How smart aged care investors are overcoming supply constraints

Australia’s Seniors Living sector has long been one of the nation’s most polarising market segments. With a rapidly ageing population and a current and forecasted undersupply across both retirement and aged care offerings, this is now the case more than ever. 

While increased funding for the Seniors Living sector seems inevitable in supporting its long-term sustainability, when this will occur still remains unknown.   

Current state of the Seniors Living sector  

In the interim, a landscape of rising construction costs and increased operational costs has made new developments in this sector few and far between. Adding to this equation is most operators freezing their new project pipeline and opting for refurbishment or extension opportunities via existing homes or the acquisition of vacant assets. In some cases, operators are now also considering leasehold assets in partnerships with private developers and investors in order to build operational scale in the short term. 

These new leasing trends have increased freehold renovation and extension interest and in effect, driven creative architectural design and expansion projects. Some of these innovations also include retirement village joint ventures or the inclusion of community cafes and medical centres. Elements of this were predicted in advance during CBRE’s interview with Tieran Kimber of Marchese Partners back in 2021.  

A result of these trends, there’s been a record number of former aged care homes being marketed for sale over the past 24 months. CBRE’s Australian Healthcare & Social Infrastructure team is forecasting this record volume of sales to be surpassed yet again in 2023. 

Transaction trends of vacant aged care property 

Over the past 24 months, numerous vacant aged care homes have been transacted and the trajectory of opportunities will only continue to head north.  

These successful transactions are dependent on the asset’s: 

• Age
• Quality
• Maintenance history of any improvements 
  
  

Many of these opportunities have transacted at below replacement cost with notable purchases focusing on aged care or Healthcare conversion and disability services. Current opportunities and requests for previous transaction information can be explored in CBRE’s Sales Selection Magazine.  

A further snapshot of the increased volumes of transactional activity is shown in the following chart. As of Q1 2023, CBRE has already seen multiple sales with further assets being marketed currently by the Australian Healthcare & Social Infrastructure team. 

Why aged care refurbishing and repurposing works  

In many cases, experienced residential aged care operators adhere to a strict maintenance and refurbishment schedule, particularly those homes located in metropolitan areas. This is primarily for residential quality of life; however, it also ties in with higher levels of government funding initiatives.  

For these reasons, refurbishment and extensions of these homes is often far less substantial in cost than a comparative new build, even when upgrading the home to a near-new standard. 

Aged care construction costs are significantly high at the moment which creates an equally high barrier for developments to enter the sector. From a developer’s perspective, projects are rarely feasible which is why the overwhelming majority of the country’s RACF homes are owner occupied. 

From past CBRE market discussions with architects and operators, construction costs can range anywhere from $275,000 per bed to north of $400,000 depending on quality. 

Development compliance for these homes is strict and all must be built to a Class 9c standard. In addition, under residential planning controls, aged care homes achieve a greater density and height allowance, typically four to five storeys, which cannot be replicated by alternate uses. 

Identifying the alternate uses 

The million-dollar question - and in most cases multi-million dollar – is: who is buying these residential aged care homes and what are their alternate uses? 

Suitors for these homes include but are not limited to: 

• Residential aged care operators: The first and most obvious buyer group is existing operators, where an aged care provider will once again license and operate the property as a home for the country’s elderly and care dependent. The scale of refurbishments, if any, can vary substantially from operator to operator. In several cases, incoming aged care purchasers conduct multi-million-dollar renovations which can leave properties near unrecognisable, drastically increasing the standard of living and ability to administer care for residents. 
  
  

• Rehabilitation and mental health providers: An asset class which is forecasted to drastically increase in scale over the coming years is rehabilitation and mental health accommodation. These health care providers often convert vacant aged care homes into modern hospital standards. Given current building and regulation guidelines, vacant homes and hospitals form a natural union with a conversion and are significantly more cost effective than a new build. All aged care homes are required to be classified under schedule 9C while hospitals must be classified as 9A. There are a number of differences between the two categories, but none are insurmountable. Typical changes revolve around fire protection systems and more.  
  
  

• SDA and NDIS accommodation providers: Similar to rehabilitation groups, the market for SDA and NDIS accommodation is also increasing at a rapid rate. This is driven by continual increases in the funding and release of homecare packages. As the number of new and experienced providers increase their presence in the sector, so do their partnerships with developers and investors. In this instance, changes focus more on the conversion of an aged care home into an apartment style complex. From an access and compliance perspective, aged care homes generally already meet the required standards.  
  
  

• Medical centre and consulting suites: A less frequent buyer source but one that does exist nonetheless is where part or entire buildings are converted into large scale medical consulting hubs. This allows for substantial consulting rooms with individual shower and bathroom amenity to attract specialists and patients alike. Medical centres can also be integrated into existing  aged care homes as a complementary user.  
  
  

The CBRE Australian Healthcare & Social Infrastructure team are experts in the sale of both leased and vacant aged care properties plus going-concern assets. To be informed of future opportunities within this space or to discuss the space further, please contact a member of our team anytime.