China’s looming need for services and facilities to cater to its fast growing population of seniors seems to present an ideal business opportunity: Demand clearly outstrips supply, and the government is welcoming foreign and private help in this area. The government’s current “Five Year Plan” names senior care as a high priority issue. The key missing factor, so far, has been a successful business model.
Many foreign companies, senior care housing operators, real estate firms and major U.S. fund management companies are gearing up to enter the China market, hoping to capitalize on the country’s growing affluence. Past experience suggests, however, that the road ahead will be a bumpy one. So far, China has no viable model for senior care housing. It lacks any senior care professionals, including doctors specializing in geriatrics. Moreover, a strong tradition of caring for elderly relatives at home also mean there is little experience with providing anything but the most rudimentary hospitals and institutions for those who are unable to care for themselves.
Any company that tries to set up a senior care service business in China will be a pioneer, says Benjamin A. Shobert, managing director of Seattle-based consulting firm Rubicon Strategy Group LLC. “The biggest obstacle is [that] there is no existing, proven model [for senior care and senior care housing]. It is simple to say but it is a profound problem,” says Shobert, whospecializes in health care and senior care.The lack of a proven business model or strategy means companies are uncertain what role the Chinese government will play as an investor and regulator, or in providing vocational training programs and education focused on senior care and geriatrics, says Shobert, who runs ablog on Asian health care. “Because there are three significant unknowns … the only model in the short term that private and foreign investors are comfortable with is a very, very high-end model, what is described as a ‘five-star resort’ for China’s very wealthy couples to put their parents and grandparents in,” he notes. “The question becomes, is that a big enough market?” Families that are wealthy enough to afford “five-star” care might just hire private help or consider facilities overseas, he suggests. There is no guarantee they would buy into an unproven, local option.
The Challenge Ahead
The huge potential size of China’s overall market for products and services for the elderly is undisputed. The United Nations predicts that almost one-third of China’s population, or 438 million people, will be over 60 years old by 2050, thanks to better living standards and health care. That is double the current 178 million over age 60. As the ratio of the elderly to the working-age population grows, the need for senior care housing is unlikely to be met by the public sector. By the end of 2010, China had only 3.5 million beds, in 101,000 public senior care facilities -- enough to provide for less than 2% of its elderly. “The Chinese government realizes that it is going to be difficult and challenging to care for all seniors,” said Bill Pettit, president of Merrill Gardens, a Seattle-based senior care company that is preparing to set up a senior care advisory, consulting and management company in Shanghai.
Overwhelmed, the government is welcoming foreign and private investors to provide other options for senior care. Michael Qu, a lawyer at the Shanghai Co-Effort Law Firm, estimates that the senior care market may grow to RMB 1.8 trillion by 2020 and RMB 7.6 trillion by 2050, from the current estimated RMB 1 trillion. “China is a big senior care market with huge potential,” says Qu, who specializes in senior care and real estate and publishes the China Senior Care Housing newsletter.
A Trial Run
Before plunging into the market, many foreign senior care operators and investors are watching to see how Seattle-based Cascade Healthcare -- a joint venture between Emeritus Corp. and Columbia Pacific Advisors, a Seattle-based wealth management company -- fares with its first facility, which will have a soft opening from June to August (during which some seniors will be admitted) and a grand opening in September.
A previous attempt to open an independent living facility came to naught.U.S. senior-housing company Holiday Retirement Corp. built a retirement community in Shanghai’s outskirts in 1998. It ended the venture in 2006 due to a failure to drum up enough interest, and the facility has since been converted into a budget hotel. “We sold our interest at a substantial discount and went home. We were a little early,” The Wall Street Journal quoted Holiday Retirement Corp.’s former chairman, Dan Betty, as saying.
Betty now heads Emeritus, one of Cascade Healthcare’s partners in its Shanghai venture. Cascade is investing US$6 million to renovate a five-story hotel building in Shanghai’s Xuhui district to be used as a senior care assisted living facility. Minimizing its up-front investment in property, it is leasing the hotel, which was used for the 2010 World Expo, and expects to provide about 60 rooms for assisted living and rehabilitation. “We will target the high-end market, charging a RMB 10,000 to RMB 15,000 monthly fee,” said Serena Xie, managing director of Cascade Healthcare.
Developing a smaller project will allow Cascade the flexibility to adapt its business model as the market evolves, says Daniel Leaf, founder and director of Tianlun Yiyangyuan, a Shanghai- based senior care consulting and management company. “There are a number of projects being developed right now in China, and each one is learning from the last one,” Leaf says.
Shobert agrees that Cascade’s strategy makes sense given the many unknowns for the China market. “It is just trying to focus on working on the model, to make sure everything we think we know translates into China. Let’s figure out some of the intangibles that will go into taking care of elderly Chinese. By doing that, they are positioning themselves to be successful in the long run,” he says.
To build a much bigger project, Cascade would need to either find a Chinese partner to provide land, or set up a management company to help Chinese investors design, build and manage a senior care project. Fortress Investment Corp. of the U.S. is now raising a US$1 billion fund to invest in senior housing in China -- an approach carrying much bigger risks than smaller projects like Cascade’s.
Xie expects Cascade’s biggest challenge to be finding qualified staff. “Staffing will be the biggest challenge because the industry is not mature and there is no available pool of talent. It will be a training ground for building our operation and training our team,” Xie says.
