The provision of aged care is probably Australia’s surest bet as a growth industry. Ageing Australia will demand a full range of top-quality care , incorporating home care packages and then an ‘aging in place’ spectrum from retirement village units to ‘high care’ facilities, ideally in the same location. But how can these expectations be made more affordable, not to mention sustainable in an economic context? Super funds, already big players in the retirement incomes game, clearly have an opportunity to help their members in a new and exciting way. Last month, Conexus partnered with Mariner Financial to discuss the issue with a group of stakeholders – from the Federal Ministry for Ageing, aged care providers, institutional investors, consultants and, in Mariner, a would-be partner to super funds in making aged infrastructure more accessible as an investment for them, and as a service to their loyal members.
Participants at the roundtable were:
• Walter Secord, chief of staff, Minister for Ageing
• Deidre Ashe, finance manager, Salvation Army Aged Care Plus
• Matina Papathanasiou, partner, QIC global infrastructure team
• Sam Silicia, chief investment officer, HostPlus
• Guy McAliece, director, KPMG
• Michael Rice, principal, Rice Warner Actuaries
• Scott Marinchek, executive partner, Mariner Third Age Living
• Kate Anderson, superannuation and retirement strategist, Mariner Financial
• Amanda White, Conexus
• Michael Bailey, editor, Investment & Technology
Amanda White: Kate, can you start by giving us a demographic perspective?
Kate Anderson: To begin with we know that 56 per cent of Australians are over 60. And if you’re 50 already, men can expect to live until they’re 94 and women until 96.
However the average super balance for those people that are retiring now, say between 50 and 69, is only about $93,000. We know that 60 per cent of Australians believe they need at least $50,000 to live in a comfortable retirement. So obviously there is quite a large gap in someone retiring just with their superannuation beside their home and their other assets, and getting the type of lifestyle that they want in retirement.
So this round table discussion is looking at how super funds and also investment managers can participate now in the aged care sector. And the quote that Scott always uses is that it’s not a problem but an opportunity for all of us.
Walter Secord: Australians now have the world’s fourth longest life expectancy, and we now have a new phenomena in Australia which is called the ‘super old’ . At the moment we have 3000 people in Australia over the age of 100, and by 2055 we’re going to have 78,000 people over the age of 100.
That is the equivalent of the city of Port Macquarie now. But at the moment, aged care, which is residential care and home and community care like Meals on Wheels and that kind of stuff, comprises 3 per cent of the entire Federal budget. If it continues, by 2050 it will comprise 9 per cent of our entire budget.
Contrast that with the United States, where some states already have aged care as their number one expenditure. It is now the single largest state expenditure in Connecticut, for example. So over the next four years, the Rudd Government will inject $40 billion into aged care. And 28.6% of that will be into aged care facilities. At the moment in Australia there’s 2870 nursing homes, providing 170,000 beds.
In the last month or so we’ve done research on the attitudes of people who are in their 60s and 70s about where they want to go. The average age of a person in aged care is 82 years of age. And most people go into aged care when they’ve had a significant incident in their life such as a spouse or carer die, or an injury. And they usually go into low care, and then they go into high care, and then unfortunately they die. But most people want to stay in their homes and live independent lives. And that’s where our government direction is going.
Amanda White: Deirdre are you seeing an increase in expectations from those entering your facilities?
Deirdre Ashe: Absolutely. And not only expectations of the resident going in but the resident’s family as well. They’re looking for a good quality of life for their parent, to make sure they’re very comfortable. So single bed, en suite, perhaps even a small sitting area in residential aged care. And at least two to three bedrooms in independent living units, if they’re going to forsake their family home.
Walter Secord: You go to some of the Baptist centres and they’ll have a room with a wall that will move away. So a husband and wife can live together. He may have dementia or Alzheimer’s and she’ll need time away from him, but she wants to be with him. So there’s been all these designs.
Deirdre Ashe: I think the new design for residential aged care also is moving away form the large auditorium sitting room where everybody had to come together. And it recognises that, you know, people don’t like to congregate in large groups.
But they like small lounge areas that feel like home, where you have a lounge and a couple of wing chairs and a TV. And that’s the way that we’re developing our aged care as well. So that there’s more recognition of people’s individual needs rather than just a collective group of people that have been put somewhere to finish off their days.
