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SECTOR BRIEFING

China Senior HousingAn Attractive Trap

DBS Asian Insights SECTOR BRIEFING 3702

China Senior Housing An Attractive Trap

Produced by:Asian Insights Office • DBS Group Research

go.dbs.com/research @dbsinsights [email protected]

Chien Yen Goh Editor-in-ChiefJean Chua Managing EditorGeraldine Tan EditorMartin Tacchi Art Director

Ken HE, CFA Equity Analyst DBS Group [email protected]

Carol WUEquity AnalystDBS Group [email protected]

Danielle WANG, CFAEquity AnalystDBS Group [email protected]

Andy YEE, CFAEquity AnalystDBS Group [email protected]

Trista QINEquity AnalystDBS Group [email protected]


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Investment Summary

Supply and Demand DynamicsOversupply, Not Undersupply

Demand May Not Be As Strong As Expected

Opportunities and Market Participants

Key Challenges

Business Models and Profitability

Case Studies

s of end-2015, China’s population of seniors (aged 65 and over) as a percentage of the total population was 10%, compared to Japan’s, the UK’s, the US’, and Australia’s 26%, 18%, 15%, and 15%. In terms of the pace of aging, China is becoming grey faster than those in the abovementioned three western

countries, but is very similar to Japan, despite being 30 years behind.

Contrary to common belief that there is an undersupply of senior housing in China, we believe there will likely be oversupply in the near future. The divergence stems from the definition of seniors (60 and over in China; 65 and over in other countries). The five-year difference makes the whole picture of senior-housing supply quite different. Based on our calculations, senior-housing supply, as measured by the number of beds over the senior population (aged 65 and over), was 4.7% by end-2015, compared to 5% in Japan, 5.4% in Australia, and 5.9% in the US.

We don’t think there will be any demand for upgrading similar to the one we saw for the office and logistics sector; more than half of China’s eldercare beds (6.7 million) were built very recently (over 2010-2015) and 18% of the total was built in 2015. The number of eldercare beds has kept up exponential growth lately, leading to our worries that China might see a nationwide oversupply in the near future.

The elderly in China, as a whole, are not as rich as their counterparts in the west – a concept expressed as “getting old before getting rich” (未富先老); this affects affordability for senior housing. In addition, the majority of the elderly population is not urban and not covered by the social insurance scheme. A mindset barrier also exists, as traditional elderly prefer to stay with family. This can be seen in Japan, where 97% of the elderly are living at home. Having said that, different market segments could see different prospects. For instance, mid- to high-end projects with special features like memory care and a combination of senior housing and medical care (醫養結合) might see a better outlook in top-tiered cities.

China is targeting for 90%/6-7%/3-4% of the senior population to live in their own homes/community-based senior facilities/institutional senior housing, respectively. Yet, most developers are rushing into building senior housing for the targeted 3-4% of the senior population. In our view, developers may need to shift their mindset from the prevailing one in the residential development business (i.e. fast asset turnover) and focus more on operations, as the senior-housing industry is more about providing services than building hardware. Otherwise, senior housing is doomed to repeat the experience of the hotel

Investment Summary

AChina is 30 years behind Japan

Undersupply or oversupply?

Will demand catch up with supply?

Operators or builders?


industry. Most senior home builders do not have the capability to manage senior homes; instead, they outsource this to eldercare operators. Yet, this model may not make sense due to (1) high initial investments, and (2) low earnings before interest, taxes, depreciation and amortization (EBITDA) yield. Unlike their counterparts in the US, Chinese developers are not able to obtain land and funding at a low cost.

The government has reiterated its support for the senior housing industry, but there has been limited policy to develop the industry. Firstly, existing senior housing is built on land for other purposes (i.e. land with industrial or commercial titles) or converted from idle assets (i.e. hotel, factory, or campus). There is limited land supply dedicated for senior housing, as selling land for eldercare homes is less profitable to local governments than selling land for residential and commercial purposes. Secondly, funding is less accessible, given the absence of a clear profitable model so far. There is no REIT platform to hold the assets. Thirdly, the tax regime provides only limited support for operations.

As the sector is still in its early days, there is limited experienced personnel. The competition for talent could potentially drive up staff costs.

Four business models exist in the senior housing sector:

1. The sales model is similar to that of the traditional residential business, but using the eldercare concept to attract eyeballs. Developers using this model include Poly CN (600048.CH), Vanke (000002.CH, 2202.HK), Greentown (3900.HK), and Greenland (600606.CH). This model might not be considered a real senior-housing business, as limited after-sales services are provided.

2. There are two asset-heavy models – membership and monthly fee. The membership model is similar to the US’ continuing care retirement community (CCRC) entry-fee model, under which residents in apartment units pay a one-time upfront entrance fee or membership fee. This model enjoys less financial burden at the beginning and asset appreciation over time, with monthly fees charged to cover operating expenses. Some developers choose this model because of the imperfection of land-use rights, leading to indivisible property rights (or apartment units that cannot be sold separately on a strata-titled basis). Sophisticated pricing strategy is required to achieve a balance between financial burden and occupancy. We haven’t seen success in this model yet. The famous Shanghai project – Cherish-Yearn – is still lossmaking and seeing limited appreciation in assets after operating for five to six years.

