An old age problem facing local society

Different stakes

However appealing China's demographics may seem, its elderly, among all its population, is the least willing to spend, according to a survey conducted by Yang from Tsinghua University.

"The GDP level in China is low and, for old people, it's even lower. Among all the age groups, people between the age of 70 and 80 have the lowest consumption power and willingness to spend," Yang said.

That, however, has not deterred most of the prospective investors. In fact, it has prompted them to start from the very high-end services and then move on to the entire chain.

"If you look at the senior-care industry in an economy such as China's, it's clear that the demographic need is real. But it's also not clear whether the Chinese are going to access senior care in the same way as we have in the West," said Benjamin Shobert, founder and managing director of the Seattle-based consulting firm Rubicon Strategy Group.

"So if you are an entrepreneur and you are trying to segment the market, it is better to focus on the least risky sector, which is the really high end. This is what has been driving most of the investment so far," he said.

Golden Heights, an assisted-living community in Beijing, was one of the communities that took the plunge in 2007 and has since reaped the rewards.

"We found that demand for senior-care services was huge but the average amount most customers were willing to pay was less than 1,500 yuan a month. That's why we decided to start from developed regions such as Beijing, Hangzhou, Shanghai and Haikou," said Gao Junsong, general manager of Golden Heights.

The company invested about 580 million yuan ($94.7 million) in a facility in Beijing and another one in Hainan. The facility in Beijing charges more than 10,000 yuan a month and has an occupancy rate of 10 percent after just four months of operation. Most of its residents are retired government employees with welfare benefits and hence have few financial concerns.

As operators focus on high-net-worth individuals, the market for the middle class still remains largely untapped. But that could be exactly where the largest demand will be coming from, analysts said.

"There is no doubt that a lot of Louis Vuitton purses are being sold in China but, at the same time, there is also a growing social need for elderly care services among the middle class," Shobert said.

"That's a much more stable and accessible part of the market. If you look at the success stories of US brands in China, you will find that some of them are luxury products but a lot of them are young brands that figured out a way to really talk to and deliver a solution for the Chinese middle class," he said.

While a viable business model with the middle-income segment of the market is yet to appear, that does not mean it never will.

China Senior Care, a US company, is developing a 64-bed five-star senior community in Hangzhou. It is also considering expanding into the middle-class market by extending its product line.

"With a five-star brand, we want to offer world-class quality of service and care. But, ultimately, we will work on our four-star brand and three-star brand," said Mark Spitalnik, founder, president and chief executive officer of CSC.

"Like the hotel business, we will focus at the top of the chain but, ultimately I think there would be a demand for four- and three-star products as well," he said.

For the moment, though, most of the foreign companies have decided to piggyback on a local partner to tap into the Chinese senior care and housing industry.

Cascade Healthcare, a Seattle-based joint venture between Columbia Pacific Advisors and Emeritus Corp, opened its first healthcare facility in Shanghai in January. The company is setting up another joint venture with Sino-Ocean Land, a Chinese real estate developer, for a new branch in Beijing that is slated to open in July. The investment in the new unit is estimated to be around 40 million yuan.

While Cascade dominates the management process, it said it is in no hurry to go independent.

"The management model we brought in from the US needs to be localized and a good partner can help us with that. Sino-Ocean Land has upmarket assets and has first-hand knowledge about upmarket customers, which can help us localize our product," said Serena Xie, managing director of Cascade Healthcare.

The company also integrated traditional Chinese medicine treatment into its original care model to cater to the preferences of the elderly.

For Chinese companies starting from scratch, the Western expertise is more than handy, just as much as their Western counterparts need local knowledge.

Vcanland, a real estate developer in Tianjin, decided in 2010 to shift its focus from traditional real estate to senior care and housing, in the hope of being a leader in a market that had very few players.

Leading role

"There was a leading role in every segment of the real estate market except the senior housing sector. Everyone started from zero so that makes it possible for us to be the leader," said Wei Song, CEO of Vcanland Senior Living Group.

However, the company realized that it would be unable to realize its ambitions without help from a foreign partner. It teamed up with Watermark Retirement Communities, based in Tucson, Arizona, to create a platform that includes everything from senior dining, amenities, security and acute healthcare for Chinese seniors.

Wei said: "Simply put, we want to play a role in the senior-care industry in the same way Marriot is to the hotel business - a distinguished management company. China doesn't have one so far but will soon have."

The company has hired more than 10 professionals from the US, Hong Kong and Taiwan and expects to turn their know-how into their own business model.

It is going to open a dementia care center in Tianjin and two assisted-living facilities in Shanghai within two years. It has also bought a slot of land in downtown Shanghai to build a retirement community.

Policy gaps

One risk that investors face is that the regulatory framework in China for the senior care and housing industry is only in its infancy.

"A lot of people are watching without getting involved because the existing policies are not very clear, especially in aspects such as pricing. The government has to assure investors on aspects such as subsidies to encourage further involvement," said Yang from Tsinghua University.

At the moment, foreign operators do not enjoy the subsidies given to domestic ones on tax, water and electricity or land.

Market entry norms also vary from region to region but this is expected to be unified in the latter half of the year after the Ministry of Civil Affairs publishes detailed regulations on establishment and supervision of elderly care facilities, said Michael Qu, a lawyer with Shanghai Co-Effort Law Firm and editor of China Senior Housing and Care Newsletter.

As more investors join in, more needs to be done by the government to allocate resources more effectively, Shobert said. While there are nursing homes that have long waiting lists, there are also others that find it hard to attract clients because of their remote location and demographics.

"Specifically, the government needs to address the excess and poorly planned senior-housing capacity that is being built across the country," Shobert said. "Too many real estate developers are accessing land by promising to build senior housing, which they do, but without the sort of market research or operating model that will be necessary for the business to be sustainable."

At the moment, government policies that favor domestic entrants over foreign companies mean local companies have an advantage in getting access to land, Shobert said.

"It's a very long and complicated process to get land in China. We usually end up spending a lot of time on that and it can be very difficult," said Wright of Merrill Gardens.

"The biggest challenge for us now is the spending power and habits of the seniors," said Gao of Golden Heights.

"Most retired in the 1980s before the Chinese economy took off. It's impossible for them to afford the senior-care services of today. Moreover, many of them are independent of their children and don't readily ask for allowances," he said.

Gao estimates the market will truly take off 10 years from now when people who made their money in the 1990s get old and ask for senior-care services.

The situation is somewhat better in Shanghai, which is the fastest aging city in China with more than 20 percent of its population over the age of 60. It is also one of the most developed cities in the country.

Huge potential

"From what we see from Shanghai, the consumption power there is enough to support a high-end senior-care market. The elderly might not be rich, but their children are. The potential is huge," said Xie from Cascade.

Shanghai has in fact been a testing ground for numerous investors for another reason: It is also one of the most service-savvy cities in China.

"Seniors in Shanghai are very open to new and Western ideas. It is also much easier to find service-oriented people in Shanghai than in Beijing," said Wei from Vcanland.

Like the hotel business in its early days in China, the senior-care business is seeing a considerable shortage of professionals and carers. China did not start training recovery therapists in its universities until 2000. The huge lack of trained healthcare workers has also been a big problem for many operators.