Michael Bailey: Walter, tell us about the providers and investors in aged care as they stand today.
Walter Secord: Of the 2087 aged care nursing homes in Australia, 63 per cent are single operators, where classically it’s the 1970s, a doctor marries a nurse and they decide to buy an aged care facility. The largest providers are usually mission based, such as Salvation Army, Uniting Church, the Baptists, the Anglicans with Blue Care in Queensland, the Catholics, all providing world class services.
And then you have the larger corporate-based providers. You have BUPA which is a British provider. They’re moving in and they’re buying up. A number of years ago you had Macquarie Bank move in. Westpac is moving in. AMP is there. Babcock and Brown Communities.
From our experience the larger investors are actually quite good because compared to the single operators, the larger providers have their overall reputation and their investors to worry about. Their investors do not want to be associated with someone who’s running a bad aged care facility. So when we have compliance issues, they are quicker to respond than the single operators because they do it large scale.
They’re able to bring in clinical staff. Now aged care in Australia is not homogeneous. You have pressure points. In Western Australia providers are having a particularly hard time getting staff, so it’s bringing in nurses from Africa and the Philippines. Last Friday, we set up a program of $300 million in zero interest loans for people wanting to set up aged care facilities, proven providers in areas of high need, and we designated the areas in Australia where there’s an aging population but there isn’t an aged care facility there.
And on March 20th this year we introduced a new instrument to give providers more funding if they’re dealing with dementia, Alzheimer’s, and what are called challenging behaviours – because with an aging population, people with psychiatric disorders also age.
Scott Marinchek: That was an impressive set of statistics and government initiatives. That certainly will be fuel for thought for us in the commercial sector as we look towards allocating our resources and looking at development and joint venture opportunities over the next few years.
Mariner has a term we use which is third-age living – this third age of life is the time that many of us are waiting for. We’ve earned it. Our kids are grown up. And hopefully we have a bit more time to do the things we want to do. At the same time the reality is we’re afraid of not being able to have our preferred choices in quality of life, accommodation and care.
Our wealth is generally not invested in assets that will provide these choices either because we avoid thinking about getting older. We’re not informed about what investments are available, or perhaps these investments or the planning that’s necessary to make these investments wisely doesn’t exist to us.
So one of the questions that I came to today’s discussion with is, what are the social and commercial opportunities that arise from building the nation that we can retire, care for ourselves, and be cared for in?
We have a whole industry of property development partners that are continually contacting us, saying we want funding to build retirement villages with or without access to community care. Nursing homes. Low care hostels and a variety of other things. We have consumers speaking to us. Individuals speaking to Kate and our financial planning network saying, ‘Where do we put our money?’
We are worried that we won’t have enough of a nest egg and we’re not quite sure how to invest in retirement. What can we buy?’ We have commercial operators and to some extent not-for-profit operators contacting us saying, ‘How do we get around funding? We’re building something which depending on the model that we pursue has a payout when people leave our facilities. Or depending on the model we pursue, has incentives from the government in terms of deposit bonds or other things that we can access. How can you help us grow our business in scale when for example with nursing homes we have constraints on licences and aggregating portfolios of properties?’
And in retirement villages as they stand right now in Australia, we have a large percentage of the commercial retirement villages, and a reasonable percentage of the not-for-profit retirement villages focused on deferred management fees, whereby the operators and their investors generate a profit when people have to leave. Either they choose to leave; they need care so they have to go; or otherwise.
But if they do go, and they move into a facility which might be the sort of residential care that is not part of ‘aging in place’, what happens when they’re rehabilitated – if they are? If we’re really living to our late 90s, is it possible that you might need care for a short period prior to that?
At the moment, we’re forced to make the decision to sell our houses to access it and not be able to go back. So there’s a lot of interesting opportunities for us as a commercial market participant and working with our institution and retail investors to channel capital towards this space.
Amanda White: With that we might flip to Sam or Matina, the insto investors we have with us. Is aged care infrastructure a compelling asset class to you today?