3. Compared to the membership model, the CCRC rental or monthly fee model only collects a small deposit amount upfront and charges a higher rental fee. In our view, developers may not have strong capability to hold such assets, given limited yield. In the US, senior housing is usually owned by REITs. Given the absence of REITs in China,

Policy is lagging

Lack of personnel and talent


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we think insurance companies may have incentive to hold such assets to generate longer-term returns and support marketing of their insurance products. Developers with insurance companies as key shareholders, such as Sino-Ocean (3377.HK) and Poly CN, may seek synergy with key shareholders on such a model. Poly CN and Vanke also use such a model to liquidise idle assets inside the group.

4. The build-and-leaseback or asset-light model operates assets, but doesn’t own them. Sino-Ocean uses this model and recently saw its first project become profitable after three years of operations. The model needs strong operating capability, but has less financial requirement. A strong operator could see fast expansion opportunities, as there is abundant senior housing but limited operators in the market. But, such a model might be affected by rising rental and staff costs. The model might need scale to attract investors’ interest, as a single project could only generate limited cashflow after rentals.

To sum up, we think senior housing is more about service. Developers need to change their mindset and focus more on operation than construction. Strong operating capability could also be used as a bargaining chip to gain access to residential land, as local governments have been quite supportive of local senior housing.

Mid- to high-end projects providing memory care or combining senior care and medical care in bigger cities may offer better returns, as in the US. Sino-Ocean and Poly CN are building their operating teams in Beijing and Shanghai. Both also have insurance companies as key shareholders, which could enable potential synergies. Vanke has no group-level platform for the senior-housing business and various business models are under trial in different regions. In addition, Vanke is also providing community-based eldercare services, which could be viewed as an extension of traditional property management. Other developers, such as China Overseas Land (688.HK), China Resources Land (1109.HK), Greentown, Evergrande (3333.HK), and Greenland are only at the trial stage of their senior-housing business, and so far we don’t foresee a feasible business model being built in the near term.

The asset-light model

Contrary to common belief that there is an undersupply of senior housing in China, we believe there

will likely be oversupply in the near future.


Oversupply, Not Undersupply

There have been various reports on the undersupply situation in senior-living facilities in China. However, based on our analysis, China is not short of senior-living space (at least as a whole); it is lacking operators and service providers. Unfortunately, most policies and market participants are still focusing on development or construction of facilities.

Against which countries should we benchmark? We use Japan and the US for our analysis. The reasons are:

1. the cultural/geographic proximity between China and Japan;

2. the US has a complete value chain for senior living facilities;

3. quite a few Japanese and American operators have ventured into China’s senior living market and most Chinese operators/owners are trying to copy the business models in Japan and the US.

According to a United Nations’ (UN) estimate, as a percentage of the total population, China’s senior population (aged 65 and over) reached 7% in 2001; and it will take 25 years for that ratio to go up to 14% and another 13 years to reach 21%. The pace of aging in China is similar to Japan’s, despite being 30 years behind. As a percentage of the total population, the US senior population reached 14% in 2014, but it will take 36 years for that percentage to go up to 21%. China’s senior population (aged 65 and over) was 10% by end-2015, much lower than Japan’s 26% and the US’s 15%. This can be explained by the low fertility rate in China and Japan, at less than 1.5, while the US has more or less maintained a higher fertility rate of 2.0.

Where are we now, in terms of eldercare facilities? The number of senior care beds in China is already close to that in the US or Japan. The key reason why our analysis shows quite a different picture compared to other reports/analysis is the definition of the senior population. The widely quoted number of beds, as a percentage of the population aged 60 and above, was 3% by end-2015, sourced from China’s Ministry of Civil Affairs (MCA). MCA’s definition of the senior population (60 and older) is different from other countries’ definitions (65 plus). We have recalculated the ratios as shown in the table below. The number of beds as a percentage of the senior population (65 and older) in China was 4.7%

A matter of definition

Supply and Demand Dynamics


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by end-2015, compared to 5% in Japan and 5.9% in the US. Based on the government’s 13th Five-Year Plan, the number of beds as a percentage of population aged 60 and above is targeted at 3.5-4% by 2020, which will translate into the number of beds as a percentage of population aged 65 and above at 5.2-5.9%.

Do we lack senior living space? On the whole, not really. Given the above analysis, China’s senior living space will be similar to that in Japan and the US by 2020. However, we don’t think China really needs that much senior living space. More than half of the total senior care beds (6.7 million) were built over the past five years (2010 to 2015) and 18% of the total were built in 2015. The number of eldercare beds has kept up exponential growth lately, leading to our concerns over a nationwide oversupply in the near future.

