China Facing Senior Housing Glut, Says DBS

During the past year China’s senior living industry has seen a surge of new development projects as developers such as Poly Real Estate, and institutional investors including Taikang Life and Taiping Insurance, bet that recent government liberalisation of the sector will lead to big profits.

In all, developers and investors doubled China’s supply of senior housing between 2010 and 2015, adding more than six million beds to serve China’s elderly.

The lure is the opportunity to find a high-yielding real estate market by serving a graying population that now has cash to pay for care in a sector that was long dominated by government providers.

Lots of Beds But Not So Much Service

But a recent report by Singapore’s DBS Group throws cold water on these hopes, arguing that China may in fact see an oversupply of homes for the elderly in the near future.

“Based on our analysis, China is not short of senior-living space (at least as a whole); it is lacking operators and service providers,” the report argues. “Unfortunately, most policies and market participants are still focusing on development or construction of facilities.” The report, “China Senior Housing: An Attractive Trap,” urges developers to follow the example of elder care operations from Japan and the US who are jumping into the sector and pursue an “asset-light” model of paying rental fees to asset owners while providing professional operating services.

Taking the Measure of the Market

The key to this contrarian analysis is to measure China’s elderly population by the same yardstick used elsewhere in the world. China’s ratio of senior care beds to senior people is often said to be around three percent as of end-2015 – far lower than the ratio of five percent in Japan or 5.9 percent in the US. This statistic relies on China’s official definition of the senior population as people aged 60 and above. But by using the more widely accepted international definition of seniors as 65 and above, DBS calculates that the China’s actual ratio of beds to elderly was 4.7 percent as of end-2015, far closer to the ratios seen in the US and Japan.

China’s five-year plan targets a 5.2-5.9 percent bed rate by 2020. “Do we lack senior living space? On the whole, not really,” the report argues. In fact, China’s authorities reported a 48 percent vacancy rate for eldercare beds at the end of 2015. Moreover, the construction of new senior living space has recently grown at an exponential pace, raising concerns that nationwide oversupply may be around the corner. More than half of China’s senior housing beds (6.7 million) were built between 2010 and 2015, with 18 percent of the total being built in 2015.

Moreover, demand for senior living facilities could be weaker than expected in view of a host of cultural, economic and demographic factors, the report claims. The elderly in China, as in Japan, traditionally prefer to live at home with family, and they would rather pass on their lifetime savings to their offspring than spend it on living facilities. China’s average life expectancy at 75.5 is also significantly lower than that of the US (78.9) or Japan (83.7), which points to less demand for eldercare services.

The elderly in China may also be less able than their counterparts in more-developed countries to pay for eldercare facilities and services. Japan’s well-established social insurance scheme covers 90 percent of long-term care fees, costs that are not covered by China’s system. Only 43.9 percent of China’s senior population is urban, and rural residents might have a harder time paying for eldercare services.

Developers Need to Curb Their Enthusiasm for Senior Home-Building

A growing array of companies and institutions have moved into China’s senior housing industry in recent years, a group that since 2010 has included property developers looking to diversify their businesses and liquidate idle assets, as well as to explore partnerships with insurance and medical firms. Major developers that have ventured into the sector include Fosun, Greentown, Greenland, Poly Group, Sino-Ocean Land, and Vanke.

While most of these developers are focused on building rather than operating facilities, the DBS analysts caution that a different approach may be needed. “We don’t think there are huge opportunities in the development and construction area. Developers might need to change from the mindset that is prevalent in the residential segment (i.e. fast asset turnover) and focus more on operations if they really want to be the first movers in the industry,” the report suggests.

Similar advice applies to the healthcare providers who are starting to jump into the senior home-building business, says Carol Wu, Head of China/HK Research at DBS Vickers. “I would suggest they continue to focus on their strong area, and work on providing senior home care. That will be a niche area with a lot of potential because after 2020, based on the Chinese government’s plan, more than 90 percent of the senior population should be stay-home seniors. Then the government will support service providers to provide senior home care, rather than encouraging people to move to institutional facilities.”

For property developers, the most promising way forward seems to be an asset-light model in which they take over the operation of government-owned facilities or projects poorly managed by other developers. The report cites the experience of state-owned Poly Group, which recently broke even on a Beijing senior housing project supported by mid-range membership fees.

Beijing-based Sino-Ocean’s Senior Living L’Amore – Kaijian project, a 116-bed facility in the city’s Yizhuang area, is another asset-light success story. Built in 2013 in partnership with an affiliate of regional healthcare provider Columbia Pacific, the facility has managed to fill 96 percent of its beds and achieved profitability in 2016, earning revenue of RMB 11,000 ($1,618) per bed.

The DBS report suggests that the success of this high-end senior living community, which charges monthly fees of RMB 8,000 ($1,177) per person plus nursing fees, could partly stem from cheap rental fees as the project enjoys local government backing.