Matina Papathanasiou: Generally our brief from our clients is that they want long term, stable cash flows. And on the face of it you would say that aged care can provide them. The way we’ve tried to approach it is to say what is the risk of an aged care facility? If we invest in an aged care facility where do we get our return from? There doesn’t seem to be a lack of demand.
But then the issue is how do you actually charge someone for providing that service, and how stable is that cash flow stream? I’m not sure how you actually charge.
Deirdre Ashe: There’s two actual assessments. There’s an asset based assessment if they’re coming into residential aged care. We’re required to leave them with two and a half times the single pension rate. And technically we can also charge an accommodation bond up to the value of their assets over the top of that. Out of that at the moment we keep approximately $18,000 which can be deducted over a five year period. And the only earnings that we have is interest on where we invest the bond money. So for the Salvation Army, we’ve been typically concentrating on low socio-economic areas, but with the change in government policy and the need to collect higher accommodation bonds, we’ve probably seen our accommodation bonds quadruple in the last five years, and we’re looking for a greater increase as well.
So that gives us then the money to actually fund high care, because what we charge is prescribed by the Department of Health and Aging. And the only avenue we have of increasing fees, is if we provide a service called Extra Service Placements, and that’s associated with high care. So there isn’t a great deal of avenues to actually increase your funding. A lot of aged care facilities now are looking at co-locating independent living units, so that the income from that can actually cross-subsidise the nursing care side of things.
Walter Secord: The average life of an aged care facility is 30 years and then you have to replace the stock, meaning rebuild for revenue.
Sam Sicilia: We’re thinking about how to fund aged care or how individuals will fund it. There is a class of products called longevity bonds which are not readily available today. Basically when you reach retirement age, you don’t know how long you’re going to live. But you should be able to in the future buy an annuity and an insurer would be well placed to group the risks together, and continue to pay you if you live beyond your expected date of death.
I think those products will become available and will be ultimately directed towards meeting your needs in retirement, including retirement living. Could I just say that it is possible to make money from social infrastructure. In fact my fund Hostplus is the largest operator of campus living in the world, 48,000 beds across Australia, UK, US and New Zealand.
That’s a lot. The concept of vacancy just isn’t there, and that’s the same characteristic that aged care facilities will have. They will be 100 per cent occupied and they will be supported by longevity bonds in order to pay for them. So you can make money on this. Build a site on land that could be provided to us by the government or as a university does, provides land to you.
You build the facility at cost. You operate it for 30 or 40 years and you hand the asset back at that stage because it’s basically worthless. You might renew it along the way but the money is made along the way. These are not astronomical rates of return. But at the same time if there are second and third order benefits to our members that have some nexus to investment returns, then we will entertain that. I’m more than happy to go in with other superannuation funds because our time horizon is similar. And I’m also more than happy to co-invest alongside the operator of the facility because their alignment of interest has to be the same as ours otherwise it doesn’t work.
And government’s alignment of interest, if they wish to co-invest through some way of providing that service. So whoever the investment parties are, the critical factor is, one of them should be the operator, otherwise don’t do it. And the second is that the term horizons for the individual investors ought to be similar.
We already have retirement village investment. We have $100 million in a retirement village group that has an alignment of interest with its operator. That only started in January this year so we haven’t got much off the ground there. Whereas the campus living is about $150 million and it was invested about 18 months ago.
Amanda White: Michael Rice, where do you think product development in this area is moving?
Michael: We’re an unusual country because we don’t have compulsory retirement benefits. And in fact it’s even more flexible with the Better Super changes, they can almost spend their money straight away when they’re 60 if they want to.
The difficulty that the average retiree has is that they don’t know how long they’re going to live. They don’t know how healthy they will be and for how long. They’ve got this sense that they may as a cohort live longer, but individuals don’t know that.
I think one of the difficulties at the moment is making people pay for things in an uncertain world. Trying to tell them to pay $100,000 for somewhere when they don’t know how long they’re going to live, is a big cost for individuals. The other problem is the way means testing on the aged pension works. Because the family home’s quarantined, people don’t want to leave it and downsize because that frees up capital which then comes into the asset test. So you get behaviour distorted by the rules.