Diagram 1. Pace of ageing

Source: United Nations, Japan’s Ministry of Health, Labour and Welfare, China’s National Bureau of Statistics, DBS Bank

Country % of population aged >=65 No. of years required

7% 14% 21% 7%-14% 14%-21%

China 2001 2026 2039 25 13

The US 1942 2014 2050 72 36

Japan 1970 1994 2007 24 13

Time lag between China and Japan

31 32 32

Diagram 2. Percentage of population aged 65 and above

Source: The World Bank, DBS BankAs of December 31, 2015


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Diagram 3. Number of eldercare beds in China

Source: Ministry of Civil Affairs of China, National Bureau of Statistics of China, DBS Bank

Year No. of eldercare beds

Population aged >= No. of beds as % of population aged >=

65 60 65 60

m m m % %

2005 1.6 80 144 2.0% 1.1%

2006 1.8 104 149 1.7% 1.2%

2007 2.4 106 153 2.3% 1.6%

2008 2.7 109 159 2.5% 1.7%

2009 2.9 113 167 2.6% 1.8%

2010 3.2 116 177 2.8% 1.8%

2011 3.7 122 184 3.0% 2.0%

2012 4.2 127 193 3.3% 2.1%

2013 4.9 131 202 3.7% 2.4%

2014 5.5 137 212 4.0% 2.5%

2015 6.7 143 222 4.7% 3.0%

2020 gov’t target

2020 8.7 168 248 5.2% 3.5%

2020 9.9 168 248 5.9% 4.0%

Diagram 4. Comparison of eldercare beds

Source: Ministry of Civil Affairs of China, Administration on Aging of the US Department of Health and Human Services, Ministry of Health Labour and Welfare of Japan, Australian Nursing & Midwifery Federation, DBS Bank

^ no. of beds for elderly living as % of elderly population (>=65) by end-2015, recalculated by DBS Bank* from A Profile of Older Americans: 2015, Assisted-living facilities are designed for fairly independent people who require minor supervision, while nursing homes are designed for people who require extensive care# from Survey on Social Welfare Institutions in 2008, three facilities covered by long-term insurance include intensive-care home for the elderly, long-term care health facility, and sanatorium medical facility for the elder requiring long-term care~ from Australian Nursing & Midwifery Federation, September 2015

Demand May Not Be As Strong As Expected

1. A psychological barrier exists. According to Japan’s 2010 fiscal year Survey of Institutions and Establishments for Long-term Care, 97% of elderly people are living at home. Given the cultural/geographic proximity between China and Japan, the traditional elderly in China also prefer to stay with family. In addition, the majority of elderly people in China would prefer keeping their full-life savings for their offspring to paying for senior housing rental or membership.

2. Life expectancy in China is lower than in Japan and the US (see Diagram 5), which means China requires less eldercare services than Japan and the US.

3. The majority of China’s elderly population is not urban and might not be able to afford eldercare services as they are not covered by the social insurance scheme. According to China’s sixth census, the urbanisation rate was 50.1% in 2010, but only 43.9% of the senior population (65 and older) was urban.

4. Japan has a well-established social insurance system (see Diagram 7), which covers 90% of long-term care fees (for three facilities covered by long-term insurance), while China doesn’t have such a social insurance system, which means the senior population in China is less able to afford senior-living facilities.

These factors explain why the MCA reported a 48% vacancy rate for eldercare beds for China by end-2015.


The majority of elderly people in China would prefer keeping their full-life

savings for their offspring to

paying for senior housing rental or

membership

Source: World Health Organization, May 2014, DBS Bank

Source: CEIC, US Census Bureau, National Bureau of Statistics of China, DBS Bank* updated to 2015 for China, 2010 for US and 2014 for Japan

Diagram 5. Life expectancy

Diagram 6. Urbanisation rate

All Male Female Rank

China 75.5 74.1 77.0 63

US 78.9 76.3 81.3 34

Japan 83.7 80.2 87.2 1

World 71.4 69.1 73.8

Urbanisation rate*

China 55.9%

US 80.7%

Japan 93.0%

Uneven distribution


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Based on the demographic trend, there is enough existing senior living space in China. Having said that, we also see that the number of eldercare beds is not evenly distributed among provinces/regions. For example, the number of beds as a percentage of the population aged 65 and above was 9.1% in Inner Mongolia, but only 0.6% in Tibet. In addition, positioning of senior-living facilities will differentiate to meet various demands. On top of that, we see a lack of professional operators, rather than space.

Source: Japan’s Ministry of Health Labour and Welfare, DBS Bank* from 2010 report on long-term care insurance services

According to a report from Japan’s Ministry of Health, Labour and Welfare, 97% of the insured elderly people are living at home.

All Male Female Rank

China 75.5 74.1 77.0 63

US 78.9 76.3 81.3 34

Japan 83.7 80.2 87.2 1

World 71.4 69.1 73.8

Urbanisation rate*

China 55.9%

US 80.7%

Japan 93.0%

Diagram 7. The mechanism of Japan’s long-term care insurance system

Pension and insurance

Taxes 50%

- municipalities 12.5%- prefectures 12.5%- state 25%

Premiums 50%

Service providers

- In-home services

- Community-based services

- Facility services

long-term care fees(90%)

10% co-payment

housing & meal expenses

services

claim benefits

Primary insured persons - aged 65 or over (29.1m*)

Secondary insured persons - aged 40-65 (42.6m*)

Insured persons Certified as requiring long term care


Diagram 8. Distribution of eldercare beds across the nation

Source: CEIC, China’s Ministry of Civil Affairs, DBS BankPlease note: senior population (65 plus) of each province is calculated by total population of each

province multiplied by senior population as a percentage of total population in each province as surveyed by National Bureau of Statistics in 2015; the sampling fraction was 1.55%

Opportunities and Market Participants

T


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he MCA aims to establish a system of senior care by 2020, targeting to have 90%/6-7%/3-4% of the senior population living in their own homes/community-based senior facilities/institutional senior care facilities (see table below).

