Until recently, the concept of a “senior housing market” in China was not even a consideration. Tradition held that families looked after their aging relatives and the government’s social programs filled in the gaps where needed. But a number of drivers are now reshaping the eldercare industry in the country. A booming senior population, changing household structural dynamics and increasing wealth have created the conditions for a new growth market: providing housing for China’s seniors.
In 2025, it is predicted that China’s national population over 60 years will reach over 241 million. In the same time period, the number of households with the minimum monthly disposable income to afford high-end senior care is predicted to be 18.6 million.
The number of seniors themselves who are able to afford senior housing is expected to reach nearly 22 million by 2020, with those living in first-tier cities accounting for more than 10 percent. Shanghai in particular appears to have a supply gap amongst first-tier cities.
Currently, less than 2 percent of the senior population uses institution-based care, although the government has set respective targets for 3 and 4 percent of the senior population to receive such care in the previous and current Five-Year Plans. Meanwhile, government studies have found that nearly 10 percent of senior Shanghai residents would be interested in receiving care in institutions. This is echoed by similar studies in other cities, such as a 2006 survey in Nanjing (8 percent).
The disparity between those interested or willing to consider institutionalized care and those who are currently utilizing it can be attributed to a number of factors including pre-conceived notions, the cultural stigma for the family and a lack of satisfactory options. Surveys suggest most of the elderly would only consider institution-based care if they needed assisted living or nursing services.
Another factor in the poor adoption rate is the cultural stigma associated with children who send their parents to such institutions. They may be viewed by relatives and friends in China as has having shirked their filial responsibilities. Yet another problem is that existing nursing facilities tended to offer unsatisfactory living environments and service, high prices, poor locations or a combination of the above.
With opportunities to fill this void, financial investors, insurance companies, real estate developers and operators are currently planning their entry into China’s senior housing market.
A Closer Look at High-end Senior Care
While there are a number of low-end institutions available—mostly rural elderly homes and rural welfare houses—the bulk of senior care institutions reside in the middle range of the market. Only a small percentage of these institutions could be classified as high-end.
At present, the occupancy rate varies across these different tiers of senior care institutions. Middle-market institutions have a relatively high occupancy rate as many of the facilities are new and provide good infrastructure and services at a price that is considered acceptable to the majority of mid-income level families. The occupancy rate of high-end institutions is generally the lowest of the three tiers; price, location and a mismatch of services are the primary reasons.
The existing high-end senior care institutions are frequently elderly homes that adopt a rental model. Yet in practice, many consumers would prefer outright ownership to a model that requires them to pay high monthly rental or membership fees.
Also, many of these institutions are located in far-flung suburbs, deterring potential residents who want to stay close to friends and family in the cities. Finally, facilities often lack good medical facilities – despite the fact that seniors often look for nursing facilities because they want easy access to medical care.
Price is also cited as a deal-breaker for many elderly-home operators. For example, Shanghai Pushan, an elderly home located downtown Shanghai, initially positioned itself as a high-end service facility but found that the demand at its price level (around RMB 5,000 per bed) was quite low. After lowering prices, it achieved full occupancy, confirming that price was the biggest barrier to success.
Given the percentage of consumers open to outside-the-home care and the high-occupancy of certain institutions, such as Shanghai Pushan, there is clearly unmet demand that can be addressed through a combination of good products offered at reasonable prices.
Five Key Business Models
Based on these various market trends and consumer preferences, L.E.K. has identified five key business models and product offerings for the high-end senior care housing market:
High-end elderly homes tend to be urban and mostly offer group living. These operations primarily target healthy seniors, but also accept a few who need assisted living or even require full-time nursing care. While the rooms are high-end, similar to traditional elderly homes, they are configured for group living with more than one bed in each room and shared facilities such as bathrooms.
These complexes are often smaller in scale and usually operate with their own staff instead of outsourcing to external suppliers. Additionally, these high-end homes are often located near a downtown, eliminating the need to build an affiliated hospital (although some still offer small on-site clinics or centers to provide basic medical services).
A review of several institutions in this bracket show that occupancy rates vary significantly—from around 20 percent in some facilities to full capacity in others—due to factors such as location, price and lack of medical services. Institutions equipped with nursing and medical resources consistently outperform those without, as they can meet the demand for medical care from their residents.
Tai Shen Xiang He was one of the earliest entrants in the high-end elderly home market in Beijing and has widely been regarded as successful in the field. Its biggest draw has been attributed to its unique traditional Chinese medicine (TCM) focus. With affordable pricing and a high reputation for service, there is currently a waiting list for prospective tenants.