And it would be nice if we could pool things. If you think of the way an industry fund works with pooled investments – you have huge masses of capital and people having their money looked after soundly because they don’t have to make a decision. But when they retire they’re left to make their own decision about very complex issues. Now I don’t think annuitisation will come back quickly because life companies don’t want to sell annuities.
In fact all of them that have them are selling them to Challenger at the moment. And I think AMP and Challenger are the only two still offering lifetime annuities. And it’s because the rules of investment are such that the life company almost has to invest in fixed interest investments to back those products which makes them unattractive as a long term investment.
Walter Secord: Aged care is not something that most people think about at all. Most people who move into an aged care facility make that decision between a five to seven day period. You have a major crisis in your life. Your partner dies or you fall and you break your hip or you suddenly become ill. Then you make a decision to move into aged care.
Matina Papathanasiou: What are they asked to commit to when they make that decision?
Deirdre Ashe: A person would be asked to sign a residential care agreement, and that’s probably for their benefit more so than ours. They do an asset assessment, and if they’re a non-pensioner we can do it. If they’re a pensioner then Centrelink does the asset test for them.
There will be an accommodation bond associated with moving into low care. And then they’re given the choice of whether they want to commit to paying that bond. That bond is as I said, refundable, less $18,500, over a five year period. So if they only stayed three months then you would only have three months of that $18,000 drawn down, and we’ve earned interest for the three months that we hold the bond.
Then there’s a daily fee that they commit to which is based on 75 per cent of the pension and then the Department contributes the majority of the funding, assessed on the actual care need of the resident. The funding is paid like that.
So if you’re going in with a broken hip – you go in with a trauma and then with the care that’s provided you actually might be quite well after that. Then they’re faced with a decision, do they stay? Because this has become their home. It’s hard for the provider as well because they’re now healthy and attract less funding from the government, so they’re only contributing a small daily stipend to their care, and taking up a bed that we could actually earn more money on.
But obviously most people stay because they’ve made the commitment to sell the family home, to come into aged care. They really don’t have anywhere to go back to.
Guy McAliece: A lot of people move into retirement villages with possibly the misunderstanding that might give them some entrée to the operator’s home care facility.
Deirdre Ashe: However, the independent living units that we’re building at the moment, which are retirement villages, they have wide access for wheelchairs. Quite often they would have a rail running through the ceiling that would allow lifters to operate. So effectively low care or high care could be actually delivered in the person’s home. And the government provides community care packages and each package suits both low care and high care. So there is a future there.
Guy McAliece: I suspect that’s the transition the industry is moving towards. We’re looking at a number of operators who are moving from just retirement villages to having both packages. Deirdre Ashe: We just recently built a beautiful five star accommodation at Bass Hill, a low socioeconomic area. And on that site there was independent living units and a low care facility. At the opening of our high care facility, one of the resident representatives said how much the residents appreciated the fact that the rest of their life was secure in this community that they knew. Couples no longer had to be separated – one person could stay in the independent living area and another person could be in either the low or high care.
Michael Bailey: How can the model be improved from both an investors’ and a residents’ perspective?
Guy McAliece: We’d like to see the work test removed between the ages of 65 and 70 for contributions to super. So if the person’s in the situation where they’re selling the home, having a little bit of excess equity which sometimes occurs and they need to draw down a pension from the super fund as well as purchasing a place in a retirement village, they’ve got that opportunity.
Scott Marinchek: For most operators there’s only a cash purchase available as an option. An incoming couple will have to sell their home to put cash into buying what is essentially a loan/lease agreement. And after a certain period of time, the operator’s entitled to, on turnover, a proportion say around 40 per cent of that. To that extent the operator does not want community care delivered, because they do not want to extend the stay of their residents.
If they had on-site residential care available, it’s almost always the case that one of a couple would enter it first, and that creates a serious cash flow issue for the operator. In addition to that, because of the traditional way these particular commercial operations structure home ownership, that is a loan/lease agreement, banks do not lend money. Therefore individuals cannot borrow nor can they get a home reverse mortgage funding product available to tap into the equity in their independent living units. And from our perspective that creates some serious challenges.
Sam Sicilia: At some point in the future you’ll have people that are going through the superannuation system and their entire life has been in the fund. And all we’re advocating is that sooner or later it will be closer to cradle to grave than what it is at the moment. At the moment it’s kind of like 80 per cent cradle to grave. If you expect to live 30 or 40 years beyond retirement, why wouldn’t you want to be invested in the same way as you were 30 years earlier.