Source: Ministry of Civil Affairs of China, DBS Bank

Diagram 9. Type of eldercare providers

Type Characteristics Care provider Target proportion

Living in own home Traditional elderly who prefer to stay with family

Family members and in-home service providers

90%

Low-income elderly who cannot afford senior care services

Community-based services

Elderly who receive insufficient care from family members

Community hospitals and other community-based service providers

6-7%

Serves as a supplement to home care

Community senior care during the day and family care at night

Institutional settings The elderly preferring to stay with other elderly

Senior living facilities 3-4%

The less independent elderly and those who need intensive care

Provides comprehensive cares and services

Diagram 10. Value chain of senior living facilities

Source: PwC, Deloitte, DBS Bank


The rising eldercare industry offers four major opportunities – in development and construction, operations, insurance and wealth management related products, and funding – and comprises four major participants – developers, senior service operators/providers, insurance companies, and other investors.

Developers have ventured into the senior care industry since 2010, for (i) business diversification; (ii) liquidising idle assets inside the group; and (iii) exploring potential synergies with associated companies, including insurance companies or medical companies. So far, we have seen developers engage in the development, operations, and funding of senior housing. However, the focus is still on the development and construction, as (i) developers are good at construction but lacking operating capabilities; (ii) some developers are using the senior housing concept as a selling point to charge a premium for traditional residential properties; and (iii) local governments sometimes provide subsidies for senior housing development.

In view of rising demand for senior care in China, international operators, especially those from Japan and the US, have rushed into this area. Yet, given the high prices of land and properties, they are applying an asset-light model to control risks.

In our view, developers may need to shift from the mindset prevailing in the residential development business (i.e. fast asset turnover) and focus more on operations, as senior housing is more about services than building hardware. Otherwise, the senior housing industry will likely repeat the experience of the hotel industry. Actually, senior-housing management is similar to hotel management, but more sophisticated.


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Features Participants

Before 2001 Few companies engaged in senior living industry, with no mid- to high-end community

Almost none from private sector

2001 The first high-end senior community emerged in Beijing

Beijing Sun City

2005 More high-end senior living communities, diversified property operation models

Shanghai Cherish-Yearn Huichen Senior Apartment

2010 More government policies and diversified investors/participants

Developers, insurers, senior service providers, and other investment institutions

Diagram 11. Milestones of senior housing industry

Source: PwC, DBS Bank

Developers versus operators


Diagram 12. International operators’ exposure to China

Company Origin Business model JV with partner in China

Footprint in China Year venturing into China

RIEI Japan Asset-light Local operators Beijing, Shanghai 2012

Medical Care Service

Japan Asset-light, senior care related products

Shanghai Sanmao

Shanghai 2011

Wisnet Japan Asset-light Local operator Dalian 2013

Nichii Gakkan Japan Asset-light, in-home care

Wholly owned Beijing 2016

Emeritus US Asset-light Sino-Ocean Group (3377.HK)

Beijing 2013

Fortress US Asset-light/Asset-heavy

Fosun (656.HK) Shanghai, Ningbo, Nantong, Suzhou, Zhenjiang, Guangzhou

2013

CAJ Right at Home

US Asset-light asset, in-home care

Wholly owned Beijing, Dalian, Erdos, Ningbo, Hangzhou, Wuhan, Chengdu, Guangzhou

2011

Watermark US Asset-light Zhonghong (000979.CH), Taiping Senior Living Inv.

Beijing, Shanghai 2016

Cascade US Asset-light Wholly owned Shanghai 2013

CP Homes US Asset-heavy Bought properties from Country Garden (2007.HK)

Huizhou 2015

Orpea France Asset-light/Asset-heavy

Wholly owned Nanjing 2014

Source: DBS Bank


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hile there have been quite a few policies to support the senior housing industry since 2010, we can hardly see a well-established policy system to facilitate the industry’s growth.

Lack of land for senior housing

Existing senior housing is built on land earmarked for other purposes (i.e. land with industrial or commercial titles) or converted from idle assets (i.e. a hotel, factory, or campus). Prices for residential/commercial land have risen rapidly lately, and there was no land designated for senior housing purposes before 2014. After the guide on land used for eldercare service facilities (養老服務設施用地) was released in 2014, several local governments, including that of Beijing, Shenzhen, Zhejiang, and Fujian, have listed land for sale for senior housing. But land for senior housing is classified under land used for medical, healthcare, and welfare (醫衛慈善用地), which makes funding less accessible. In addition, after the rapid growth in land prices in 2016, local governments are slowing down the launch of land used for eldercare services which offer lower profits to them. Beijing launched seven plots of land for senior housing in 2015, but none in 2016.

Key Challenges

W


Funding is less accessible

1. There are government subsidies, including a one-off construction subsidy, interest subsidy, and tax subsidy; but the subsidies are far below costs.

