Aged care sector must overhaul capital model: Grant Thornton
The aged capital care model must be restructured to ensure the sector can attract the $72.34 billion required over the next seven years, according to a recent Grant Thornton report.
The capital model for the aged care sector is in need of review with the sector less attractive to investors compared with other industries, a recent report by Grant Thornton has found.
The report, which examined capital models supporting the aged care sector said factors such as low returns, high and variable regulation, regulated revenues and difficulties attracting workers made attracting investment for the sector more difficult.
Grant Thornton principal and national head of health and aged care Darrell Price said the aged care sector will need to attract around $72 billion over the next seven years to sustain growing demand.
The Royal Commission into Aged Care Quality and Safety found the number of people aged 85 years and over will increase from 515,700 in 2018–2019 to more than 1.5 million by 2058.
This will significantly increase the demand and requirements for aged care, including residential and home care, and home support providers, said Mr Price.
“In order to fund this estimated $72 billion, capital will primarily have to be found by the for-profit and private sectors, which is a shift from the current not-for-profit sector majority funding,” he said.
The current investment model consists of 33 per cent for-profit providers, while 56 per cent are not-for-profit providers with no access to traditional investment sources. government-funded providers equate to 11 per cent.
Mr Price said the entire capital model must be structured in a way that makes it attractive to investors.
“A fresh look at the model of investment for the sector is required to ensure the rapidly rising demand can be met, and there is sufficient incentive for investors to invest in providers and for providers to invest in replenishment and replacement of older stock,” he said.
The report noted there is currently a high reliance on refundable accommodation deposits (RAD) as a source of funding for residential services.
“RADs are the fundamental source of repayment to aged care development lending. Therefore, any change to RADs would have an impact on bank lending for new aged care developments, the attractiveness of the sector for new equity, as well as the current balance sheets and liquidity of operators,” the report stated.
However, the report said the current RAD model also limits the price providers can charge to consumers for accommodation, which limits competition, innovation and capital flows.
“This impairs the functioning of the market and has the potential to restrict new supply,” it said.
“They are also not well understood by consumers who often don’t appreciate the RAD is refundable.”
The report said that an alternative option could be to retain the current RAD arrangements but introduce a deferred management fee (DMF) styled payment.
Consumers could choose to pay a RAD with an effective rental deduction, like a DMF or daily accommodation payment (DAP).
“Revenues from the DMF and DAP would improve cashflows and profitability for providers, as well as equalising the relative attractiveness of RADs and DAPs,” the report said.
“This will facilitate an increase in the number of people who are able to pay more, to do so, improving cashflow to providers and slightly relieving the burden on the government to fund the sector overall.”
Several providers have also used operating company (OPCO) or property company deal (PROPCO) structures to access capital where an investor owns the residential care facility, and the approved provider operates it on a lease basis.
“There are examples of where this works well and several examples of where it has failed,” the report said.
“The PROPCO requires a commercial yield on its investment and to some degree carries the risk of the tenant failing as the service provider.”
The introduction of a ‘regulated’ return for PROPCO investors may reduce the hesitancy to invest at scale, which the sector has lacked to date, the report said.
“[However], there is little margin for error for operational shocks, such as temporary reductions in occupancy, such as during COVID,” it said.
“Successful arrangements are complex and require detailed knowledge of the commercial arrangement required to make it work, supported by robust feasibility studies.”
Grant Thornton said that given the important role RADs play in financing development in the sector, a viable option could be to keep the RAD model but adjust the current restrictions.
The report noted, for example, that the RAD caps are currently set at $550,000 and haven’t changed since 2014.
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