Research and Forecast Report

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HEALTHCARE AND RETIREMENT LIVING 2016

Healthcare and Retirement Living | Research & Forecast Report | 2016

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CONTENTS 4

Healthcare snapshot Healthcare overview



5

Residential aged care

6

Retirement villages

9

Manufactured Home Estates (MHEs)

12

Private hospitals & specialisations

14

Outlook

16

Our experience – Healthcare and Retirement Living

22

Healthcare and Retirement Living | Research & Forecast Report | 2016

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HEALTHCARE SNAPSHOT Combined residential aged care and home-based care places will cover

70

the population over the % of age of 85 years old by 2025

First admissions to residential aged care were for high care 2010

59%

2014

67%

Average length of stay 2012-13 Public hospitals

Private hospitals

Acute care 2.8 days 2.1 days

Increasing life expectancy + Relatively low levels of fertility =

Rehabilitation care 16.2 days 4.5 days

Ageing population

Forecast supply on care places & average annual growth 2015

2025

280,574 PLACES RESIDENTIAL AGED CARE 2025

2015

157,823 PLACES HOMECARE

3.8% 7.9%

HEALTHCARE OVERVIEW ASSET RICH CASH POOR The family home represents 54% of the mean net household wealth and 80% of the median net household worth for Australians aged over 75

11.1

%

15.8

2017

2013

Total health expenditure as a percentage of GDP

%

( fo re c a s t )

Working age people (15-64) to support every person over 65 2002

5

2042

2.5

Average entry age to residential aged care

83.5 YEARS OLD

with a tenure of 2-3 years with greater care needs during that time.

By Kristina Mastrullo Manager | Research [email protected] The rate at which Australia’s ageing population is growing shines the spotlight on the country’s healthcare sector. The number of Australians aged 65 years and above will grow disproportionately, more than doubling from 3.6 million to 8.5 million between 2015 and 2055. On top of that, the proportion of working population aged 15 to 64 is plummeting. In 1985 there were 6.4 workers for every retiree but by 2042 this is forecast to reduce to only 2.5 workers per retiree, placing an increasing financial burden on working residents to support the retiree population. The aged and healthcare sector will be heavily leant on in the future as social demographics continue to change with lower fertility rates and life expectancy increasing, with the evolution of medical technology. As Australia faces the future of an ageing population, the federal government has played a significant role in building capacity within the aged and healthcare sector. Currently, senior living and health services are funded by government subsidies, user contributions and volunteer care with 70-85 per cent of the cost of formal aged care funded by the Australian government. However as we steer from the public to the private purse, aged care will largely be funded by the consumer.

The aged and healthcare sector will be heavily leant on in the future as social demographics continue to change with lower fertility rates and life expectancy increasing with the evolution of medical technology.

Research & Forecast Report

RESIDENTIAL AGED CARE Healthcare and Retirement Living | 2016

Sector snapshot Accommodation and nursing care for residents who have a continuing need for assistance with day-to-day living. Within these facilities there are fully qualified staff available around the clock. SIZE OF MARKET

$14.8 BILLION

TRANSACTION VOLUMES

PROVIDERS 2015

Government funding

8.32%

2016 YTD

Opal

BUPA

Regis

Estia

LIFE CYCLE STAGE

Japara

Allity

GROWTH COMPOSITION

Australia’s ageing population

Regulated industry

Aged care reform The Australian government’s end result of the aged care reform, outlined within the Aged Care Roadmap March 2016, is a push for the aged care sector to evolve into a consumer-driven, marketbased system where price, provider and care type is determined by the consumer. Essentially, shifting the heavy reliance on government funding to the user.

6

2015

2016 YTD

KEY DRIVERS

FA C I L I T I E S

RESIDENTIAL PL ACES

9.49% $394.1 million

972

192,370

MAJOR PLAYERS

$810.5 million

in revenue

2,681

AVERAGE YIELD

For profit 38%

Not-for-profit 62%

While this reform reallocates and redirects funding, it will allow much more flexibility in a system that has historically been highly regulated, restricting supply. Once implemented, the government will act as a ‘safety net’ when there is insufficient market response, rather than a first port of call, for funding. The Aged Care Roadmap March 2016, expects the reform to be implemented within 5-7 years, achieving the reform expectations shown in Figure 1.

A shift to the private purse Operators will be required to; upskill their staff, implement required financial technology and learn to balance their funding pool across their specific care profile, as funding is proposed to transition directly to the consumer as the push for consumer-directed care (CDC) continues. Operators will have to evolve their care models to match the consumers care needs and ability to pay for same. In the immediate term, by January 2017, changes to the main funding instrument for the sector – the Aged Care Funding Instrument (ACFI) - will mean that the Complex Healthcare (CHC) scoring will be simplified to lower most resident scores, thereby reducing funding to aged care facility operators. Through this system, the Government is expected to claw back in excess of $1.7 billion in funding over the next 4 years, decreasing total annual funding by an average of $6,655 (11 per cent) per resident, which for most operators, relates directly to a loss in earnings in the same magnitude. Operators with a weighting to high care residents (the majority of aged care operators) will be most affected, as this segment will be re-rated significantly where government funding will be revised lower. This thematic will have direct implications for an operator’s revenue streams and hence overall profitability.