Diagram 13. Major documents regarding land use for eldercare services since 2010

Date Policy Regulator

2015.11 Guiding Opinions on Maximizing the Leading Role of New Consumption and Accelerating the Cultivation of New Supplies and New Driving Forces

The State Council

2015.11 Guiding Opinions on Advancing the Combining of Medical and Health Service and Eldercare Service

National Health and Family Planning Commission and other

ministries

2015.03 Notice on Advancing the Residential Properties and Land Supply and Promoting the Stable and Sound Development of the Real Estate Market in 2015

Ministry of Land and Resources

2014.11 Guiding Opinions on Innovating the Investment and Financing Mechanisms for the Key Fields and Encouraging Social Investment

The State Council

2014.11 Guiding Opinions on Promoting the Development of Eldercare Service Industry

Ministry of Commerce

2014.09 Notice on Accelerating the Construction Projects Progress of Health and Elderly Service Facilities

Ten ministries

2014.05 Notice on Accelerating the Construction Work of Eldercare Service Facilities in Urban Area

Ministry of Civil Affairs

2014.04 Guiding Opinions on Land Used for Eldercare Service Facilities

Ministry of Land and Resources

2014.01 Notice on Enhancing the Planning and Construction work of the Eldercare Service Facilities

Ministry of Housing and Urban-Rural Development and other

ministries

2013.09 Several Opinions on Accelerating the Development of Health Care Service Industry

The State Council

2013.09 Several Opinions on Accelerating the Development of the Eldercare Service Industry

The State Council

2012.07 Implementation Opinions on Encouraging and Guiding Private Capital’s Entry into Eldercare Service Sector


2011.12 Social Eldercare Service System Construction Planning (2011-2015)

The State Council

Source: CREIS

2. It is not easy to get bank loans, given the lower visibility of profitable models in the industry. So far, banks only provide funding to public/government-related senior care facilities and senior care facilities with land use rights and construction in progress.

3. Funding from the equity market is also difficult. The well-known senior housing play – Cherish-Yearn (親和源) suspended its initial public offering in the A-share market in late-2015. In early-2016, Yihua Real Estate (宜華健康, 000150.CH) announced the acquisition of a 58.33% stake in Cherish-Yearn. According to the announcement, Cherish-Yearn is still loss making after five to six years in operation and is expected to gradually narrow losses over the next three years.

4. More than half of senior housing owners/operators are funded from REIT platforms (see Diagram 14). However, REITs are unlikely to kick off in China in the near future, as limited by current law and tax regimes.

5. Private equity and trust investors are less interested in senior housing as the industry is still at the start-up stage and there is no clear profitable model yet. Also, private equity and trust investors usually require higher returns


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Diagram 14. Top ten senior housing owners in the US

2016 rank Company Code REIT? No. of properties

No. of units

1 Brookdale BKD US 945 78,595

2 Welltower HCN US Y 666 65,042

3 Ventas VTR US Y 716 61,969

4 HCP HCP US Y 470 49,000

5 Senior Housing SNH US Y 297 34,687

6 Boston Capital n.a. 468 29,134

7 NorthStar NHHS US Y 209 17,514

8 New Senior SNR US Y 150 17,474

9 Senior Lifestyle n.a. 161 16,187

10 Holiday Retirement n.a. 86 10,474

Source: ASHA 2016, DBS Bank

It is not easy to get bank loans, given the lower visibility of profitable models in the industry


Diagram 15. Major policies regarding support for the eldercare services industry since 2010

Date Name of Document Publishing Commissions

2016.03 Guiding Opinions on Accelerating the Development of Eldercare Service Industry with Financial Support

People’s Bank of China and other ministries

2015.11 Guiding Opinions on Maximizing the Leading Role of New Consumption and Accelerating the Cultivation of New Supplies and New Driving Forces

The State Council

2015.11 Guiding Opinions on Accelerating the Development of Consumer Service Industries and Advancement of Consumption Structure

General Office of the State Council

2015.04 Implementation Opinions on Supporting Social Eldercare Service System Construction with Development Finance

Ministry of Civil Affairs and other ministries

2015.04 Notice on Issuing the Guidelines for the Issuance of the Special Bond for Pension Industry

National Development and Reform Commission

2015.04 Notice on Further Improving the Eldercare Service Industry Development

National Development and Reform Commission and other ministries

2015.02 Implementation Opinions on Encouraging Private Capital to Participate in the Development of Elderly Service Industry

Ten Ministries

2014.11 Notice on Relevant Issues concerning Reduction and Exemption of Administrative Charges on Eldercare Institutions and Medical Institutions

Ministry of Finance

2014.11 Guiding Opinions on Promoting the Development of Eldercare Service Industry


2014.11 Guiding Opinions on Innovating the Investment and Financing Mechanism for the Key Fields and Encouraging Social Investment

The State Council

2014.11 Announcement on Encouraging Foreign Investors’ Establishment of For-profit Eldercare Institutions


2013.09 Several Opinions on Accelerating the Development of Health Care Service Industry

The State Council

2013.04 Administrative Measures for the Central Special Lottery Public Welfare Fund on Supporting Rural Nursing Homes

Ministry of Civil Affairs and other ministries

2012.07 Implementation Opinions on Encouraging and Guiding Private Capital’s Entry into Eldercare Service Sector


2010.05 Several Opinions on Encouraging and Guiding the Healthy Development of Private Investment

The State Council

Source: CREIS

Lack of a favourable tax regime to support operationsPublic/government-related senior housing usually enjoys local governments’ subsidies on operations or tax benefits. Private non-profit eldercare institutions could also enjoy subsidies and tax benefits, but the monthly charges will be usually capped by government, and profit is not allowed to be distributed back to shareholders. For commercial eldercare institutions, there is no limitation on price and profit distribution, but they generally cannot enjoy subsidies and tax benefits.