Guy McAliece: The important thing is to harness t“he growing asset pool of the super funds to build the streamlining at retirement villages, so the member/investor can go from retirement right through to aged care. If that was made easier then the operators could offer something which would be a viable investment stream. The super trustee has got a better chance of getting compliance from the operator than the individual who’s just trying to purchase a particular unit. So putting the two industries together works quite well.
Amanda White: Are the risks and opportunities in aged care investment being communicated well enough?
Scott Marinchek: With aged care it’s a bit tricky right now in Australia. We have yet to crack that nut. We are continuing to look for opportunities which on a recurring basis provide stable and predictable cash flows for investors, and therefore attract capital from other opportunities such as lower care hostels – which experts say will disappear as a segment as more care comes towards retirement villages or gets pushed up towards ‘aging in place’ opportunities in terms of residential care.
Yet currently in retirement villages we still have a fragmented industry with a few key larger players. And they have a business model which is based on turning people over to get a cash flow in the future. It’s some hybrid between rent and ownership. The United States retirement village market has a much higher preponderance of rental models than we do.
Australia has some amount of strata ownership. A certain high percentage of loan/lease. And a very very small percentage of actual true rental. And operators tell us, we can’t make money running the villages unless we get a big bite of the cherry when people leave.
Well we wonder whether that’s true or not. And so to that extent we look to find the right partners to help us provide opportunities for investors that they can understand, where the risks are explainable. For example we’re doing a transaction right now, a joint venture in Europe, where we are purchasing nursing home properties from a variety of different operators to give them the cash flow they need. They’re paying us a rent. We have no operating exposure. Our investors like that. It’s very clean. There’s a very solid regulatory environment.
Amanda White: So you’re splitting the property elements and the operating elements of the investment?
Scott Marinchek: Those investors who like long term stable cash flows have opportunities to get that. Those investors who are very comfortable with operating risk have that. Those investors who like development risk and want to take pieces of land and turn them into things can take those opportunities as well.
You could see a situation where you could build a facility and have an embedded supermarket on the ground floor of that facility, thereby giving you rental stream and a captive market for the supermarket. There’s a project in French’s Forest, which has only thus far had preliminary discussion, where the very substantial kitchen of the retirement village could be used for Meals-on-Wheels and a variety other community services on a commercial basis.
Very interesting from our perspective to see hybrids of different models come in where commercial operators and investors can have certain types of exposure that they’re comfortable with, and not have other exposures.
Matina Papathanasiou: Going back to Sam’s model. I would have thought a rental approach rather than having to hand over your assets would be a better model and you’re more aligned with your customer base. Instead of handing over your home to the operator, you invest it in Hostplus, and they take the rental out of your pension, effectively.
And that way the person who’s selling their home – say they only lived for a year afterward, if there is anything left it can be distributed as they wished. They’ve paid for the service they’ve received during that year. Now the question is, if basically all the money gets used – they’re still alive after 20 years and at the end there’s no money left in the Hostplus allocated pension for them, does the government step in with a subsidy to bridge the gap at the end?
Sam Sicilia: This is why that concept of a longevity bond basically says, ‘I don’t know how long I’m going to live so if I give you $100,000 will you give me $20,000 a year for the rest of my life?’ Now if you think I’m only going to live four years, but I live 20, then you’re out of pocket.
But the group risk is spread and you should be able to make it viable. The model I was advocating never requires anyone to sell their home. If they’ve been in the super fund for their entire life they ought to have a nest egg at the end that can pay the rental stream in a retirement village
Michael Rice: With a 9 per cent contribution, even over a full working career, people will only have enough for retirement income. If you look at the Intergenerational report of Treasury, the number of people who will be self-sufficient in retirement in 40 years time will only grow from I think about 16 per cent to 20 per cent of the population.
So even to get retirement incomes up to a comfortable standard, you’re going to need to go to 12 or 15 per cent compulsory SG. If you then superimpose guaranteed aged care, that will be another couple of per cent. So it’s going to be a gradual change. And it’s one the community has to accept.