RICH PICKINGS: Going out on a high
The changing shape of Australia's aged care sector has seen many pioneers of the industry selling out for top dollar. What does this mean for future investors?
Earlier this week, Bill Lewski sold his interest in retirement village developer Prime Trust to Melbourne investment house Kidder Williams for somewhere between $60 million and $80 million. Lewski will step aside as managing director of the trust, but will stick around as a full-time consultant to Kidder Williams. The chairman of the company, former federal health minister Michael Wooldridge, says Prime Trust is now in a better position to play a role in the consolidation of the aged-care sector.
That consolidation has made a number of families very wealthy over the last few years, as big property developers and investment banks try to grab a slice of the ageing action.
In February of last year, the Knowles family, owner of aged-care group Australian Retirement Communities, sold 17 retirement villages, three villages under development and six in planning to listed property company Stockland for $329 million. The family has retained eight aged-care facilities and three under development; these facilities are part of the government-subsidised area of the sector.
In December 2006, John Gandel sold three villages in Sydney to Retirement Villages Group (a joint venture between Macquarie Bank and listed property development company FKP) for about $100 million. Gandel’s family still runs the Applewood Retirement Village in Melbourne.
In October 2006, Sydney’s Moran family sold the operating leases for 39 aged-care homes to Principal Aged Care for $129.3 million. The year before, the family off-loaded 11 aged care homes for $189 million. The Moran’s have since started a new business and re-entered the sector.
In September 2005, the Inge family flogged 49 per cent of its retirement village to Macquarie Bank for $100 million. The family’s fortune was valued at $290 million on last year’s BRW Rich 200.
That more than $900 million worth off aged care facilities have changed hands in the past three years indicates the high level of interest in the sector. But while most of these aged-care entrepreneurs have retained at least a slice of the business, the deals also prove there are plenty of proprietors willing to cash in some of their chips.
It’s no surprise that people are willing to sell out – this is not an easy industry. It is splintered into a number of sub-sectors – high-care facilities, low-care facilities, hostel-style facilities, short-stay facilities retirement, villages, luxury units – all of which require specific operating models.
Getting the mix right between high-care beds (which are expensive to build) and low-care beds (which are cheaper but attract less government funding) has been a particular challenge. Skills shortages have also helped ramp up costs in recent years and sharp increases in property prices has made good locations harder to find and more expensive to buy.
Figuring out the right way to extract fees has also been a challenge. In the mid 1980s, veteran property developer Cyril Maloney converted the Astra Hotel in Bondi to an aged-care apartment building and tried to sell the units in the usual way. But it didn’t work. He eventually shifted the units by halving the cost with a buyback clause that means the apartment reverts to his company on exit.
Aged-care business models will continue to evolve as customer needs change. Where once the community or village style of facility (usually located in an outer suburb or regional area) was popular, many developers are now favouring multi-storey facilities in urban areas, which allows residents to stay near the former home. Advances in medical technology mean residents will be older and frailer in the future. The rush of baby boomers looking for beds will need to be addressed. Increases in superannuation will change fee models.
All of which means aged-care investors will need patience and deep pockets. Expect more of the sector’s entrepreneurs to spread their risk by taking advantage of the big prices on offer and selling a slice of their business.