I chaired Day One of the two-day Retirement Communities World Asia 2012 conference, organized by Terrapinn, in Hong Kong on October 17 – 18. What follows is a summary of the major take-aways from the first day of the conference. My friend and colleague, , will sum up the second day of the conference, which he chaired.
As the name implies, the conference was pan-Asia in coverage, with presentations and panels on China (including Hong Kong), India, Japan, Thailand and the Philippines. The workshops on the day before the conference also addressed general issues such as the development of affordable senior housing and service strategies, and the challenges of planning and designing senior living communities in Asia. However, much of the focus of the conference was on China.
In my opening remarks, I described what I saw as the major themes of the Retirement Communities World Asia 2011 conference, in which I also participated, leading a master class and moderating a panel. A year ago, the discussion of senior housing in China centered around the need to import senior housing expertise, primarily from the U.S.; the uncertain regulatory environment; the strong preference of foreign operators to start at the high end of the market; and the shortage of skilled healthcare workers.
So, has anything changed over the past year? I think a major step forward in the industry has been the growing realization among domestic participants that senior housing is not a real estate play. A few projects built or under development without an experienced operator in place have faltered, and domestic players have come to realize the necessity of having an experienced operator involved from the beginning in the planning and operation of senior housing projects. Also, not surprisingly, the foreign operators who are active in the sector have been devoting substantial time, effort and money to building their operating organizations before they put a shovel in the ground.
The regulatory environment is still in flux, but the central government and local governments are acutely aware of the need to rationalize the regulations for the industry and which ministries and bureaus are in charge of what. Also, various kinds of programs to spur the growth of the industry – such as designating land for senior housing, thus eliminating competition with residential and commercial developers for land use rights, preferential pricing of land use rights, preferential tax and utilities rates, pilot projects and so forth – are being considered within the central and local governments. My prediction is that we will soon see pilot projects in the first-tier cities, most likely Beijing and Shanghai, where the need for senior housing is acute. Much in China, particularly in the real estate industry, is done by cities’ moving forward with pilot projects and then formulating regulatory schemes based on what worked and what didn’t.
Foreign operators are still focusing on the high end of the market, but it is clear that the greatest demand for senior housing will be in the middle-income market. It is likely, though, that the mid-market will not be viable as an investment opportunity until the government develops a pension program that will enable the middle-income elderly to afford the housing. Long-term care insurance, reverse mortgages and similar programs that are being considered will also aid the development of affordable senior housing.
Of course, an essential feature of any successful senior housing project will be the services of trained healthcare workers, who are currently extremely scarce in China. The foreign operators who are active in the market are gearing up to train workers, but it must be remembered that these workers, once trained, will be sought after not only by other senior housing operators, but also by community hospitals and other agencies providing home care to the elderly. So I would expect the demand for trained healthcare workers to continue to be high for quite some time, and until training institutes are established in China, the supply will continue to be restrained.
If the experiences of the U.S. and Japan are any gauge, expect the China senior housing market to take some time to evolve and mature. The U.S. market is relatively mature, having been in existence for over thirty years, but the product type is not yet a core component of institutional investors’ portfolios; and despite their stable performance during the fiscal crisis, senior housing properties trade at a substantial spread – 300 to 400 basis points – over multi-family properties. Japan, which is a few years behind the U.S. in the development of its senior housing industry, has attracted some foreign direct investment, and the government just established a commission to study the establishment of a health care REIT. The acceptability of the product type by consumers and investors does not occur overnight, and those looking at China need to keep this in mind. In developing its senior housing industry, though, China does have the advantage of being able to learn from the mistakes made in the U.S and Japan, which should help the industry to mature relatively quickly.
A major challenge facing the market in China at this point is ascertaining which senior housing product types will likely succeed. A few years ago, Sunrise Senior Living, a well-respected U.S. developer, owner and operator of senior housing, forayed into Germany and the U.K. and introduced an assisted living product. The German market completely rejected the product type, while Sunrise was quite successful with the product in the U.K. Understanding and appreciating local culture can be the difference between success and failure. What the China market will accept is a big open question.
Some of the same issues that face the China market are being played out in India, where the senior housing industry is also in its infancy. India has a growing demand for senior housing and lack of supply, as well as affluent and rising middle class populations. It has similar issues of prohibitively high land costs in its cities, uncertainty whether its culture will accept senior housing and, if so, what product types, affordability, regulatory uncertainty and lack of trained healthcare workers. And like China, India is also looking to attract experienced foreign operators to assist in the development of the industry.
Japan and Hong Kong are developing models that will serve all income brackets of their populations, recognizing that the residents below the high end will need some kind of assistance, either in the form of long-term care insurance or direct government subsidy. Solving the problem of senior housing for the lower income population in China will require similar, forward thinking.
In summary, the senior housing industry in China has made progress over the past year, but in my view, part of that progress involved the industry pausing and taking a deep breath, as it assesses how and when to move forward. A great deal of emphasis has been placed on building operating platforms and training personnel, both of which require a long start-up period. Business models have yet to be proven, and there will no doubt be failures along the way, due to misconceptions about the market from a cultural point of view or the level of demand for the product.
I look forward to looking back at this time next year.
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