RAD/DAP preferences As a coupon free source of capital, the sector is underpinned by Refundable Accommodation Deposits (RADs) however represents a contingent liability for the Government by virtue of their guarantee

of the amounts paid by residents. Pre reforms, the ratio of RADs to Daily Accommodation Payments (DAPs), which is the annuity stream equivalent, was circa 90:10 but has steadily fallen to circa 60:40 and trending towards 50:50, post reforms as consumers exercise the flexibility now available to them. Unsurprisingly, payment preferences for two of the three listed players have now trended towards the 50:50 DAP:RAD ratio, however Estia was the outlier given its heavy reliance on RAD capital, and we’re likely to see all other providers follow suit. Fuelled by the reform changes, the RAD balance in the sector has increased 24.2 per cent from $17 billion in FY2014 to circa $21 billion by September 2015. While at first glance, this a positive of the sector, the majority of the capital inflow has been utilised for acquisition activity as opposed to its intended purpose – increase of supply. In this context, the operational risk for the sector is increased should the RAD:DAP ratio further favour DAPs as operators will have to fund an outgoing lump sum (the RAD) for an existing resident whilst replacing it with an incoming annuity stream (the DAP). This heightens concerns for sector participants as many do not have the balance sheet capacity or scale to offset the immediate to short term funding pressures. The shift towards DAPs has occurred primarily because of the following: •

The Federal government continues to claw back funding, thus residents are now increasingly having to fund care themselves as the user pay model gains traction;

Figure 1: Aged Care Reform Expectations DOMAIN

DESTINATION

How do consumers prepare for and engage with their aged care?

Consumers, their families and carers are proactive in preparing for their future care needs and are empowered to do so.

How are eligibility and care needs assessed?

A single government operated assessment process that is independent and free, and includes assessment of eligibility, care needs and maximum funding level.

How do we make dementia care core business throughout the system?

The community is dementia aware and dementia care is integrated as core business throughout the aged care system.

What care is available?

A single aged care and support system that is market based and consumer driven, with access based on assessed need.

Who provides care?

A single aged provider registration scheme that recognises organisations registered or accredited in similar systems, and that has a staged approach to registration depending on the scope of practice of the providers.

Who pays?

Sustainable aged care sector financing arrangements where the market determines price, those that can contribute to their care do, and government acts as the ‘safety net’ and contributes when there is insufficient market response.

How will the formal and informal workforce be supported?

A well-led, well-trained workforce that is adept at adjusting care to meet the needs of older Australians.

How will quality be achieved?

Greater consumer choice drives quality and innovation, responsive providers and increased competition, supported by an agile and proportionate regulatory framework.

Healthcare and Retirement Living | Research & Forecast Report | 2016

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•

•

Incoming residents and their families have become more financially savvy, seeing value in retaining and re-mortgaging assets to benefit from capital appreciation; Tenure of stay within aged care facilities is also declining and alternative funding arrangements for the cost of care are being made e.g.. Children funding the cost of care to retain the capital assets.

Operators will have to withstand short to medium term funding pressures as residents entering aged care facilities (at a later age, within high care) lead to a high rollover of RAD outflows. This adjustment period should continue as we approach 2020 and complete the transition to a user pays model. It’s expected that operational pressures will stabalise over the next decade.

Making up the difference Residential Aged Care facilities have historically been seen as nursing homes, however they are becoming more diverse and advanced. Despite the aged care profile being predominantly occupied by high care residents, these facilities have been expanding their product offering, allowing operators the flexibility to charge for a variety of accommodation. This diversifies revenue streams, maximises occupancy rates within a broader age profile and counteracts the impact future funding cuts will have on operators’ facilities. People are encouraged to enter these facilities earlier than they normally would if presented with a premium lifestyle. Furthermore, offering ‘Independent Living’ within an aged care facility offers a seamless transition into higher or complex care, so the resident isn’t significantly disrupted if and when care is needed. This in turn, can prolong a resident’s overall stay and lengthen the operator’s cash flow. While Japara, Regis and Estia commented that ACFI changes may cause more margin compression in FY2018 and beyond, the overall response to mitigate the impact is to implement additional consumer charges via an expansion in services. Although prima facie there are sufficient numbers to warrant such a response, as the direct cost of acute care increases, so too does the threat of product and service substitution as consumers opt for greater flexibility in their environments and value for money (such as health integrated retirement villages) in a commodotised care delivery system.

Many, to few: Rationalisation An aggressive hunt for scale was observed in 2014 when sales surged at 41 transactions over the year. Prior to that, 2011 and 2005 were periods of heightened activity with 21 transactions occurring in each of those years. Within 2014, Japara, Regis and Estia Health listed on the ASX, with Japara becoming Australia’s first pure-play aged care operator, creating the equities market for the sector.

