
Strong after-market trading for IPOs has encouraged more operators to undertake IPOs and created a strong acquisition currency for listed entities in the sector.
3. SEPARATION OF AGED CARE AND RETIREMENT VILLAGES
Aged care facilities are often co-located with a retirement village. While there can be synergies from owning and operating both (such as shared food preparation, shared cleaning and laundry services, shared grounds maintenance), many operators prefer to specialise and focus on one or the other.
An example is Stockland’s recent strategic partnership with Opal Aged Care (where Corrs advised Stockland). Stockland wanted to focus on the ownership and operation of retirement villages, while Opal will own and operate the co-located aged care facilities. This separation makes sense given that aged care and retirement villages involve different business models, services and regulatory regimes.
For M&A transactions which involve the acquisition of co-located facilities, we expect consortium or on-sale arrangements will be common.
4. GROWTH OF IN-HOME CARE
In-home care, where aged care and health services are provided to people in their family homes, represents a high growth opportunity in the aged care services market.
In Australia, “care packages” are growing at 13% per annum (much higher than residential aged care). This high growth is likely to continue due to:
- cost-effectiveness: receiving in-home care services can be significantly cheaper than moving to a residential nursing home;
- demand by patients to be cared for in their home environment: many elderly people prefer to remain in their family home for as long as possible, rather than relocating to a nursing home; and
- technological advances: better enabling health services to be delivered remotely.
5. OPPORTUNITIES IN CHINA AND CROSS-BORDER ACTIVITY
There are emerging opportunities for Australian aged care service providers to take their expertise to overseas markets.
China potentially represents the biggest opportunity and the recently announced Free Trade Agreement between China and Australia was a huge positive for Australian aged care service providers. Previously, Australian operators were only permitted to work in partnership with domestic operators, but under the new FTA, Australian wholly-owned aged care providers can be established in China.
The proportion of China’s population aged 65 or over will grow much faster than Australia (from 8% currently to 25% by 2050). Social trends in China also underpin growth in aged care, with traditional family-based care under threat as younger people move to cities and leave behind their extended families. More elderly Chinese will need to pay for aged care services in the future rather than rely on their families for care and support.
There are already examples where Australian and US-based operators have entered the Chinese market. We expect more Australian aged care operators partnering with Chinese parties to develop aged care facilities or provide home care services.
Australian operators have the expertise to assist with the design and construction of aged care homes and retirement villages, train staff and ultimately manage and operate the facilities.
There are also signs of foreign capital being attracted to the Australian aged care sector, particularly from Singapore. While some foreign players may need time to get comfortable with the regulatory environment, Australia has a plethora of acquisition and partnership opportunities to offer them.