Another bottleneck is personnel and talentThe sector is still in its infancy. There is abundant senior housing supply but limited experienced personnel. The competition for talent could potentially drive up staff costs.


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Source: DBS Bank

Diagram 16. Policy comparison of private non-profit eldercare institutions and commercial eldercare institutions

Categorisation Social service institutions (Private non-profit eldercare institutions)

For-profit eldercare institutions

Land supply Allotted Most are leased; others are acquired through negotiation or public assignment

Time limit on land usage

50 years of land usage Commercial land: 40 years

Residential land: 70 years

Property rights Possessory right only; no right of sub-lease or sale Commercial or residential land: Right of sub-lease and sale

With the construction of eldercare facilities: No right of sub-lease or sale

Land-transferring fees

Not required/rarely require the payment of land-transferring fees

Normally require full payment of land-transferring fees

Land size Nursing home with single institution: three hectares No limitation

Combination of medical and health services and eldercare services: maximum five hectares

Property requirements

Should be limited to 40 square metres Tenancy period: 20 years

Tenancy period cannot exceed five years

Registration Registered in Ministry of Civil Affairs Registered in State Administration for Industry & Commerce; Certified by Ministry of Civil Affairs

Listing requirements

Cannot be listed on the market Can be listed on the market

Government subsidy

One-off construction subsidy of 25,000 Chinese yuan per bed, and operating subsidy of 500 yuan per bed per month

No subsidy

Monthly fee standard

Monitored/capped by government Mark-to-market

Tax benefit No value-added tax, income tax and other government administrative charges

No value-added tax, half of government administrative charges

Profit distribution No profit distribution, no privatisation of assets, no setting up of branches

No limitation


The four major business models:

1. Sales model: This model is similar to the traditional residential-development business. Developers are using the eldercare concept to attract eyeballs and charge premium pricing for their projects. Developers using such a model include Poly CN (Xitangyue 西塘越), Vanke, Greentown, Greenland.

2. Asset-heavy model – membership: This model is similar to the CCRC entrance fee model in the US. Such a model will enjoy an “interest-free loan” from the upfront membership fee (some are refundable or partly refundable, while others are not refundable but can be transferred) to alleviate the financial burden at the beginning, enjoy asset appreciation over time, and charge monthly fees to cover operating expenses. However, we haven’t yet seen a successful example in China, given high financial costs, and rising land prices. Also, a high upfront membership fee might not be easily accepted by the elderly. Developers using such a model include Fosun, Sino-Ocean (two projects are under planning) and Cherish-Yearn. As mentioned, Cherish-Yearn is still loss-making after five to six years in operation. Fosun is using the platform to sell insurance or wealth management related products to enhance total profitability.

3. Asset-heavy model – monthly fee or CCRC rental: This model charges a higher monthly fee than the membership model, but only collects a small upfront deposit (usually 50,000-100,000 yuan per person) for emergence. Yet, for developers, such a model can’t help alleviate the initial financial burden incurred for construction. Poly CN and Vanke use this model for idle assets (previously designed for hotel use) inside the group. In our view, developers may not have a strong capability to hold such assets given limited yield of about 2.7% (our rough estimate shown in the table below). In the US, senior housing is usually owned by REITs offering 6.8-7.5% cap rate and 5% dividend yield. Given the absence of REITs in China, we think developers may have to seek financing from or partnerships with insurance companies that have incentives to hold such assets to generate longer-term returns and support marketing of their insurance products. Developers with insurance companies as key shareholders, such as Sino-Ocean and Poly CN, may seek synergy with key shareholders using this model.

Business Models and Profitability

4. Asset-light model: This model doesn’t own assets but pays rental fees to assets owners. This model is widely used by international operators in China. Developers using this model include Poly CN and Sino-Ocean. Some projects have started to breakeven or even turn a profit, but are usually supported by cheap rentals. The scalability of such models is uncertain. Poly CN’s Beijing project (西山林語和熹會), with a mid-end position (monthly charge of 5,000-6,000 yuan per person), has recently achieved cashflow breakeven after being fully occupied. Sino-Ocean’s first project in Beijing Yizhuang with high-end positioning (monthly charge of 8,000 yuan per person plus nursing charges ranging from 2,000-8,000 yuan per person) has achieved 80% occupancy and positive cashflow recently after nearly three years in operation. The success of Sino-Ocean’s project could be partly due to cheap rental fees (less than 2 yuan per square metre per month) as supported by the local government.


