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Build it and they will come … or will they?

The Department of Health recently announced ACAR 2018–19 and that an invitation to apply for 13,500 residential aged care places, 775 short-term restorative care places and up to $60 million in capital grants is expected soon.

Residential aged care (RAC) building activity has skyrocketed since legislative reform transformed the industry on 1 July 2014.

One of the key reforms was enabling providers to set accommodation prices to market. A protection for consumers is the Aged Care Pricing Commissioner who has an approval function for proposed refundable accommodation deposits (RADs) above $550,000. In the main, market prices now apply for RAC accommodation.

Pricing to market has led to a dramatic change in the RAC facilities on architects’ drawing boards and what is coming out of the ground. For example, new developments are including hotel-like suites with sitting rooms to cater for those residents and families who want more and can pay for more. Interestingly, this is occurring in regional and rural areas, not just the major population centres.

Greater resident accommodation choice is also occurring with an eye to more discerning Baby Boomer customers. The eldest of this cohort are about 10 years away from residential care themselves but their own preferences are influential in selecting RAC accommodation for a parent. There is also an expected dramatic shortening of length of stay, as well as the continued emergence of private assisted living facilities. The question that many providers are grappling with is – are these new developments being built in locations that best respond to customer need? What features of a new development best respond to customer need?

When undertaking market catchments studies for RAC providers to support business cases for new developments, acquisitions or ACAR applications, one key takeaway often stands out – in many instances new RAC developments are burgeoning side by side in catchments with an existing statistical oversupply.

The implications of this depend on which side of the coin the stakeholder is sitting: customer/resident or provider. For residents and families, a new abundance of choice and quality accommodation is a welcome change. For providers though, it may create challenges for business cases and real world, long-term occupancy.

Challenges for NFPs and other incumbents

Many long established not-for-profit (NFP) providers now have large portfolios requiring redevelopment or a new rebuild to remain competitive. The approach of each NFP is influenced by their mission, vision, strategic goals, target market and resources. Mainly for reasons of mission and resources, a few have exited RAC such as Masonic Care, Queensland and Presbyterian Care, Tasmania. Mostly, though NFPs are in an expansionary mode. However, with the potential for excess supply, it is imperative for expansionary NFPs to understand the impact of competitive supply on a proposed new development’s occupancy levels in the longer run.

Incumbent providers with older, lower quality facilities will be the first to be adversely affected by competitive pressure resulting from the new supply. Box 1 shows some locations of statistical oversupply relative to the Commonwealth Government target ratio of 78 RAC places per 1,000 people over the age of 70.

Box 1:

Allocated Ratios – RAC : Top 10 by Planning Region
(excl. remote and rural) as at June 2017

Source: Australian Institute of Health and Welfare, ArcGIS Pro and The Ageing Equation analysis. The Commonwealth Government target ratio is 78 RAC places per 1,000 people over the age of 70 to be achieved by 2022. The map shows the distribution at a planning region level. As is evident from the above map, the distribution is uneven and a number of metropolitan and regional catchments exceed the target ratio. Catchments within planning regions may hold even higher concentrations of RAC place supply. Total allocated places include unused and provisionally allocated licences. The likelihood and timeframes of these places becoming operational is not known.

In addition to the challenge of new competitive supply, incumbents are having to consider potential changes to the residential aged care landscape, such as:

  • The Review of the Aged Care Funding Instrument which may lead to a completely new revenue model.
  • Shorter lengths of stay, which are increasingly evident, may mean a fall in RADs relative to DAPs (a daily rent).
  • The potential elimination of ACAR in all but rural and remote areas. This may lead to a greater intensity of competition.
  • Less in the way of RAD inflows compared to new entrant. Before benefiting from the new RADs, incumbents have to pay back existing RADs to residents in a redevelopment – cash outflow! This contrasts starkly with a new entrant that does not incur this financial obligation.

These uncertainties challenge incumbents in developing business cases that stack up.

Are residential aged care providers optimally targeting need?

So are residential aged care providers optimally targeting need? Based on my experience in conducting market research, the answer is ‘in a lot of instances, no’.

Planning regions are geographical areas, boundaries are defined by the Department of Health to allocate the aged care supply. By contrast, a catchment area is a smaller geographical area where a facility’s prospective residents tend to currently reside. The geographical boundary determination is based on factors such as land use, drive times, internal migration trends and levels of socio-economic status. Many catchment areas can form a planning region.

RAC developments are often opportunistic, targeting high median house prices and land availability, not necessarily targeting need within a catchment. I observe that some catchment areas within a planning region are in a statistical oversupply whereas the planning region as a whole is in statistical undersupply.

Up against new supply, it is essential for existing providers to understand the external market environment and differentiate their product/service to ensure long-term financial sustainability. For new providers, it is imperative to gain deep understanding of the market before entry. This means determining what are the product and service features they are going to offer that will respond to unmet demand.

Safdar Ali is the director and founder of The Ageing Equation, a consultancy specialising in quantitative and qualitative market catchment studies to support business cases in RAC and retirement living for new developments, mergers and acquisitions and ACAR applications. 

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One comment

  1. This is timely in view of the ACAR announcement. The government’s focus is rural and remote but I imagine the metro and some regional areas will be highly contested and a credible market needs analysis as well as demonstration of capacity to deliver the beds will be crucial in an application.