While demand for residential aged care is set to grow as Australia’s population ages, the residential aged care sector is unlikely to keep up over the next decade, according to our new research.
Our inaugural Residential Aged Care Sustainability Review, published with the support of Macquarie Telecom and St George Bank, examines issues and trends that directly relate to the viability and sustainability of the residential aged care sector. It examines the market dynamics, financial dynamics, and other factors that affect the aged care sector.
The review aims to provide the aged care sector with a holistic view of changes in the sector. It provides executives, boards, and other stakeholders with critical analysis and insight into the impact and implications of the changes occurring in the sector.
Demand for residential aged care services is projected to increase by almost 68% in the next 40 years, according to the Australian Bureau of Statistics.* Despite this expected demand, the review suggests that there is little evidence that enough supply will be created to meet the most optimistic forecasts of residential aged care demand during the next 10 years.
This is not for lack of demand, but rather a lack of capacity to create the additional places to meet such demands, the review suggests.
The grim residential aged-care supply outlook is compounded by the finding that official estimates of demand are more likely to be underestimated than over-stated, with the base rate of demand potentially standing at 35,000 places above official forecasts, if the current utilisation rates are maintained.
The review also highlights an emerging trend towards shorter residential aged-care stays of between one and three months. This may be contributing to higher vacancy rates, despite falling supply trends.
Meanwhile, increased interest in applying for new places is yet to translate into operational places. The research suggests the percentage of allocated places that are not being made operational is increasing.
This may reflect the industry being more focused on investment returns than creating additional capacity.
Many of the overarching industry trends we’re seeing in the residential aged care industry suggest that the profitability of the sector is actually declining, despite increasing demand. Although there was improvement in operating performance in 2014, the industry is no more profitable than it was in 2012.
The research suggests that, in addition to declining profitability in the sector, return on assets and equity in the sector is also declining. As a result, the industry is likely to become increasingly reliant on short-term finance in the form of resident loans, which increases the risk profile of the industry.
The key findings of the review are:
- the 2025 forecast for total residential aged care demand is 278,000 places
- actual investment in new residential aged-care stock in 2014 was AU$703 million
- residential aged-care industry EBITDA – earnings before interest, tax, depreciation and amortization – in 2014 improved by 7% on 2013
- residential aged-care providers in the top performing quartile increased average EBITDA by 3.8%
- the average EBITDA of providers in the bottom performing quartile declined by 143%.
*Population Projections, Australia, cat. No. 3222.0; Australian Bureau of Statistics; 2013
Bruce Bailey, Director, RSM Australia
