This week, the U.S. Department of Commerce together with Ambassador Locke, led one of five trade delegations that the Ambassador has committed to conducting in 2012. This one, focused on China’s burgeoning need to build green hospitals and senior care facilities, conducted meetings in Xian and Beijing. Relative to senior housing, roughly twelve companies exhibited in Beijing (yours truly included). The other 11 present in Wednesday’s Beijing meetings were UA Design Group, Victory Star Architecture Design Group, Holabird & Root, Perkins & Will, Beijing Sun City Group, Zhangtian Haikang Investment Group, Cascade Investment, Belmont Village, Cornerstone Affiliates, Hanson Bridgett, and Merrill Gardens. This was a lot of top-shelf experience from the United States, a commentary both on the quality of this trade mission as well as the level of interest building around the senior care market in China.
The opening senior care presentation was from Nie Meisheng, the President of the China Real Estate Chamber of Commerce. Meisheng’s presentation was a very fast overview of their services, which range from helping developers build a business plan, capitalize it, and get the right licenses. During the presentation, the questions Meisheng raised about what she admitted were the big unknowns relative to China’s senior care market at one hand perfectly capture the under-developed nature of this market, while also illustrating the opportunity. Her questions were all the right ones, yet also some of the most basic (What should a planned community look like? What services should be available to residents? What is the right operational model? Who is going to pay? How much are they going to be willing to pay?).
The first panel focused on architectural questions unique to senior care. Given the large number of Chinese real estate developers and architecture firms in attendance, this was of obvious interest. Branyo Dvorak, Mark Hebden and Paul Donaldson all reinforced the need for architecture to be the by-product of a coherent business plan, a process that needed to be iterative, but always in sync with the operational model and market research that was guiding the development. This subtle point, one easy to overlook, remains a concern as China’s developers have already shown a willingness to get too far ahead of either a solid demographic analysis of their target market, or the operational model that should flow out of this target market analysis. Chinese developers tend to begin with the end in mind, a point of view that will be challenged by senior care’s unique needs. In China, and in particular within the real estate industry, too much capital has historically been richly rewarded simply by pursuing the strategy of “build it and they will come.”
The most interesting opportunity the architects pointed out was the possibility that China could be the first country to really pursue an “aging in place” development model. In other developed economies, this is possible once customers move into an independent living facility that is capable of migrating to an assisted living model as they age. In China, it might be possible for residents to move into a community as young people that is designed to allow them to never move, to truly age in place. The phenomenon may sound uninteresting to Westerners who value moving up to bigger and better homes during their lifetimes, but in a market like China where real estate transactions are more involved and rare, this might be an ideal venue to pursue what one panelist called “true lifelong aging in place” developments.
I particularly enjoyed hearing from Christopher Alberti of Cascade Healthcare. The first western operator to receive a license to operate a senior care facility in China, Cascade is positioning itself to be the first western operator to prove they can build a viable business model within the country. Obtaining this license is one of the major unknowns that western operators remain concerned about. While the licensing process is not a well-trod path, Chris did say that when the time came, the relevant officials in Shanghai were extremely professional, easy to work with, and eager to see the licensing process go forward.
As has been previously written in Long Term Living Magazine, Cascade is starting small: they are rehabbing an existing hotel conference building and will offer 100 beds in 60 units. Scheduled to open in July of this year, Cascade is the operator and development the industry is watching. They are intentionally starting small and will focus on assisting Chinese families who can no longer provide the necessary care for their elderly parents in their homes. This can be short-term rehabilitation care, or longer-term more involved high acuity care where recovery is not possible. Care will be provided 24/7 and the facility will offer a variety of on-site clinics. Cascade has, according to Chris, the capital to build “another 30 facilities [of similar size] over the next several years.” Their model emphasizes location of the operation within the community, hence the likelihood that future developments will take place in under-utilized existing real estate shells where they can avoid the difficulties developers have had getting senior care facilities located within existing community centers.
I was intrigued to hear Paul Gordon of Hanson Bridgett. Paul literally wrote the book on how to design and implement the real estate and operating model for senior care in the United States (no, seriously, he actually wrote a book on this). Paul shared that what he sees happening in China roughly parallels what he saw happen in the United States, starting in 1985. Then, the United States real estate market had badly overbuilt and had excess under-utilized capacity sitting around. Looking for new markets to explore, there was a “surge of interest” as Paul put it, in senior housing. He went on to ask the audience if this “didn’t all sound familiar?” Obviously, this same thing is happening in China. Paul shared with the audience that in the United States in the mid-80’s, developers “had known financing, great development ideas, built buildings, but no one came.” (emphasis mine) Why was this? According to Paul, not enough due diligence had been done over what sort of build-outs were going to be most attractive to the target market and the locations of the actual developments were not convenient either for residents or for families to visit.
Is this same set of issues presenting itself in China? My own opinion is that yes, the same issues are occurring in China. I also harbor reservations about whether the Chinese market will prove to be as elastic in its ability to absorb the necessary adjustments to the senior care model. In this vein, Chip Marshall of Merrill Gardens China voiced his concern that China is going to “get rich before they get old.” This concern, coupled to what he described as “suburbanization going on at very rapid rates” and the “hundreds of millions of Chinese not living near their children” are concerns that the market will need to work through. I found Chip’s closing statement powerful and worth quoting at length: “yes, senior care has a real estate play … but it is also a restaurant, hotel and hospital all rolled into one … my biggest fear is that developers will see it simply as a brand of their real estate business … you need to have very high standards set … if the business model isn’t right, membership fees are not going to be high enough and elderly Chinese are going to discover that their needs are not going to be met because the operating model is not sustainable.”
Patricia Will, the President of Belmont Village, made a comment in closing that is very near and dear to my own research: the need for trained staff to support China’s senior care industry is acute. As she said on Wednesday, “recruiting and retaining staff in a high touch business is a challenge even in the United States … in China, the bigger the scale, the bigger the issue.” Throughout today’s meetings, the chronic need for China to develop a trained workforce was a consistent and repeated theme.
This has become a mantra of my research, but the meetings and conversations from Wednesday’s event in Beijing reinforce the need to be cautious, patient, and sequential as western developers, investors and operators expand into China. As Chris put it, “the inflationary rate of return on capital for real estate developers is over; now, this is a low rate of return business … we have not yet seen a viable business model … [people] need to slow down and get a business model that works … it is our obligation to get this right, otherwise this will just be a land grab, something this country has seen plenty of in its past.”