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Aged care sales and initial yields 45

20% Number of Sales (LHS)

40

Average Initial Yield (RHS)

18% 16%

35

14%

30

12%

25

10%

20

8%

15

6%

10

4%

5

2%

0

0% 2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Year

Source: Colliers Edge

The scale sought after by top listed players brings with it many advantages such as higher overall occupancy rates, more efficient administration and management platforms, together with the ability to invest in technology and function across a broader range of service tiers providing the ability to soften the impact of negative changes. Once operators achieve scale, underlying platforms allow bolt on acquisitions to be integrated efficiently and synergies to be realised more effectively. After the consolidation boom of 2014 and 2015 we’ve seen market activity cool, as the ability to achieve further scale has been constrained by the scarcity of assets and price expectations. Notwithstanding, with the multiple pressures at play smaller operators without scale and unlevered balance sheets will have limited capacity to manage the changes and are likely to be marginalised leading to a second wave of consolidation activity.

Homecare gains market share Homecare services account for a growing proportion of operational care places, increasing from 20 per cent in 2007 to 25 per cent in 2014. Homecare packages are now growing at 13 per cent per annum, much higher than residential aged care in line with a consumer driven, delivery agnostic system. The increase is due to seniors wanting to stay longer at home, maintaining their independence. This trend toward homecare is being facilitated by advances in medical technology and the upskilling of staff – the latter initiative the government is contributing $20 million toward. This program also allows the government to increase the number of operational ‘places’ without placing undue pressure on existing facilities, creating cost efficiencies within the sector and keeping up with mounting demand. Additionally, this aspect of the system will be effectively deregulated from February 2017 further removing the supply constraints and allowing the CDC construct to fully function in this space. Practically speaking this means the consumer can now access care between where historically a homecare package would cap out (at circa 25 hours per week) and where residential aged care takes over at 24/7, in an environment of their choosing.

Research & Forecast Report

RETIREMENT VILLAGES Healthcare and Retirement Living | 2016

Sector snapshot Residential developments tailored for the over-55 age group. The quality and amenities available vary between villages, although generally encompass assisted living.

$3.1

SIZE OF MARKET

TRANSACTION VOLUMES

MAJOR PLAYERS

AVERAGE YIELD

$410 million Lendlease

Stockland

Aveo

Retire Australia

14.34 %

2015

14.75%

2016 YTD

BILLION IN REVENUE

184,000

RESIDENTS IN RETIREMENT VILL AGES 2014

$105 million

KEY DRIVERS 2015

2016 YTD

Australia’s ageing population

Ability to unlock wealth

LIFE CYCLE STAGE

COMPOSITION For profit 40%

Not-for-profit 60%

Care in community setting

Horizontal vs Vertical Currently, horizontal (or broad acre) villages are far more common than vertical and combination configurations, however the scarcity of land for development and expansion coupled with consumer preference of care outside the residential aged care setting is shifting the market towards vertical villages. A vertical village not only allows for the developer to expand upwards making way for more units or account for integration of aged care amenities, it also allows infiltration of denser markets (metropolitan areas) which are harder to enter due to land scarcity. Metropolitan vertical villages can better suit a tech savvy retiree that is reluctant to leave their existing community, while horizontal villages are located in more suburban, regional or coastal

GROWTH

locations. Some operators have already established vertical villages within 10kms of Sydney’s CBD. Aveo has two villages in Mosman, 8kms from the core and Australian Unity operates in Bondi, 7.7kms from the city and in Carlton, 3km away from Melbourne CBD. More recently, Lendlease purchased ‘Trebartha’ village in Elizabeth Bay as well as ‘Waterbrook’ in Greenwich 1km and 4kms respectively from Sydney’s CBD. Uniting Communities also recently obtained approval for an 18 storey integrated retirement complex in the heart of Adelaide. Ongoing retail and public space development coupled with a more robust country-wide infrastructure plan and a higher preference for urban living indicates that metropolitan locations will maintain their appeal and grow in preference to coastal towns and regional centres.

Healthcare and Retirement Living | Research & Forecast Report | 2016

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Market recapitalisation

Breakdown of village type

Recapitalisation of the retirement village market is being procured from various areas of the general market place:

5% 9%

•

Divestment of non-core assets - The disposal of non-core assets such as the recent sale of the Lendlease New Zealand DMF Retirement Village portfolio to Blackstone’s Tactical Opportunity Fund is one example of this.

•

International Investment - Both Retire Australia and Aveo have funding from offshore, the former from two NZ Pension Funds and the latter out of Asia. Recently announced, Aveo has now taken full control of Retirement Villages Group after first purchasing 23 per cent of RVG in May last year.

•

Capital partnerships - Stockland has stated it will sell up to 50 per cent of its existing retirement village portfolio over the next six months to institutional investors. Lendlease has indicated a ‘medium’ time frame to engage with capital partners.

•

Public Listing - There has been talk of the potential ASX listings of at least one of the major retirement village groups which we are likely to see late 2016 or early 2017.

