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Investing in the Aged Care Sector
The aged care sector seems to offer everything an investor could want in an investment. There is a strong demand for the services and a market that continues to grow. Government regulations offer some protection to the industry and historically, good returns are expected to grow.
As with any investment there are risks involved, but aged care, especially retirement villages and aged care homes, continues to be a good investment.
Baby boomers are heading towards retirement age and it’s expected that by 2036, almost one in four New Zealanders will be over 65. In a few years, the numbers of those aged 80 plus will be affecting bed requirements in high-care facilities.
The industry projects that the country will need another 284 retirement villages by 2043. That amounts to building nearly one a month. The outlook in aged care facilities is even direr; the Ministry of Health expects a shortage of beds by 2022.
Although it’s not true that everyone will need care eventually, the percentage who do go into care stays steady. Additionally, the market penetration of retirement villages continues to increase as retirees are attracted to the idea of downsizing and living in a community with activities and high-end facilities.
Effects of Regulation
Although government regulation is often seen as a hindrance to investment and business profits, in the aged care sector, legislation to protect residents can also offer security to investors. Most retirement villages operate under an occupation right agreement (ORA), with residents buying the right to occupy a home and receiving a percentage back when they leave the village. Regulations and an industry code of practice protect this money and ensure that capital continues to appreciate.
Residential care facilities benefit from government investment. As part of the health care industry, government regularly contributes to the industry, invests in infrastructure and subsidises the placement of some residents. This is especially true as the population continues to age.
With a growing market and government protection, it’s not surprising that the sector brings solid returns. The industry boasts 586 businesses across the country, an annual revenue of $3 billion and annual growth of 5 per cent. Although some outlays are expected in the coming years, including new construction and upgrading facilities, experts believe that investors will continue to see the value of their shares grow.
As with all investments, investors need to do their own research as there are risks involved. Although it’s unlikely that demand will disappear, changing governments can change regulation and affect profit and growth. In Australia, for example, funding cuts led to sector losses on the stock exchange.
Another government initiative, proposed changes to the Overseas Investment Act, may make it more difficult to buy land to build on. The industry also faces risks as it continues to build, with shortages of qualified builders and contractors slowing work. The big players are likely to overcome this through consolidating their resources and keeping good workers in their employ.
The current aging population is also staying healthier and wishing to stay in their own homes longer. This may seem like a risk but is unlikely to have a huge effect. As retirement villages continue to improve their offerings with premium facilities, more retirees will be attracted to the business model. Villages that offer a continuity of care with aged care homes at the same community will also attract retirees who don’t want to move as they require more care. If the market penetration of retirement villages was any higher, it would be difficult for the industry to keep up with demand.
The aged care sector offers a number of benefits to investors. Government regulations to protect residents also offer protection to investors who can find a secure investment with strong returns in the sector. As long as they investigate companies properly and understand the risks in the industry, investors are likely to find excellent investment opportunities in the industry.