The aged care sector will soon become a more prominent avenue for commercial property investors according to research by CBRE.
A new report by the leading real estate firm states that investment opportunities will arise from a period of consolidation in the aged care field driven by both recommendations from the upcoming Royal Commission into the industry combined with changes already set to come into effect.
A period of consolidation will ensure, with mergers and acquisitions “likely to become more commonplace,” says CBRE’s senior research manager and Head of Retirement and Healthcare Research Danny Lee.
“This will present opportunities for investors to break into the market, potentially at a lower price point.”
In light in the aged care sector being hit by allegations and reports of poor quality care and negligence, the industry is facing regulatory change as well as the microscope of a Royal Commission.
Among the most likely recommendations of the Royal Commission will be increased staff levels at aged care facilities which when combined with other rules coming into effect will place financial pressure on running costs as operators struggle to comply.
“If staffing ratios are recommended and mandated, it will have a significant impact on profit margins,” Mr Lee says.
“The cost of compliance will affect operator profitability, with the biggest impact on smaller operators who lack the scale and expertise to implement and maintain a higher level of care.
“Despite many operators being not-for-profit, they will still need to break-even to remain operational. In an industry where 60% of operators have just one facility, and 30% between two and six, mergers and acquisitions are likely to become more commonplace in order to take advantage of economies of scale.
“A number of operators have been contemplating exiting the sector since cuts to funding were made by the federal government in 2015 and 2016, and are now actively seeking advice on exiting the industry.
“Therefore, we expect the industry will undergo a period of consolidation as larger operators acquire smaller ones.”
Staffing levels, however, are just one of many issues soon to impact on the aged care industry.
As of June 1, 2019, operators will need to comply with an entirely new set of safety requirements that have far-reaching parameters. This will add to their operational costs as staff are trained and educated in these new requirements which for the first time place responsibility for residents’ safety solely on the operator, even when caused by the criminal actions and/or failings of a staff member.
Staff wage rises are also set to impact on operational costs: The Aged Services Industry Reference Committee is currently reviewing and setting minimum workforce qualifications and standards for the sector, which means looking into current wage levels for nurses and personal care workers.
On the whole, the CBRE analysts report that “operating costs are expected to rise going forward and will likely have a significant impact on operator profitability”.
Shake-ups and sell-offs have already begun. CBRE’s report states that since the uncovering of abuse and neglect at Oakden Park nursing home in South Australia, the Department of Health has bulked up its assessment team and ramped up unannounced visits.
Along with resulting in an increased number of operators under sanction, subsequent sanctions imposed on Milstern, Riveria and Ark Health have seen those operations recently sell.
“Other larger operators have not been immune from sanctions either,” CBRE’s research report states, before going on to note that “facilities for-profit and not-for-profit, large and small, regional and metropolitan will all be affected.”
Overall, these moves by the government to focus on providing a higher standard of care in aged care facilities and restore the trust of the community in doing so will open up new avenues for investors.
“Smaller operators are expected to sell out or be acquired as they are most at risk of being unable to comply with a higher standard of care,” the report states.
“More mergers and acquisitions are expected over the next few years as the sector undergoes a period of consolidation, presenting opportunities for investors to get into the market at potentially lower pricing.
“The Royal Commission is good for all Australians, and consolidation in the number of operators will create a more sustainable and better quality of care in the industry.”