HORIZONTAL VERTICAL COMBINATION

86%

Source: 2015 PwC/Property Council Retirement Census

Notwithstanding the underlying trend, vertically integrated care villages still have operational and ownership hurdles to solve. For example, in a fully integrated village unless the entity straddles retirement villages, home care and aged care, there are potentially three different operators within the building which creates complications around responsibilities for maintenance capex, legal liability in the case of care provision and margin dilution for third parties by virtue of rental payments to the building owner.

Little Bay Retirement Village, NSW Sold by Colliers International

10

Waterbrook, Greenwich NSW Sold by Colliers International

Greenfield development Greenfield development has been limited since 2011 however Stockland and Opal have developed a state of the art co-located village (Cardinal Freeman) in Ashfield. Greengate Partners have developed a number of vertical co-located facilities in metropolitan Sydney including St Bridget’s Green in Maroubra and St Patricks Green currently being developed in Kogarah. Additionally the not-for-profits have been busy developing greenfield sites, most notably St Basil’s co located vertical village in Randwick. Catholic Healthcare and Anglicare (formerly ARV) have been active in the development of greenfield retirement. A number of vertical co-located villages have been announced and are either in planning or development stage. There are no significant greenfield broad acre retirement villages in the development pipeline with the exception of some brownfield development in regional areas.

Longevity risk Retirement Villages can be sensitive operations, and despite a high level of institutional investment, villages present unique and complex risks for investors and operators. Controllable risks such

as quality product control, price offerings, DMF contract structures and capital sinking funds need to be balanced against more subjective risks such as re-sales, roll over rates and property price growth. Due to medical and technological advances, Australians are living longer which can extend the average length of stay but simultaneously erode investor returns. The structure of most DMF contracts result in village operators maximising results after 10 years – residents that stay longer than this dilute the returns to operators. Village operators have been challenged to turn a profit, especially those with a narrow resident age profile. While a broader age profile for older and more established villages will take time, perhaps even a decade, the DMF pressures can be curtailed. A more regular revenue stream can be achieved through aged care amenity integration, although this can depend on access to capital. Even so, village occupancy rates continue to track high, averaging 91 percent throughout Australia. We note that retirement villages remain a popular choice for seniors, typically trading at just 6080 per cent of median house price values. This allows seniors to unlock home equity and relocate to an environment which promotes independence and social interaction.

Healthcare and Retirement Living | Research & Forecast Report | 2016

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Research & Forecast Report

MANUFACTURED HOME ESTATES (MHEs) Healthcare and Retirement Living | 2016

Sector snapshot A retirement concept in evolutionary phase. MHEs are an affordable and relocatable alternative to traditional retirement living concepts. SIZE OF MARKET

$2.6

BILLION ASSET VALUE

200 estates

LIFE CYCLE STAGE

GROWTH

(estimated)

No restriction on entry age

Ingenia Communities Group

National Lifestyle Villages

$303 million

$157 million

Lifestyle

MHE 6%

COMPOSITION Tourism parks 64%

Lifestyle Communities

TRANSACTION VOLUMES

KEY DRIVERS

Residential affordability

MAJOR PLAYERS

Mixed use 30%

A two-tiered product Due to their low cost characteristics and greater affordability, MHEs are typically associated with residents from lower socio-economic backgrounds. However, MHEs are now growing in favour as an alternative to the traditional retirement villages concept because of their simplified cost structure and their two-tiered quality offering:

2015

Gateway Lifestyle Group

Palm Lakes Resort

AVERAGE YIELD

8.39%

2015

8.09%

2016 YTD

2016 YTD

of MHEs have successfully combatted this perception. Creating higher quality MHEs with an abundance of amenity has increased cost per dwelling, however these assets remain affordable relative to other retirement living options, keeping MHE communities exclusive to retirees.

2. High – premium qualities with like amenities, similar to retirement village concepts

Modern MHE developments have now surpassed the standard of most other retirement living alternatives where community facilities can include swimming pools, tennis courts, bowling greens, community halls, parks, nature trails and even marina berths. They are fully serviced and from the outside appear as a fixed building. Even though these units can be relocated, it is extremely rare to do so.

While this socio-economic stigma has been somewhat accurate in the past, The enhancement of quality, and growth in popularity

MHEs present a suitable alternative for residents on the cusp of retirement. The mounting appeal to a larger age group, together

1.

12

Low to moderate - varied quality, privately owned homes with basic amenities

with the simpler cost structure will see the sector grow in market share in the coming years.

Co-location of services Like aged care and retirement living, MHEs have sought to expand their age and care profile by offering transitional services as residents get older. Established lifestyle communities such as Palm Lakes Resorts have already implemented aged care precincts within their estate to facilitate all care needs in a number of their communities, with all new developments appearing to be approved as a co-located facility. Although more capital is being spent on broadening the amenity offering, premiums can be charged to recover these costs, and the investment results in longer overall stay length and revenue streams.

