Looking After China’s Elderly

With an aging population and fewer young people to care for their parents, there is a growing opportunity for foreign companies to provide institution-based care to China’s seniors. By Helen Chen and Ken Y. Chen

As China’s rapid economic development continues, demographics shift, and social needs change, the country will face new challenges, not least of which is looking after its growing elderly population.

While a variety of care facilities have cropped up to care for China’s seniors, few have been widely successful in capturing the market. A closer look at consumer preferences, current market dynamics, and the challenges that lie ahead provide an overview of the landscape and opportunities for taking care of the country’s aging citizens.

An aging population

China’s population is undergoing a dramatic shift as the implications of the one-child policy tilt the balance towards an aging population. A phenomenon known as “4-2-1”—where a family may consist of four grandparents, two parents, and a single child—has led to a situation where fewer young people are available to care for aging parents.

China’s aging population has also grown because of significant improvement in life expectancy, which has increased from just over 68 years in 1990 to almost 75 years in 2010, and is expected to reach 75 years by 2020. As a result, the senior population is seeing significant growth in absolute numbers and as a percentage of the total population.

According to statistics released by the World Health Organization, on average, Chinese citizens have a “healthy life expectancy” of 66 years, leaving a gap of roughly eight years for which some form of care will be needed—either in the form of assisted living or nursing care. As they age, their need for care increases: Nearly 50 percent of the oldest (80-plus years) seniors are unable to take care of themselves, according to the China National Committee on Aging (CNCA).

Mass urban migration is also reshaping the country’s demographics. The urban senior population is expected to grow at a much faster pace than rural areas and is expected to surpass it as early as 2020, according to CNCA.

An additional and noteworthy trend that is appearing among this segment of the population is that more and more seniors are living on their own. The 4-2-1 phenomenon, coupled with changing family dynamics, has led to an older generation that commonly lives apart from its adult children.

Stay-at-home seniors

In a recent survey conducted by the Philips Center for Health and Well-being, 86 percent of Chinese citizens indicated that living independently as they age was important to them. Correspondingly, home care currently accounts for 90 percent of the care that China’s elderly receive. As private sector home care develops, the central government is providing more encouraging initiatives and standardization guidelines in areas such as daily support, housework, psychological counseling, rehabilitation, and emergency help. In 2012, the Ministry of Civil Affairs issued a regulation to support private senior home care through subsidies, purchasing of services, coordination assistance, and public standard endorsement.

While the majority of the senior population is looked after by family members, franchised whole-chain home care services are starting to enter the market. For instance, Right at Home is a senior in-home care provider that caters to the high-end market in several cities throughout the country. They provide companionship and homemaking, physical assistance, as well as hygiene and wellness services.

Unfortunately, in-home care providers are rarely able to offer skilled medical services—a key requirement for the elderly. Institutions on the other hand, can. But at present, a meager 2 percent of China’s senior population chooses institution-based care. The government would like to see these numbers rise as indicated in its latest Five-Year Plan (2011-15), which aims to provide institution-based care to 3 percent of the total senior population—or about 3 million people—by the end of 2015.

Nursing homes to destination resorts: senior housing options

The 2010 Sampling Survey of the Status of the Elderly in Urban and Rural China conducted by CNCA indicates that 11.3 percent of urban senior citizens and 12.5 percent of rural senior citizens are open to institution-based care. This number could be on the low side, though, as it does not account for the poor image that most “old folks’ homes” conjure up nor the availability of current “home-like” institutional settings.

In fact, this perception is built on a market that is primarily made up of low- and mid-end elderly homes and welfare houses. Nonetheless, a high-end market is beginning to bloom. And given the percentage of seniors who are open to external care and assisted living options, there is likely to be an unmet demand in this segment. Based on different market sizing methodologies, Shanghai appears to have a supply gap among the first tier cities. L.E.K estimates that there is a shortage of about 3,000 to 4,000 beds for seniors in Shanghai.

As the market develops, L.E.K. has identified several different models that have cropped up to meet this growing demand:

• High-end elderly homes mainly target healthy seniors, offer group living, outsource most services, and usually only offer basic medical care.
• Comprehensive senior communities often target seniors who wish to live independently, providing them with residential apartments and creating an inclusive community and a comprehensive set of facilities and infrastructure including banks, supermarkets, and post offices.
• Affiliated senior apartments provide an elderly friendly layout and design and have been recently introduced to the market through developers who target independent seniors that would like to live close to their children.
• Destination resort senior sanatoriums offer a model in which seniors can choose a destination with very limited elements of senior care.
• High-end nursing homes target seniors that need assisted living or nursing care and often contain internal hospitals to provide medical services to residents.

High-end nursing homes appear to be the most promising market for investors given that they target customers who need a high level of medical care and can afford to pay for it. These facilities may enjoy some preferential treatment when it comes to land acquisition from the government—due to their focus on medical care—but these same medical services often pose high entry barriers, such as regulatory requirements for local approval, and accompanying costs. Nonetheless, these institutions typically enjoy a high occupancy rate because there isn’t enough supply.

What the customer wants

The number of elderly who are able to afford high-end senior housing is expected to reach roughly 22 million by 2020, and seniors currently living in Tier 1 cities, which are China’s largest and wealthiest, account for approximately 10 percent of that total (see Figure 1).

L.E.K.’s research indicates that seniors prefer housing with good healthcare options, even if they are healthy when they move in to a facility. As with all real estate, location is also an important factor: Seniors prefer housing and care facilities that are near their family and friends. Furthermore, a good environment and family-like atmosphere are important to attract and, even more so, to retain residents. Finally, consumers prefer to own instead of rent and pay membership fees because of cultural reasons such as a better sense of security.

This last point challenges the traditional model for elderly residential care facilities, which is to rent, and highlights the distinctive challenges that this market holds for developers and operators.

Creative collaboration is key

Senior care in China represents an immense opportunity for investors, developers, and service providers alike. With a variety of different entry points from senior housing to home-based care, the market is ripe for exploration.

Chief among these opportunities is a growing need for quality service providers. But as more developers begin to train their own qualified staff, both foreign and domestic operators will face increasing competition in the field.

Among other new competitors, insurance companies are also forging grand plans for entry into the market. Considering their unique resources—such as their large customer base—some insurance companies are even planning to include senior housing in their package offerings. For these investors, the right partnerships will be crucial for success.

But it is not just insurance companies that need to pursue strategic partnerships. Developers and operators will also need to engage one another, finding creative ways to collaborate in achieving both an adequate rate of return as well as sustained income respectively.

One of the pioneers in the market is a joint-venture in China by Merrill Gardens and Related Companies. Merrill Gardens is one of the largest private operators of retirement communities in the United States and brings operating experience, while Related, as the developer of projects such as the Time Warner Center in New York City, supplies the real estate know-how. The JV has recently embarked on its first senior housing project in Shanghai, which is expected to open in 2014.

With minimal regulation or precedent, the senior care market holds great opportunity for innovative solutions and creative collaborations. But as with all new markets, senior care is as complex as it is vast. All market players will need to navigate the road between consumer preferences—especially that of quality medical access and service—and market opportunities. Matching service quality expectations, enhancing operational capabilities and understanding consumer preferences will be the key to success in China’s burgeoning senior care market.

[author]
Helen Chen and Ken Y. Chen are partners at L.E.K. Consulting, a global management consulting firm with 22 offices across Europe, the Americas, and the Asia-Pacific region. L.E.K. has been on the ground serving clients in China since 1998.[/author]