A marginal business: residential aged care delivering real return of 1.6%, says Steven Strange

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The return on capital in the aged care industry currently has little to no appeal for investors, writes the Health Metrics co-founder – and the only solution is for the new Government to challenge the idea of inheritance, so those who can afford to pay, co-contribute to the cost of their aged care services.

Steven uses the example of a hypothetical aged care facility built to accommodate 100 beds.

“Based in metropolitan Melbourne, the facility costs $40 million to build (building costs and land procurement). I’m assuming earnings of $20,000 before interest, tax, depreciation and amortization (EBITDA) per bed per annum (high end). I’m also assuming an occupancy rate of 92.5%, which is at the high end of the current industry norm,” he says.

“Basic (simple) calculations indicate that there would be a 4.6% return on investment. This is not amortising the two years of build-time that would have an impost of approximately $6 million in carrying costs. Viewing over a five-year period, including the carrying costs, would demonstrate that the real return would be about 1.6%.

“Move the occupancy rate and the EBITDA down a notch (or two) and the whole situation is untenable and completely financially unviable. If you happen to have $40 million, you could invest it elsewhere easily with the ability to achieve a greater than a 4.6% return on investment with little effort. Given your investment wasn’t in aged care, there would be no auditors, no angry families, no ACFI validators, no workforce stresses, no negative media headlines and no coroners. Simply put, investing in aged care as it presently stands has little to no appeal for investors.”

Demonising the sector, particularly For Profit operators, will only drive away future investment.

“If the Government ‘cuts too close to the bone’, they will offside and marginalise the For Profit segment. In this context, it appears the For Profit sector is expected to operate in an altruistic manner rather than a commercial one. The logical conclusion to this is a serious contraction of investment. With that contraction in investment will come a reduction in innovation and consumer choice.”

The answer lies in the new Government addressing the role of inheritance, said Steven.

“We should begin to challenge the unwritten assumption that the children of residents in Australian aged care facilities have an entitlement to their parents’ assets – the biggest one (usually) being the family home.

“Addressing the premise of inheritance and not merely accepting it as a norm, could make significant progress towards a future that has financial stability for care sector. We need brave decisions by Government as we head into new territory.”

Steven Strange is the founder of Health Metrics, a leading supplier of software solutions to the aged care industry. Steven is currently Strategy, Research and Innovation Director for Health Metrics.