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Items Amount

Land cost + construction cost (yuan/square metre)* 16,000

Decoration cost (yuan/square metre) 6,000

Unit size (square metre) 50

No. of units 100

Total cost per unit (yuan, million) 1.1

Total cost of project (yuan, million) 110

Room rate (yuan/month/unit) 11,000

Occupancy rate 90%

Annual revenue (yuan, million) 11.88

Earnings before interest, tax, depreciation and amortisation (EBITDA) margin

25%

EBITDA (yuan, million) 2.97

EBITDA yield 2.7%

Diagram 17. Rough estimate for an asset-heavy monthly fee project (mid- to high-end) in tier-1 cities

Source: DBS Bank*Sino-Ocean just acquired one project at this cost in Shanghai. The project will be repositioned as a CCRC membership model; we use

the cost for a rough estimate.


Dividend yield Status

FY16 FY17

Health Care REIT HCN US 5.25 5.34

Ventas Incorporated VTR US 4.81 5.07

HCP Incorporated* HCP US 5.12 5.11

Average 5.06 5.17

Diagram 18. Current dividend yield of senior housing REITs in the US

*FY17 & FY18 dividend yield@Feb 15, 2017

Source: Bloomberg Finance L.P., DBS Bank

Diagram 19. Exposure of major listed developers to the senior housing industry

Developer Poly CN Sino-Ocean Land

Vanke Fosun Greentown Greenland

Stock code 600048.CH 3377.HK 2202.HK/ 000002.CH

656.HK 3900.HK 600606.CH

Senior living platform

Operations platform would be Poly-Anping Pension Care (保利安平), while assets will be owned by Poly Healthcare Investments (保利健康投資 )

Senior Living L'amore (椿萱茂)

No group-level platform, various brands in different regions

StarCastle (星堡); also Star Healthcare (星健) is supposed to consolidate all the business resources along the value chain of senior living inside Fosun Group

N.A. N.A.

Reasons to do the business / advantages

Liquidise idle assets inside the group; senior living operating capability could be used as a bargaining chip to access land

Two major shareholders are insurers, which could create potential synergies

Liquidise idle assets inside the group; senior living operating capability could be used as a bargaining chip to access land

Exposure to full value chain, including property development, insurance, hospitals/eldercare, and pharmaceuticals.

Business diversification trial

Business diversification trial

Partner The first project was with Emeritus. Memory Care, partnered with Meridian

N.A. StarCastle partnered with Fortress

N.A. N.A.

Our suggestions to developers:

1. Developers might need to focus more on operations. 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.

2. An Asset-light model is preferred. In our view, China is lacking in professional operators. Developers with proven operating capability could expand into those projects owned by government or those that are poorly managed by other developers.

3. Mid-to high-end projects in tier-1 cities, especially Beijing and Shanghai, could be a starting point. Both cities have a large proportion of seniors with higher education and income. But developers need to have clear positioning to differentiate their projects, such as those providing memory care or combining senior care and medical care.


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Dividend yield Status

FY16 FY17

Health Care REIT HCN US 5.25 5.34

Ventas Incorporated VTR US 4.81 5.07

HCP Incorporated* HCP US 5.12 5.11

Average 5.06 5.17

Source: Company, DBS Bank

Business model Lease, sale, and membership

Asset-light care building and asset-heavy continuous life retirement centre

Lease, sale, and membership

Continuing care retirement community (CCRC), asset-light

Sale Sale

Exposure Beijing, Zhejiang, Guangzhou, Chengdu, Sanya

Beijing, Shanghai

Various regions across China

Shanghai, Ningbo, Nantong, Suzhou, Zhenjiang, Guangzhou

Jiaxing Wuzhen Kunshan Huaqiao

Commencement 2012 2013 2010 2013 2014 2007

Other comments /special features

Mid-end positioning

Memory care; also created its own healthcare brand “Health in Here” (海醫匯)

Provide a wide range of eldercare services in different regions

Aims to provide insurance-related products to enhance profitability

University for the elderly

N.A.

Targeted mid-term or 2020 operating scale

80-100 senior housing projects with 20,000-30,000 beds

20,000 beds or revenue above 1 billion yuan

N.A. 30 senior housing projects and 50 daily care centres

N.A. N.A.

Focus on operations


Welltower Healthcare REIT* Public operators^

Property age (years) 22 36 32

Occupancy 86% 82% 81%

Revenue per occupied room (USD/month)

6,830 4,666 4,131

Net operating income per unit (USD/year)

23,525 15,090 12,764

Net operating income margin

28.7% 27.0% 25.7%

Diagram 20. Returns of high-end projects in the US

Source: Welltower, Company, DBS Bank*including HCP, NHI (National Healthcare), SNH (Senior Housing)

and VTR (Ventas)^including BKD (Brookdale), CSU (Capital Senior), FVE (Five Star)

Developers need to differentiate their projects by providing memory care or combining senior care

and medical care

he asset-heavy model may face various challenges; while the asset-light model has started making profits.

