Australia / Analyst Insights
Strong demand for aged care services attracts investor interest

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by Derrick Wu
Apr 26 2016

Australia’s ageing population is supporting high demand for the aged care residential services industry, with 4.7% growth projected over 2015-16. The number of Australians aged 70 and over is expected to increase strongly over the next five years as more baby boomers enter this age bracket. The ageing of Australia’s population will promote construction of new aged care facilities and industry consolidation as existing players acquire smaller facilities. As a result, the industry is expected to become increasingly attractive to investors.

IBISWorld forecasts that the number of Australians aged 70 years and over will grow by an annualised 4.0% over the five years through 2020-21, boosting the number of older people residing in aged care and retirement facilities. As people grow older, they are more likely to suffer from illness or chronic disease.  For example, research conducted by the Australian Institute of Health and Welfare shows that an estimated 60% of men aged 75 and over suffer from cardiovascular disease. Many of these individuals need specialised medical treatment, promoting residential aged care as a preferred care option.

Solid growth prospects for aged care residential service providers have attracted significant investor interest over the past five years, demonstrated by several strong initial public offerings by large industry players. Three major industry players, Japara Healthcare Limited, Regis Healthcare Limited and Estia Health Limited, were listed on the ASX in 2014. Since their initial public offerings, the shares in Estia, Japara and Regis have risen steadily, up 55, 24 and 45 per cent respectively by the end of 2015. Other aged care providers are expected to follow their example over the next five years, given strong demand and the industry’s growth potential.

The industry’s fragmented structure and cash injections from listing on the ASX have allowed Japara, Regis and Estia to acquire smaller operators. Estia has been the most aggressive, with its latest acquisition being private aged care provider Kennedy Health Care in December 2015. The deal took Estia’s total acquisition spending in 2015-2016 to nearly $400 million.

Consolidation can provide significant benefits as larger operators are generally more administratively efficient and can typically offer more flexible staffing rosters, invest more capital in technology and lower procurement costs.  As a result, large-scale operators are often more profitable than smaller players. Furthermore, acquiring aged care facilities is comparatively less risky than in other industries as many existing standards and processes can be easily implemented across new facilities without major disruptions. These factors could lead to further industry consolidation over the next five years, boosting the industry’s currently low market share concentration.

The need for aged care residential services is expected to remain strong over the next five years, as Australia’s population continues to age and require appropriate accommodation and care. Industry competition is expected to intensify as large players consolidate through additional mergers and acquisitions. Residential aged care providers will need to become more competitive to attract and retain customers.


Relevant companies:

Japara Healthcare Limited

Regis Healthcare Limited

Estia Health Limited