While local players are expanding portfolios, interest from international investors is causing further yield compression. Over FY16, Australian MHE yields at an average of eight per cent (passing) remain compelling relative to traditional investment classes, such as office, retail and industrial assets. The largest interested offshore investor by region is the USA which possess a relatively more established and mature market largely due to their higher penetration rate of retirement-aged population compared to Australia. US investment portfolio sales have recorded a sub-five per cent yield making relative Australian returns very appealing. For this reason we expect domestic MHE assets will appeal to foreign investors looking to globalise their current asset portfolios and capitalise on their extensive operational and developmental knowledge.

Land constraints restrict scale

Offshore interest and yield compression Yields for MHEs have consistently compressed since 2008, especially within the last two years as transaction volumes increased. The latest compression of analysed yields has been well documented through intensified activity in the market for the last 18 to 24 months. MHE transactions clearly demonstrate lower comparative yields achieved and a gradual tightening over the period. Furthermore, yield compression is apparent within caravan park purchases due to investment groups purchasing these sites with the intent to convert them into over-55’s communities.

The main limitation in Australia has been the ability to achieve scale due to the vast amount of land MHEs require to accommodate dwellings and accompanying amenities in metropolitan localities. These ‘gated’ communities are mostly located in coastal towns as they are unable to find suitable space elsewhere. The nature of the product prevents vertical growth, however due to domestic consolidation peaking, the market is now likely to pursue greenfield expansion opportunities with local operators already active in 2016. The demand for this product will continue to grow as retirement village and aged care costs increase while the government simultaneously claws back aged care funding.

Manufactured Home Estates vs Mixed Use Caravan Parks Yields 15%

14%

13%

12%

11%

10%

9%

8%

7%

6% Jan-08

Jan-09

Jan-10

Manufactured Home Estate

Jan-11

Jan-12

Mixed Use Caravan Park

Jan-13

Jan-14

Linear (Manufactured Home Estate)

Jan-15

Jan-16

Jan-17

Linear (Mixed Use Caravan Park)

Healthcare and Retirement Living | Research & Forecast Report | 2016

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Research & Forecast Report

PRIVATE HOSPITALS & SPECIALISATIONS Healthcare and Retirement Living | 2016

Sector snapshot An institution providing medical and surgical treatment together with nursing care for sick and injured people. SIZE OF MARKET

$62.1

TRANSACTION VOLUMES $44.6 million

$44.26 million

B I LLION IN REVENUE

Other public hospitals 15.4%

COMPOSITION Public tertiary hospitals 60.5%

Private hospitals 24.1%

KEY DRIVERS

MAJOR PLAYERS Ageing population

Healthscope

2015

8.24%

2015

6.25%

2016 YTD

2016 YTD

LIFE CYCLE STAGE Ramsay Healthcare

AVERAGE YIELD

Government funding

Private health insurance take-up

GROWTH

*

*represents one sale

A stable environment

Low costing specialisations

The private hospital operating environment is expected to remain stable due to the fact that assets are tightly held and traded infrequently. This is because the level of capital deployed with the addition of operational costs does not encourage the owner to part with their asset until the end of its life cycle, typically 10-15 years. Additionally, there is little opportunity for growth in suitable greenfield and brownfield sites due to high design and construction costs.

Private hospitals are categorised into the following with general levels of capital and operating costs attached:

In the last 5 years, Ramsay and Healthscope absorbed large shares of hospitals beds, but are now restricted for further expansion by the ACCC because of their almost duopoly status. This has also limited domestic and foreign investor activity.

14

PRIME

DESCRIPTION

LEVEL OF CAPITAL & OPERATING COSTS

Acute care

Treat medical and surgical patients

High

Rehabilitation

Rehabilitation of neurological, muscularskeletal, orthopaedic

Low

Psychiatric

Assists patients with psychiatric, mental or behavioural disorders

High

Free-standing, day time (day hospitals)

General surgery, specialist endoscopy, ophthalmic and plastic/ cosmetic treatments

Medium (varies according to specialisation focus)

Lower capital and operational costs have encouraged the divorce of mental health (Dementia, Alzheimer’s, etc.) and rehabilitation specialisations, away from medical and surgical in both private and public hospitals. The initial construction costs of these premises are comparatively inexpensive because they don’t require the same level of medical equipment or operating theatres. The opportunity for a higher return in these specialisations was realised when Rydges Wollongong, purchased by Evolution Healthcare and Australian Property Trust, was converted into a 90-bed private psychiatric hospital in February 2012. Furthermore, these specialisations tend to be located in either: 1.

Hospital grounds - within new or refurbished hospitals (such as Ramsay), adjoining sites have been allocated to specialisations such as rehabilitation, physiotherapy, consultation rooms, pharmacy, etc. so that it doesn’t eat into space retrofitted with medical equipment; or

2. Retail premises – specialised clusters established either on high streets or grouped within home maker centres, intending to provide a one-stop shop for medical, GP, physiotherapy, and pharmacy needs. Day hospitals have consistently been more profitable, peaking in FY2015, suggesting that separating these specialisations from mainstream hospitals have proven successful.

