How did residential aged care go from hot to not as an investment option?

A decade ago investors were jumping at the chance to dive into residential aged care as figures of the ageing population and the services they would require were bandied about.

The Government’s ‘Living Longer, Living Better’ reforms which began in 2013 were seen as acknowledgement that the industry needed the policy focus and funding to support the growing demographic of older Australians, and this showed incredible promise for investors.

But in 2023, residential aged care is no longer being seen as a hot market to invest in, even though the want to invest in the ageing population is still high.

So what happened? Where did residential aged care go wrong in the eyes of investors and what does the sector have to change to win back their attention?

The alternatives

Residential aged care investment needs context to be able to assess exactly why it has gone from a hot market to much lower on the preference list.

According to Mark Draper, financial adviser with GEM Capital Financial Advice, aged care simply isn’t the top way of investing.

“I think the demographic is correct in terms of, if you were to pick some megatrends to invest into, the ageing of the population is one of them,” he said.

“But then you have to ask yourself as an investor, what’s the best way I can play?

“Should I invest in aged care facility providers which have massive capital costs, huge risk of Government policy changes and huge labour costs, which are only growing by the way, or do I play that demographic through a different method such as owning a health care provider of medicine and health services?”

It’s important to understand aged care is not the only industry experiencing growth due to the population.

Looking outside the population trends, Mr Draper said, offers even more investment options with astounding growth and more tolerable risks, such as industries working on “greening the planet” and the “electrification of industry”, or even cloud computing.

What has gone wrong?

For Mr Draper, it’s the industry wide change in aged care over the past few years that has made it such an unattractive investment option.

The biggest deterrents have been: 

• Changes due to the Royal Commission into Aged Care Quality and Safety which increase costs
• The reforms of the previous Liberal Government which focus on people staying at home for longer rather than moving into a residential facility
• The new Labor Government’s reforms which look as if they will be costly, such as 24/7 nursing and increased care minutes
• The Fair Work Commission’s approved pay rise for aged care workers

“You wouldn’t classify aged care as a hot sector despite the demographic,” Mr Draper said.

“I think the reason largely for that is, you know, the Government following the Royal Commission has basically mandated an extraordinary increase in costs, that will have to be borne by somebody – it will either be borne by the shareholders or will be borne by the residents at the end of the day.

“The other reason why I don’t think it’s attractive to invest into, is apart from the uncertainty of Government policy, the other big important cost is labour and there is no doubt the cost of labour is rising, particularly in that area, and they probably have been underpaid but that doesn’t help from an investment perspective.”

And while the Government has now shifted the focus of Australia’s pandemic response to one in which the country is moving out of the pandemic with virtually no restrictions, aged care continues to feel the effects of the spread of the virus throughout the community.

This means further ongoing costs in consumables used to limit the spread of COVID-19, such as Rapid Antigen Tests (RATs) and Personal Protective Equipment (PPE).

The impact of these additional costs is another negative for investors, who want their investments to deliver the best returns possible.

Cam Ansell, Managing Director of aged care consultancy firm Ansell Strategic, has labelled this period of change and increased costs as the ‘third wave of consolidation’ in a report on the state of the sector from an investment perspective.

“Whilst the second wave was driven by investor confidence, this wave will be carried by a will to survive as the Federal Government ramps up its compliance regime and austerity funding arrangements,” Mr Ansell explained.

“The combined pressure of COVID-19 and the Royal Commission has seen an exodus of leaders and clinicians, spreading management talent thinly across an expanding sector.  

“This is a dangerous place for small operators and many large providers are positioning to scale up and bunker down against more stormy weather.”

With all these challenges facing the industry, Mr Ansell encouraged investors to, “get big, get tough or get out”.

Fellow Ansell Strategic Director Amber Cartwright added that while workforce shortages, COVID-19, tightening regulation and new funding instruments have impacted the bottom line for many providers, investors have “observed this cyclical trend in the past”

“We expect that these trends will improve in the coming years as the market stabilises,” she said.

How can you make your organisation more attractive to investors?

There are some factors which aged care can use as a basis for attracting investors and then build on as the sector learns to manage the broader issues.

Ms Cartwright believes the changing behaviour of the ageing population is an attraction for investors.

“The next generation, who are already beginning to receive some aged care services, have very different wealth and health needs and expectations. We need new services and infrastructure to meet future demand as well major reinvestment in our existing services and infrastructure to ensure they are fit-for-purpose and high quality,” Ms Cartwright said.

“The industry is currently highly fragmented, with most providers operating a single site. There is a major opportunity to drive consolidation and create synergies and savings through scale.”

As this kind of investment attraction is taking time to develop, Ms Cartwright said the industry at the moment is most attractive to long term investors that can wait for returns, and impact investors looking for a socially responsible way to invest.

According to consulting company Queensland Investment Consulting Group (QICG), there are some ongoing attractions that aged care already offers investors, including: 

• Leasing conditions for long term tenants
• Exemption from paying land tax
• Strong and stable Government support for the sector

These three positives are unlikely to change any time soon, making them a strong foundation. 

Maintaining and managing operation costs

However, QICG agrees that even with these three factors, the investment only offers stability if aged care facilities can “maintain adequate occupancy rates and keep operation costs in check”. 

Mr Draper brings it back to the founding principles of investing, which he said aged care providers need to understand in order to understand where investors are coming from.

“If you’re retired, you want companies that are profitable, so they can pay a dividend payment and if you’re a younger person in a superfund, you want a profitable company, so that the share price goes up in addition to paying dividends,” he said.

“So everything comes back to company profitability when investing, you know, invest in something that’s profitable, then you’ve got a reasonable chance of making money.”

Clearly, managing operation costs is the key to putting the industry back into a position where investors will consider it more favourably.