A second model that is emerging is that of senior communities, which target a broad range of potential customers. Their primary focus tends to be independent seniors who need little assistance, but they often also offer sections that cater to individuals needing nursing services. The living space is often apartment-like, providing privacy and a home-like atmosphere for residents.
As the name “community” might imply, these institutions are often self-contained living spaces that offer a comprehensive set of facilities such as supermarkets, post offices, banks, etc. Thus these communities rely on a variety of specialized external suppliers. Such communities also often include a hospital on the premises or nearby.
Despite being the most comprehensive option, senior communities have been found to have a low- to mid-level occupancy rate, with a few exceptions. The long distances to downtown and high cost of living are the main hurdles for the community operators, since the majority of these projects are located in the suburbs and require a significant entrance fee or monthly service charge.
Projects that have been more successful for developers either adopt a for-sale model to attract investment-minded buyers or offer excellent locations and medical service offerings. With a rental-only model, project owners estimate a relatively long payback period ranging from 10 to 15 years. They require, on average, a 50 percent occupancy rate to break even.
Cherish-Yearn is the first, and currently only high-end comprehensive senior community in Shanghai. The facilities and services—particularly that of its medical care, with a hospital located on its campus—have been well regarded for their high standards. Unfortunately, its location in the suburbs and its high cost of living have proved to be a barrier to achieving full capacity for the facility, highlighting the importance of not only nursing services but also location and price in the senior housing marketplace.
A third model, the affiliated senior apartment, is a new pilot being tried by traditional real estate developers. Primarily targeting independent seniors, these apartments are made for the elderly who prefer to live close to their children. Room designs are similar to ordinary apartments but customized to be senior-friendly. This type of project differs in that is a sale-only model, just as a typical real estate project would be. There is only one identified existing project of this type thus far, but it has a relatively high occupancy rate.
The only identified existing project is Greenland’s Xiaoxianfang in Kunshan. Thus far it has enjoyed relative success with a high occupancy rate, as the apartments have been purchased for inflation proofing or as an asset appreciation investment. Unfortunately, while investors have found this an attractive option, developers may not achieve additional profits due to the high construction costs related to this model.
A fourth model, destination resort senior sanatoriums such as Zhongzi Yinian, also caters to independent seniors and offers more of a tourism-oriented real estate model. These institutions target healthy, high-income seniors who enjoy traveling. Typically located in scenic destination, this model employs a more hotel-like approach, often with limited medical care facilities. Customers typically stay several weeks or months, as opposed to year-round living. There are few of these institutions in the market. It is not seen to be a successful model going forward, as its target customer base is too limited.
In contrast, the fifth model that L.E.K. identified, high-end nursing homes, is considered promising. The facilities target a customer base with the highest demand—those requiring assisted living and full-time nursing care. Their biggest asset is their ability to provide medical care, often with an on-campus hospital in additional to standard nursing facilities and services.
Due to limited need, the facilities at nursing homes are often simple, with minimal entertainment amenities, allowing these institutions to be self-managed instead of outsourced. High-end nursing homes often adopt a rental or membership model and enjoy preferential treatment when it comes to land acquisition from the government due to their focus on medical care.
Currently, there are very few high-end nursing homes available due to the high entry barrier and costs associated with quality medical care. However, because of the inflexible demand, these institutions usually have a high occupancy rate. Golden Heights in Beijing is one such example.
The Way Forward
Regardless of the model chosen, there is a growing need for quality service providers. Foreign and domestic operators both have the opportunity to vie for market positions, but with more developers training up their own operational staff, competition will only grow. Knowing how to match service quality expectations, enhancing their operational capabilities and understanding consumer preferences will be key to success in this market.
Insurance companies are also making aggressive plans to enter the senior housing market. Considering their unique resources, such as leveraging their large pool of existing customers, some insurance companies are also considering embedding senior housing into their insurance products to achieve synergies. Creating partnerships with developers and operators will be a primary consideration for this group.
Despite their varying model preferences and market considerations, operators and developers will also need to find creative solutions to work together. Investors likewise will need to select their collaborators with care. While there is no shortage of customers, all market players must fulfill consumers’ preference for quality medical access and services as well as a central location in order to succeed.
As with all new markets, China’s senior housing is as complex as it is fast-changing. With little regulation and precedent, great opportunity exists to make the most of the country’s new frontier for its aging population.
Helen Chen is a director and co-head of the China practice at L.E.K. Consulting in Shanghai and Ken Y. Chen is a director in Shanghai. Please contact them at email@example.com for additional information.