Private hospitals net operating margin 25%

Acute and psychiatric hospitals

Day hospital facilities

20%

15%

10%

5%

0% 2010-11

2011-12

2012-13

2013-14

2014-15

Financial Year

Source: Australian Bureau of Statistics

Activity absent While Australia struggles to meet demand for hospital beds, the appetite to reinvest and expand is largely absent. Foreign investors are looking for high returns achieved by scale, however transaction activity within the industry remains low and available sites for development or expansion remains constrained. The capital costs to develop are not only expensive, but also prolonged. On average a hospital can take 18 months to build, excluding the time it takes to conceive, design and gain approval, which combined could take years. This causes timing issues as technological advances have potential to make hospital infrastructure redundant before it’s operational.

Greenslopes Private Hospital, Greenslopes Qld Valued by Colliers International

Healthcare and Retirement Living | Research & Forecast Report | 2016

15

Research & Forecast Report

OUTLOOK

Healthcare and Retirement Living | 2016

The Australian Healthcare system is undergoing unprecedented, systemic change. Direct and indirect variables that impact care models, the environment in which care is delivered as well as who and how the care cost is funded are all being altered to drive the following outcomes: •

Lessen the burden of healthcare on Federal and State governments

•

Provide additional care options and flexibility for consumers – consumer funded and led

•

Unlock wealth from those who are asset rich and cash flow poor

•

Provide a seamless, fully integrated care continuum that is delivery environment agnostic

As a result, whilst it is acknowledged that the underlying demographics create a large demand for overall healthcare services, the demand-supply gap is lessened when a ‘whole of system’ view is taken. Put another way, the above is driving convergence between what were traditionally care silos being residential aged care, homecare, retirement villages (and alternatively MHEs) and hospitals which can be seen as the ‘Continuum of Care’. This convergence is leading to an evolution of the historical co-located model to that of vertically integrated retirement villages with residential aged care and allied health located in the same building. For the affected areas of the continuum, the key future trends have been outlined overleaf.

Continuum of care Pharmacies, therapy services, agencies, lifestyle services

Primary care

Secondary care

Tertiary care Hospitals

Preventative and general wellbeing

In home and community care programs

Home and seniors living

Medi hospital (sub-acute care)

Aged care

Dementia care

Sector

16

Service

Mission Australia Portfolio, Sydney NSW Valued by Colliers International

Residential aged care

Financial

Care models Consumer directed care within the homecare package regime that delivers care in the person’s own home or retirement village has acted as a preface to potentially being implemented in residential aged care framework. If user-pays and care services move further downstream, models will likely be tiered across four levels in a user funded system akin to other sectors that are commoditised: 1.

Safety net services - for those that have little to no income and/or assets

2. Base level of services 3. Base level of services plus some additional services 4. Boutique/niche - care, accommodation and additional services package at a premium Operators will need to adapt service models to ensure occupancy and earnings are maintained and scale will become increasingly important to provide additional levers to manage earnings. Providers will also look to further specialise (e.g. dementia) or move into other care avenues such as homecare and/or retirement villages as recently seen by Japara, Regis and Estia. These listed players have begun to consider the cost of allied health service provisions and partnerships to diversify their revenue streams, acting as cost reduction and margin expansion methodology.

Traditional banks have historically restricted access to capital in the sector, and coupled with sector corporatisation, interest from super funds, offshore investors, pension funds and broader institutional infrastructure funds has increased. That said, with impending direct and indirect funding changes, potential changes in payment preferences between DAP/RADs and overall margin compression, senior debt availability is likely to contract and certain development projects may become unfeasible. Returns will also fluctuate in the short term until operational and care models become ‘normalised’ and sector funders become comfortable with the new sector norms.

Government reform & user pays Reforms will likely seek to increase consumer choice, support industry consolidation and continue the transition from public funding to consumer funding based on means. The consumer with even marginal assets and income will be required to contribute increasingly towards their cost of care and accommodation. Further deregulation is more likely to be promoted as structural changes to allocation of licences in the residential aged care sector occur. As a preface, the homecare regime has transitioned from a Government controlled allocation system to effectively fully deregulated.

Healthcare and Retirement Living | Research & Forecast Report | 2016

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Consolidation The merger and acquisition market for individual facilities and portfolios is strong with mega mergers more likely, increasing the number of large operators. For most facilities, a current threshold of 1,000-1,500 beds is apparent, however this will move closer towards circa 3,000 beds – a far cry from the 64 per cent of sector operators with one facility. The listed players also recognised that the level of opportunities is likely to increase in the short term as smaller operators are limited in their ability to respond to direct and indirect market forces at play. Given the push for scale to drive incremental earnings, by 2026 Japara has flagged an additional 2,500 new places with Regis another 1,404 new places by 2020 via development activity with acquisitions continuing to provide step changes in their organic growth strategies. In FY16, underlying organic growth ranged between three and five per cent normalised for acquisitions and supply pipeline for the listed players. Private sector involvement has been increasing and is expected to continue over the long-term.

