Getting Developers and Operators In-Phase with One Another

           I would imagine that one of the highlights for many who attended last week’s Ageing Asia Investment Forum in Singapore was the presentation by Mabel Chau of Athena.  Amidst all of the excitement over the potential profits to be made as China’s senior care market explodes, it is essential to listen to voices of experience like that of Ms. Chau, whose presentation implicitly asked the question of whether real estate developers and operators were in-phase with one another?  She began her presentation with a provocative statement:  “no one right now has a correct model of what works in China – it is more accurate to say people know what doesn’t work.”

Within China, real estate developers are, as she put it, “… eager to release the value of the land they have been holding whether or not they have experience [in the senior care market].”  Ms. Chau went on to state “too few talk about their operational model – no one really has experience running an aged care facility in China, which means they don’t know if they can really find the right people or whether they really have the right model.”  Much of this is consistent with a market early into its high growth and rapid expansion phase; however, voices of experience like Ms. Chau also recognize that if the market expands too aggressively with too little in the way of support infrastructure, the concept of senior care could be damaged within China in ways that no amount of high-end luxury CCRC developments will be able to resolve.

Thus far, western developers and operators in China have elected to pursue the high-end, five-star luxury market.  There are multiple reasons for this, not least of which is the role of the Chinese government as a payer is irrelevant.  Candidates for this sort of high-end luxury CCRC likely fall into two categories:  the first are wealthy elderly people and the second are wealthy children who wish to honor their parents by putting them into a high-end development.  Ms. Chau believes focusing purely on the high end of the market might overlook the extent to which elderly Chinese do not want to be a financial burden to their children.  In addition, she shared “older people of today do not want or aspire to the luxury lifestyle.  Their comfort zone is within their old community.”  During a subsequent interview with me, she shared that “the big players are focused on the high end because otherwise, the numbers don’t work; however, while the high end segment of the market does have money, the questions are whether you can find them and whether they are really willing to pay the premium … after all, these are people who have lived very humble lives and many will wonder why they should change this as they grow older.”  She went on to remind those in the audience that “families in China are used to being separated.”  I have written previously about the idea of “fatal flaws” within the CCRC model in China, and it is worth reflecting on whether Ms. Chau’s comments further reinforce the need for western operators to think seriously about penetrating the middle segment of the market earlier than they may have originally planned.

The balance of her presentation asked eight questions she believes successful CCRC developers and operators in China will need to ask and answer.  First, whom are you serving?  Do you really understand the expectations of your target market?  Second, how are you planning to handle ageing in place?  If your development starts out with active seniors, where do they end up within your CCRC?  Does your development fully support active ageing?  Third, does your development take into account environmental factors?  The example she presented was whether an outdoor balcony was included.  In Xian this might not be necessary, but in Foshan it would be considered mandatory.  Fourth, what sort of food services will you include?  She mentioned one development that had invested over $1m in a canteen, only to see it sit un-used.  Or, in another more humorous example, the CCRC in Taiwan that had a communal kitchen (sounds like a good idea, right?); the only problem was the old people ended up fighting in the common area over who had the rights to use the common equipment and cooking area!  Fifth, the role of the clubhouse in your development.  Ms. Chau pointed out that as just one example, CCRCs in Northern China needed to consider whether they could support the cost of filling a swimming pool over the long term.  For those familiar with China’s major water issues, this is nothing to gloss over.  Sixth, does the development convey a sense of community to the residents?  Are they in a similar economic situation?  Is their convenient access to shopping, banks, etc.?  Seventh, is the community actively engaged with the residents, or eager to see the CCRC as part of its overall development?  And eighth, is their proximity (but not “nearness”) to a hospital?  Just like in the west, easy hospital access is important, but making it too close can send a bad message to the residents.

During our one-on-one interview, Ms. Chau made another point that I think is worth focusing on as investors:  as she put it, the 5-star luxury hotel market in China has had 30 years to get where it is at now.  The 5-star luxury CCRC model is still highly immature, and the easiest place to see this is in the paucity of staff available to serve the senior care market.  She also made the point that as developers and operators build up their local staff they will need to deal with the problem of employee retention.  As she put it, once they are trained it will be very difficult to keep them, especially if they have been trained in the United States or Australia.  This phenomenon is one many western operators of other branded products or services have had to deal with and will likely result in early-stage wage inflation that needs to be incorporated in financial models.

None of these comments should dissuade investors and operators who want to get into the Chinese senior care market; rather, they should inform and guide the patience and humility of the plans you make.  As Ms. Chau put it to me, “the critical mass is in finding a solution for the middle segment of the market.”  She was also quick to point out “over 90% aspire to stay in-home – that in many ways is the aspirational brand for senior care in China.”  With this in mind, it should not be a surprise if the Chinese government comes to incentivize community-based care centers and in-home care versus residential solutions.