What To Watch for During 2012 in China’s Eldercare Market

As 2012 gets off to a start, eldercare operators with an interest in accessing the China market are paying close attention to what many believe are a handful of key issues that will define how the market evolves in the coming years.  Each of the individual questions that remain to be answered are subordinate to the biggest top-level question:  can a successful model, even if only on a pilot basis, be proven to exist this year?  2012 is likely to be, as shared with me, the “Year of the Pilot Project.”

While putting together this post, I spoke with a wide range of industry experts, each of which agreed with Daniel’s comment.  Most also agreed that the project of most interest is the Shanghai-based Cascade/Emeritus facility.  As Daniel shared, “this is a project that is manageable in size … while not large in scale, it provides the opportunity to get the model right.”  , formerly a partner at DLA Piper in their Hong Kong office who specializes in senior housing now as a Fellow at the Harvard Kennedy School of Government, noted that the Emeritus project is also important because it is the first example of a foreign operator getting licensed to provide healthcare in China for seniors.  It was suggested by several people knowledgeable about Emeritus’ plans that private equity investors on Wall Street are paying particular attention to the Emeritus transaction as evidence of whether the Chinese eldercare market is ready for further investment.

Beyond the Emeritus project, those I spoke with pointed towards four other operators whose build-outs and business models they are watching closely:  General’s Garden, Sun City, Singapore-based ECON, and Cherish Yearn (although the latter for reasons that may not all be positive).  Other operators like China Senior Care, CRSA, Right at Home, Home Instead are certainly also being closely monitored.  Given the reality that several like Right at Home and Home Instead offer different models of senior care (in-home versus residential or facility-based), some of this is likely the result of industry watchers eager to see the developer-centric model prove to be viable in China as it has in developed countries.  With this in mind, , Managing Partner with Hampton Hoerter shared that he believes 2012 will need to address “the appearance of a geriatric care operator whose business model is fee for service exclusively. At present, the business today in China is fueled by a real estate model and this reflects the lack of understanding how the operator business works.”

To Daniel’s earlier point, cumulatively, these projects will test both the big-picture issues (is the market ready, do operators know how to sell into the Chinese market, what will the Chinese pay) as well as smaller, but no less important issues (should food services be run in-house or outsourced, what services are most valued).  However, no issue loomed larger in my conversations than the role of finding, training and retaining quality staff.  , Senior Director of Operations at CRSA China Management, acknowledged that “it is going to take time for that pipeline [of qualified talent] to build.”  Their way of dealing with this issue is likely going to include what Jason characterized as “building classrooms as part of the retirement community’s campus.”  Count me in the camp of people who think that the first to prove scalability of their services and those that will be the most financially lucrative senior care businesses in China are going to be those that have personnel development either as a key part of their in-house business model, or who choose to make training and certification their actual for-profit business.

, a Shanghai-based lawyer with Co-effort Law Firm, publishes the China Senior Housing & Care Newsletter.  Beyond concerns over how all of the new operators (both domestic and foreign) rushing to build facilities and hire personnel for their new businesses, Michael believes the industry also needs to be careful that it does not overheat in 2012 in general.  As Michael put it, there needs to be “self-discipline for the whole market.”  He went on to share that it is a concern that, “too many service providers and senior housing developers will emerge but without sufficient capabilities, [they could] bring growing pain[s] for the industry.”  Almost everyone I spoke with admitted that senior care has little market recognition in China and that the little it did have was not necessarily positive.

The Chinese senior care market has other important “known unknowns” that 2012 is likely to shed additional light on.  These include four that most industry insiders agree are the most important:  government regulations on senior care operators, government incentives to real estate developers to build senior care facilities, government incentives in the form of additional insurance payments or other compensation mechanisms to pay for eldercare services, and how China’s fast changing property market – specifically concerns over a property bubble – will impact Chinese developers appetites for senior care developments over other build-outs which have traditionally been more lucrative.

For certain operators, in particular those whose model is focused on the very high-end of the market, the role of the government is not as critical to define (it would be helpful on the real estate side of the equation, but not necessary on the operational questions they face).  In many ways, for the high-end operators the additional involvement of the Chinese government could prove to be an un-necessary burden in many of the same ways the Hong Kong Housing Council found its local government’s involvement to be (see more about the HKHC’s model here).  However, the role of the government is absolutely critical for in-home care to reach the bulk of the population in need of senior care and for those mid-market senior care residential operators who believe they can built models that are accessible to China’s new middle class.

, General Manager of Beijing-based General’s Garden, shared that “a strong message [from the China Social Welfare Centre] was that in-home care is the preferred aged care model, not only from the service recipient perspective (client), but also from the financial perspective of the public purse.”  Michael’s additional comments reinforced those made by , VP of Right at Home, that the linkage between government hospitals, families who must make decisions about the sort of eldercare they can afford and are willing to spend money on, and the recipients of the care themselves remains a connection that must get stronger in 2012.

One question that I was particularly interested in exploring was how the Chinese real estate market’s bubble, particularly acute in the Tier 1 cities where most of the residential developments are slated to occur, might impact the industry.  Joe Christian, who is a leading expert on the real estate portion of the eldercare market in China brought up the point that should a bubble pop, what might present as opportunities would be to find distressed developments or, as Emeritus has done, underutilized properties like hotels, and reconfigure them as senior care facilities.

Michael Qu believes that a deflating property market might have a “positive impact.”  His reasons were shared by others who believe that in the aftermath of a property bubble, as Daniel Leaf put it “developers  & investors may look to diversify their portfolios … a residential/hotel developer who has done well in the past may start to look at alternatives like seniors housing.”  Jason Cronk had similar thoughts.  He mentioned that feedback they have received suggests that while people are certainly watching and talking about this issue, but that “even if prices fall, we are still in a position to move forward.”  Problems in the period after a property bubble cannot be entirely overlooked:  as Michael put it to me, “nobody wants to buy in during a downturn.”

Much of the confidence I heard while talking with this group of industry insiders and others reflects the huge market opportunity in China and the compelling need it reflects.  However, it is important to keep front of mind that China’s senior care market is not an inevitable market opportunity.  Yes, it is a compelling market opportunity, but only focusing on the magnitude of the need and the potential it suggests is to fall into one of the classic China traps that other industries newly focused on the domestic Chinese market have fallen into.  Those who prove successful are going to be ruthless in their execution and patient in their time horizon.  Consequently, the pilot projects of 2012 are critical to laying a foundation for both their own business as well as those who are a few steps behind.  The pioneers will prove whether a scalable model can be built and implemented by foreign operators, what the trajectory is for the role of the Chinese government as payer, and how operators can find, train and retain skilled senior care-givers.