Retirement Villages Vertical integration Vertical ‘apartment-style’ village integrations are anticipated to increase in coming years with the likes of Stockland’s mediumrise development in Ashfield and Australian Unity’s six-story village in Melbourne’s Carlton as well as those under development by Aveo, Retire Australia and some of the progressive not for profit groups. More recently, Uniting Communities are developing an 18-level tower in central Adelaide combining independent living with short term accommodation, retail and community facilities. The rising volume of baby boomer retirees preferring to remain in urban settings will underpin demand. In our view, this and homecare package deployment within villages will become the

Living Gems Portfolio, Qld Valued by Colliers International

18

new norm blurring the line between aged care and retirement living, providing operators the ability to lengthen residents’ stay (via widening age and care profiles) resulting in an expansion of their revenue stream. Further opportunity will be unlocked within metropolitan areas, especially within the 10km ring of the CBD. This will allow the construction of vertical villages thereby allowing ease of aged care amenity integration. Should a suitable site come to market, we expect that bidders will be aggressive in securing it, potentially repricing the market. Alternatively, a two-tier market may be perpetuated by splitting out traditional coastal horizontal villages and metropolitan vertical villages.

Penetration Currently about 184,000 Australians live in retirement villages, or 5.7 per cent of the over-65 population. This penetration rate is projected to increase to 7.5 per cent by 2025, meaning approximately 382,000 people will be in need of retirement village accommodation by 2025. This is more than double the current number of village residents nationwide. As such, a large amount of investment will be needed in the sector in coming years to meet projected demand. Developers and operators are finding it easier to sell down new retirement stock, with penetration rates expected to increase. That said, there is also outdated stock that will not be able to cater for care delivery and will require significant refurbishment or full redevelopment.

Financial As a result of the convergence of various healthcare profiles, coupled with the increasing number of people using village environments, superfunds and offshore investors by way of pension or private equity funds are expressing strong interest within the sector. This is in addition to banks increasingly becoming aggressive, opening up more financial options for the sector.

In addition, more sophisticated and financially adept operators are produced as larger players continue to grow and smaller players become corporatised. On both the vendor and purchaser side, capital is being deployed at more realistic levels towards greenfield and brownfield developments as purchase, build and operating costs are progressively understood and hurdle rates justified.

limitations within metropolitan locations, there is still a hefty portion of the market seeking coastal communities once retired. Following in the footsteps of retirement villages and aged care facilities, it’s more likely that co-location of services within MHEs will develop, as seen in Palm Lakes Resort. Security of income and the potential to add value through additional development and management efficiencies will continue to facilitate investor interest

IPOs

locally and offshore.

Looking forward, the level of investor appetite within the retirement living and aged care sectors can in part be gauged by the success of any Initial Public Offering (IPO) in the listed market. Australian investors are watching the New Zealand market closely where there are several operators planning IPOs.

Hospitals & Specialisation

In 2014, retirement village operator Arvida listed on the NZX and more recently the company beat its prospectus based earnings forecasts. In Australia, BGA capital has also been aggregating a portfolio of retirement villages with the objective of listing on the ASX. The instances of listing and/or direct investment in the sector will act as a barometer of health in the industry as perceived by potential investors, subject to broader equity market conditions.

Consolidation Consolidation has been a key driver of activity from companies such as Stockland, Lendlease and Aveo who have in recent times undertaken a combined total of $625 million of retirement acquisitions. We are anticipating that investment volumes from institutions will continue to rise in 2016, increasing their ownership concentration levels and improving the diversity of their portfolios. We anticipate the number of units per retirement village will grow strongly in the medium term as investors and developers build to meet rising demand.

Service demand fundamentals are present and will only increase with Australia’s ageing population, however constraints in the form of capital, operational expertise and physical sites exist. The convergence of healthcare and the pressure from government to shift to consumer funded care also creates pressure on the current model. Whilst decentralisation of low capital cost services (physiotherapy, rehabilitation, pharmacy, GP, etc.) is occurring, there is an ability to cluster these specialisations in a vertical manner. Hospitals, however, will be challenged by this model as it requires a complete overhaul of the hospital’s footprint which has not deviated in decades. A vertically integrated model has the ability to solve land access issues but will take the industry decades to adopt domestically, although we concede this is successfully occurring in the US and Asia.

There have been few significant portfolio sales over the past three years with the bulk of current sales being individual facilities/small clusters. However, the emergence of not-for-profits and core industry players as purchasers are occurring. Rising institutional investment will be a positive for the sector as these players typically have better access to funds, enabling them to build and acquire on a large scale and manage the long term capital requirements. The second wave of consolidation is imminent as bigger players start selling their non-core facilities.