An Empty Talent Pipeline
The shortage of expertise runs the gamut, from those able to manage such a facility to those providing medical care and even the hands-on services required. “There is no pipeline of trained Chinese nurses, physio and rehabilitation specialists and doctors for senior care,” says Shobert. “You do not have basic geriatrics training for nurses and doctors at Chinese medical schools. It is going to be hard to build a meaningful senior care model,” he adds. The lack of professionals is a serious concern, says Joseph J. Christian, a fellow at the Ash Center for Democratic Governance and Innovation at Harvard’s Kennedy School. “Elderly people need to be treated differently from younger people,” he notes. The risk for Cascade is that even if they manage to train the right staff, typically in China [those staff members] will get poached by their competitors.
Pettit, who is preparing to set up a senior care consulting and management company in Shanghai, says he plans to bring staff to the U.S. for training and also U.S. professionals to China to help with training there. In particular, he is recruiting Chinese nationals working in the senior care industry in the U.S. who would like to return to China.
Meanwhile, Chinese private investors are gearing up for senior care housing projects, but generally are focusing on such ventures as property, rather than service-oriented businesses. Many of the Chinese companies interested in developing senior housing projects are real estate developers that want to build, sell and make a quick return. One drawing much attention is China’s first high-end retirement community, Cherish-Yearn, or Qinheyuan in Chinese. The US$82 million independent living senior care house, with a small clinic manned by a doctor and nurse and about 800 apartments, opened in the outskirts of Shanghai’s Pudong district in 2008. The project is not meant for families on tight budgets: The occupation/use rights fees range from RMB 400,000 to RMB 800,000, depending on the apartment, and the management fees range RMB 30,000 to RMB 70,000 per year for one apartment. A Chinese industry analyst says it the company has been struggling to fill Cherish-Yearn’s units because the location is regarded as remote and the cost too high. To help tide the project along, in 2010, the Chinese private equity company Trust Bridge agreed to invest RMB 100 million in Cherish-Yearn.
Another recent example, Beijing’s General’s Garden, or Jianghu Zhuangyuan in Chinese, also appears to be struggling. The project is more of a residential complex than assisted care housing, with a golf course, recreational facilities a country club, hospital and clinic. The elder care facilities include four buildings with 70 rooms each, ranging in size from 34 square meters for RMB 5,000 a month to 52 square meters for RMB 7,700 per month. So-called “transgeneration” units, of over 150 square meters to 166 square meters, require the purchase of a RMB 3 million, 50-year membership. Total investment is estimated at over US$100 million, though the company declined to provide details.
The entire project is in the process of being recapitalized, after laying off its senior staff in February, said a senior care industry consultant who declined to be named. “The biggest reason for recapitalization is that they built out too much, too fast. In venture capital terms, their ‘burn rate’ was too high,” Shobert says. He says he views this as typical of Chinese entrepreneurs, who tend to treat senior housing projects with a "build it and they will come" mentality. “The problem is that reaching the right audience and working out the kinks of your operational model takes time. Consequently, the right sort of investments are going to be smaller, more gradual and more sequential,” Shobert notes. As with Cherish-Yearn, General's Garden’s location was awkward, outside Beijing’s fourth ring road. Those in the industry estimate that its occupancy rate is less than 20%. (General's Garden would not comment.)
Focusing on the High End and Home Care
While Chinese private investors struggle to devise their own, broader approach to the market, foreign ventures will likely remain focused on the extreme high end of the market. Much as foreign joint venture hospitals charge rates about 10 times those charged by locally operated ones, the foreign senior care operators are targeting the upper-middle to high-end market. This means they will not be mainstream but will only be a supplement in bridging the shortage of facilities. At the lower end of the market, nursing homes generally cost RMB 1,000 to RMB 2,000 a bed per month, plus RMB 350 to RMB 400 for food and other miscellaneous fees. Such institutions generally restrict elders from freely entering and leaving the home.
Pettit, of Merrill Garden, hopes to help Chinese investors set up senior housing in Shanghai. Foreign investors likewise are following this path. He hopes to set up the management company within a year. “I would recommend that foreign companies set up management companies and cooperate with Chinese investors to help them design and manage their facilities,” Qu says.That model requires a relatively small investment of US$2 million, and risks are commensurately smaller than those involved in setting up joint ventures.
Another promising area is home nursing care. In the U.S., about 15% of seniors stay in senior homes while most remain in their own or relatives’ homes. That is also true of China, where such services are severely lacking. “Home care has not been developed in China,” says Xie of Cascade. Chinese hospitals crammed with long lines of outpatients, are not capable of offering home care services to elders remaining at home.
Traditionally, Chinese families hire maids to help care for elders, but most of those are unskilled women from the countryside who are unable to care properly for those needing medical care for chronic illnesses or injuries. Right at Home International Inc., a leading U.S. franchise provider of in-home senior care and assistance, opened in Beijing in 2011. It is preparing to begin franchising in China by 2017. Another such venture is the locally developed Pinetree Life Institute, which provides home nursing care in Beijing for an average fee of RMB 500 per month, though it varies depending on individual needs.
Will there be a successful model for senior care housing soon? For now, Chinese investors appear to be going for more mega projects. Government-owned Shanghai Industrial Investment Co. has announced plans to build senior housing for about 50,000 people on Chongming Island -- a very large island in the middle of the mouth of the Yangtze River. Heavily inhabited, the once-isolated island is now connected to the city proper via bridges and tunnels. The RMB 10 billion first phase of the project will be one million square meters, with 7,700 units that can house 10,000 people. “I wonder if they have a clear strategy for marketing to find the people and if they will be profitable,” said a foreign senior care company executive. However, he asks, “Where will they get their senior care workers?”
For many in the industry, such projects appear unduly daring. “You will understand the market, demand and operations only after you are actually doing it and you build up a team,” says Xie. “We are not crazy about these massive real estate projects with thousands of units. We want to be in the senior care business, not the real estate business.”