Case 1: Cherish-Yearn’s asset-heavy model in Shanghai

Cherish-Yearn is a first mover in the sector and its brand name is well recognised by the industry. The company was founded in Kangqiao, Nanhui, Shanghai in 2005. The project is a CCRC entrance fee model, comprising 12 multiple-storey buildings with a total of 838 units. Despite its low land cost (estimated 750 yuan per square metre) and being a first mover in the area – the company had achieved 95% occupancy – it still made a 30-million-yuan loss in 2015. According to the announcement from Yihua Real Estate (宜華健康, 000150.CH, not rated) in early-2016, the company might not be profitable before 2020.

The return of the project looks unsatisfactory. Total investment in the project was reported to be 600 million yuan and the implied transaction price (when acquired by Yihua Real Estate) was 700 million yuan. In addition, market capitalisation of Yihua Real Estate shed 3.4 billion yuan within one week after the acquisition announcement. Trust Bridge Partners (or TBP Capital, 摯信資本) invested 100 million yuan in a 25% stake in Cherish-Yearn in late-2010. Based on the 700 million total transaction price in early-2016, TBP’s 25% stake in Cherish-Yearn translated to 175 million yuan, implying a total gain of 75% over the past five years.

In our view, its failure could be attributable to (i) the large upfront entrance fees are not easily accepted/affordable for the traditional senior population; (ii) the project size, which is too big, compared to the usual 150 to 200 units for CCRC projects in the US. In the initial years, the project also faced problems regarding uncertain land-use rights.


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Case Studies

T


Case 2: Sino-Ocean’s Senior Living L’amore in Beijing

The first project in Yizhuang was Sino-Ocean’s residential public housing project, which was completed and returned to the local government in 2013. Then, Sino-Ocean leased the area at a relatively low rental rate from the government. Since the area was supposed to be set aside for senior housing when the land was sold, the building was designed and constructed for senior housing purposes and there is no redesign or reposition issue for Sino-Ocean. The project, with 89 rooms and 116 beds, was opened in August 2013. The renovation/facilities cost per room was 300,000 yuan, translating into total renovation costs of 26.7 million yuan. After three years in operation, the project currently has occupancy of 96% and started to make profits in the last three months of 2016. Revenue-per-occupied-bed is currently 11,000 yuan with total revenue targeted to be 15 million yuan in 2017. On-site management expects the earnings before interest, tax, depreciation and amortisation (EBITDA) margin to gradually improve to 35% in the medium term, driven by rental revision and improving cost efficiency. Assuming 25% of normalised earnings before interest, tax, depreciation and amortisation (EBITDA) margin (similar to peers in US and Europe), its mid-term EBITDA yield on renovation costs could go up to 14%, which is quite a good return.

The success of this project could enable Sino-Ocean to quickly apply this model to other government projects or some idle projects being built by other developers. In fact, it already has four asset-light projects in Beijing now. In addition, this may also allow Sino-Ocean to have advantages when bidding for residential land in top-tiered cities, given local governments’ focus on senior housing.

Membership Unit size (sm) Entrance fee (yuan)

Annual service fee (yuan)

Permanent (hereditable and transferable)

58 750,000 29,800

72 39,800

120 69,800

Life membership 58 450,000 23,800

72 550,000

120 880,000

50 years 58 20,000/square metre

23,800

72

120

Diagram 21. Cherish-Yearn’s membership fees

Source: Company

Case 3: Nichii Gakkan’s home care service

Nichii Gakkan (9792.JP, not rated) is, in fact, a senior in-home service provider instead of a senior housing provider. The largest senior care service provider in Japan, Nichii Gakkan offers in-home nursing and assistance with daily living activities. The reason we have this case here is we think its business model looks more suitable for eldercare in China. Also, the asset-light model is expanding rapidly in China and making good money as well. Moreover, if such a model turns out to be more favourable in China, it may dilute demand for senior housing.

As we mentioned previously, the government is trying to build a three-layer eldercare system with 90% of the senior population being taken care of in their own homes. Nichii’s model can accommodate 90% of the senior population, while the other market participants are rushing into the senior housing sector, which is supposed to accommodate 3-4% of the senior population. In addition, Nichii also provides training services to cater to the rising demand for nursing staff.

Supported by strong business expansion in China, Nichii recorded 51.6% on-year growth in revenue in the first quarter of the 2017 fiscal year, and 215% on-year growth in operating income in China.


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Basic monthly fee (yuan)

Independent living first elderly resident

second elderly resident

Deposit for emergence 80,000 20,000

Standard unit - A 8,500 4,200

Standard unit - B 9,600

Suite - A 14,400

Suite - B 16,000

Suite - C 20,800

Assistance with daily living activities

Monthly fee (yuan)

Level-1 care 1,500

Level-2 care 3,500

Level-3 care 5,500

Level-4 care 8,000

Diagram 22. Senior Living L’amore’s monthly fee

Source: Company


(million yen) FY2016 First quarter

FY2017 First quarter

change, year-on-year

Total sales 67,878 68,414 0.8%

China sales 318 482 51.6%

China as % of total 0.5% 0.7%

Total operating income -614 -215 n/m

China operating income

116 365 214.7%

China as % of total n/m n/m

China operating margin

36% 76%

Diagram 23. Nichii Gakkan’s financial performance in China

Source: Company


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Disclaimers and Important Notices

The information herein is published by DBS Bank Ltd (the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee.

The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof.

The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.

The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.


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