MHEs With a financial structure much less complex than that of retirement villages, this industry is ripe for growth. MHEs not only can be a simpler, cheaper alternative but this lifestyle can be accessed well before retirement age. Regardless of land

63 Lynwood Ave, Dee Why NSW Sold on behalf of a private investor

Healthcare and Retirement Living | Research & Forecast Report | 2016

19

UNRIVALLED EXPERIENCE We are the market leaders - our breadth and depth of expertise, as well as our focus on service excellence, means we have the right team to deliver better results faster.

We offer a full range of healthcare & retirement living solutions…

Across every healthcare & retirement living property and business type…

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PERTH

Healthcare and Retirement Living | Research & Forecast Report | 2016

21

OUR EXPERIENCE HEALTHCARE SOLD

14 assets with an estimated value in excess of $328.8 million

Noosa Nursing Centre Tewantin, Qld

Gympie Nursing Centre Gympie, Qld

Coffs Harbour Nursing Centre Coffs Harbour, NSW

South West Rocks Nursing Centre South West Rocks, NSW

230 bed aged care facility

130 bed aged care facility

147 bed aged care facility

80 bed aged care facility

On behalf of Profke Aged Care Group

On behalf of Profke Aged Care Group

On behalf of Profke Aged Care Group

On behalf of Profke Aged Care Group

Hutchinson Portfolio Foster, Tuncurry & Taree, NSW

Fraser Shores 1 & 2 Hervey Bay, Qld

Victoria Towers Aged Care Southport, Qld

Tea Gardens Manor Tea Gardens, NSW

350 bed aged care portfolio

249 Independent Living Units

84 bed aged care facility

106 bed aged care facility

On behalf of Blaise Hutchinson

On behalf of Torrisi Family

On behalf of The Lottie Group

On behalf of Palm Aged Care

63 Lynwood Ave Dee Why, NSW

Lambert Village Mount Gambier, SA

Diamond Valley Specialist Centre Greensborough, Vic

Alexam Place, Salisbury East, SA

86 place childcare centre

57 bed supported residential facility

Specialist Centre

61 bed supported residential facility

Sold on behalf of a private investor

On behalf of a private client

On behalf of Grimshaw Warwick Unit Trust

On behalf of St Andrew’s Healthcare

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AUSTRALIA AND NEW ZEALAND IN THE LAST 12 MONTHS VALUED

170 assets with a value in excess of $2 billion

Illawarra Retirement Trust Portfolio, NSW & Qld 910 independent living units over 10 retirement villages and 762 beds over 6 aged care facilities

On behalf of Illawarra Retirement Trust

Living Gems Portfolio, Qld

Ingenia Communities Portfolio, NSW

Gateway Lifestyle Portfolio, Qld

1,173 sites over 5 manufactured housing estates

1,546 sites over 6 mixed use parks

927 sites over 3 mixed use parks and 397 sites over 2 manufactured housing estates

On behalf of Australia and New Zealand Banking Group Limited

On behalf of Ingenia Communities

On behalf of Gateway Lifestyle Residential Parks

Part Anglicare Portfolio, NSW

St Basil’s Portfolio, NSW & ACT

Bundaleer Portfolio, NSW

Blue Hills & Durham Green, NSW

181 independent living units, 100 bed aged care facility and respite & day care centres

40 independent living units and 395 beds over 5 aged care facilities

79 independent living units, 139 beds over 2 aged care facilities and development site

276 independent living units over 2 retirement villages, 171 beds over 2 aged care facilities

On behalf of Bundaleer Care Services Ltd

On behalf of Blue Hills Village (Liverpool) Pty Ltd and Bonvale Enterprises

Mission Australia Portfolio, NSW & Vic

Rivercity Medical Centre Auchenflower, Qld

On behalf of Anglicare

Manchester Unity Portfolio, NSW 182 independent living units over 3 retirement villages and 183 beds over 2 aged care facilities On behalf of Manchester Unity Australia Ltd

On behalf of St Basil’s Homes

Wollongong Private Hospital Wollongong, NSW 151 bed private hospital On behalf of Australia and New Zealand Banking Group Limited

132 beds over 2 aged care facilities and 6 assisted living units On behalf of Mission Australia

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Medical centre and day hospital covering 3,647m² On behalf of Westpac Banking Corporation

554 offices in 66 countries on 6 continents $2.5

billion in annual revenue

2.0

billion square feet under management

16,000 professionals and staff

OUR RESEARCH EXPERTS Anneke Thompson National Director National Office Research +61 412 581 647

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Sas Liyanage Research Analyst National Industrial Research +61 411 534 522

Manal Haque Manager VIC Research +61 497 771 020

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Kate Gray Associate Director, SA Research National Rural Research +61 401 610 766

Dominic Aungles Analyst ACT Research +61 428 403 009

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Colliers International does not give any warranty in relation to the accuracy of the information contained in this report. If you intend to rely upon the information contained herein, you must take note that the information, figures and projections have been provided by various sources and have not been verified by us. We have no belief one way or the other in relation to the accuracy of such information, figures and projections. Colliers International will not be liable for any loss or damage resulting from any statement, figure, calculation or any other information that you rely upon that is contained in the material. © Colliers International 2016.

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