Residential aged care industry factors in $1.2 bln funding cut announced in May

Australia’s $14 billion residential aged care industry is still assessing the recent funding cut and the impact lower government revenue will have on its growth which is being driven by the long-term health needs of Australia’s aging population.

The $1.2 billion cut, announced in the May Federal Budget, will make its way through the aged care industry during the next four years. 

It will target Aged Care Funding Instruments—the classification system used to assess the health of residents and the payment of government subsidies to aged care operators following government concerns about higher than expected growth in ACFI expenditure.

Colliers International Executive Health and Lifestyle, Henry Vu said Federal Government subsidies made up the majority share of the industry’s operational income and the budget cut would land a direct hit on bottom lines.

“The real implication of the budget cuts are yet to filter through but in WA, there could be less impetus for new aged care developments and increased consolidation activity, especially for the smaller operators that are not as well-placed to handle the impact to profitability,” Mr Vu said. 

“Smaller, single-site aged care operators may not have the business models to survive long-term and similar to what we have already seen in New Zealand, are likely be taken over by bigger organisations that can use their scale to remain profitable.”

In the biggest transaction in WA last year, Opal Aged Care purchased the St Ives Group’s aged care business, which included two facilities in Melville and Murdoch and a development project in Carine. 

Listed operators are best placed to weather the funding cut but a recent downgrade by Bank of America Merrill Lynch based on ACFI payments being harder to secure, indicates they too won’t be unscathed.

In the weeks since the budget, the Aged Care Guild, the industry body representing private sector residential aged care providers, has commissioned Deloitte Access Economics to review the impact of the budget cuts.

According to analysts, investment and growth in Australia’s aged care sector is required because of population growth, the ageing population and increased life expectancy.

Figures from the Australian Bureau of Statistics show the number of older Australians, aged 65 or above, will more than double from 3.6 million to 8.5 million from 2015 to 2055 and the expanding older population is also absorbing a greater proportion of government spending. 
On the current trajectory, Productivity Commission forecasts indicate that in the years to 2060, retiree related spending will grow in proportion and actual money terms to over half of government spending. 

Mr Vu said the burden of paying for retirees was also falling on a smaller workforce and this would accelerate moves toward the user-pay model. 

Figures in Colliers International’s Healthcare and Retirement Living report shows that in 1985 there were 6.4 workers aged 15-64 for every retiree but by 2055, the number will halve to 2.8 workers per retiree.

“Residential aged care homes in WA are a hotly contested asset class and always carry a lot of interest,” Mr Vu said. 

“Strong demand to buy the facilities and the scarcity of properties offered for sale has also kept transaction prices high.”

In the past 18 months, Colliers International has negotiated aged care related deals valued at $50 million, all of which had transaction prices in line with or above market valuations.

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