Chief among these lessons has been the challenges unique to real estate, both the transaction made by the developers at the front end of the project, as well as that completed by the customer upon purchase.  With both of these transactions in mind, I wanted to get the thoughts of one of the leading experts in the senior housing real estate market in the United States, Paul Gordon.  I mentioned Paul previously as part of Ambassador Locke’s Senior Housing Trade Mission.  As I pointed out then, he has quite literally written the book on senior housing, and is uniquely positioned to comment on how the American senior care market developed.    My specific area of interest was in learning more from Paul about how the American senior care and senior housing market came to fruition, and what lessons China should draw from any mistakes that were made then.

Paul opened our conversation last Friday afternoon by sharing that to him, “what is going on in China feels a lot like what went on in the US in the mid-80s.  There was a sudden interest in senior housing as if it had not existed – almost as if seniors had not existed – but what happened was this surge of interest from real estate developers that had found a niche market with good demographics that could be developed.”  This echoes a comment he made in Beijing around the observation that American real estate developers had – in general – over-built in the 80s to discover they needed to either convert under-utilized properties, or build new ones in order to keep afloat.  As Paul sees it, this same dynamic appears to be occurring in China:  “There apparently has been over-development in some areas of China’s real estate market and so there may be a similar need for China to find a less-developed niche market.  This is not to say it is bad – it is all good; but, there are going to be some successes and some failures as there were in the US.”

I wanted to get Paul to expand a little bit on what the Chinese should learn from our own experience of seeing developers too aggressively pursue senior care without adequately understanding the market’s needs.  He shared that in his estimation, “What went bad in the US were developers targeting too young of a population to serve and thinking that a 65 year old would respond to the new developments, when the opportunity was actually when these people came closer to 75 or 80 years old. If you don’t understand the market, you build in the wrong place and build too many of the wrong sort of units.”  He went on to make an important caveat:  “Does the US experience transfer 100% to China?  It probably doesn’t.  It may be that a younger age group in China might be more prone to moving than in the US … who knows?  Assumptions about who is going to show up in a community have to be tested a bit before you spend millions building something.”

Let’s pause a bit here and nudge out what I think is an important insight Paul is offering:  as Kevin Ryan shared with me recently, Chinese developers tend to want to talk about building huge communities, a reflection of three factors.  First, it’s how they do business.  They didn’t get to where they are by starting small.  Second, their understanding of the market opportunity and all the “compelling” demographics suggest to them that going big is the natural thing to do.  Third, they think that the “go big or go home” pitch will impress potential western investors and operators when, in particular for the latter group, going big into an untested market without a proven business model is perceived to be the absolutely wrong thing to do!

Paul went on to comment that as he sees it, the other major mistake American developers made was focusing on all the infrastructure and amenity issues at the expense of more important operational issues.  On this point he explained, “The other mistake some in the US made was that a lot of emphasis was put on real estate, architectural design, the ease of developing a particular piece of land, zoning and entitlements, making these processes easy – those were the driving factors for development of some properties.  But the developer didn’t pay sufficient attention to other issues such as competition in the market, whether there is a sufficient population to support it, what percentage do you have to attract to fill the building, what sort of services do you have to offer, does your target audience need care today or 10 years from now?”

Paul added some additional commentary on how the American regulatory system evolved and what China could take from our experience on this front:  “In China I really don’t know what the regulatory situation is, but from what I hear it is a hodge-podge.”  Paul has helped the China Real Estate Chamber of Commerce (CRECC) develop accreditation standards for Chinese senior housing based on a model for assisted living regulations developed by the American Senior Housing Association and US state laws.  With this experience in mind, Paul went on to comment, “China could also benefit from the US regulation model.  Many states have regulations on CCRCs – this would be helpful for China to emulate because despite the differences in culture between the US and China and the underlying laws in the two countries, so many things the regulations need to deal with are about what we have in common related to human interactions:  older people living in a managed residential community, receiving services including healthcare from the manager for a price, under circumstances and rules that are defined in part by the law, and in part by a contractual relationship between the parties.”

That is a mouthful, but it is so important to point out that not only does this sort of regulatory framework not exist in China, but that within the healthcare space itself, paying for services in China remains more of an unknown on both a transactional and reputational level than is widely understood.  American providers eager to expand in China would do well to make sure their contracts and collateral do not make the mistake of over-promising and under-delivering.  Until a more robust regulatory regime is in place in China, much of this will exist in the realm of private contracts, which puts the onus on the operator, not the individual.  As a Western company in China, you can bet the courts will err on the side of protecting the family before you.

I was curious to ask Paul if he saw China making any of the same mistakes we made, and whether anything could be done to prevent these errors from occurring in China.  Paul shared that “there are a number of well-publicized entrance fee CCRC models that failed in the US over the years all the way back into the 1970s.  Also, in the late 1990s, monthly fee based assisted living facilities were overbuilt, and many failed.”  Explaining how this happens, Paul shared that “What tends to happen is a developer goes out and tries to determine if there is a market for a particular facility; they may also get entrance fee deposits from customers before a building is built (typically 10 or 20% of an entrance fee) but then for whatever reason, construction commences, and in some cases deposits would disappear never to be seen again.  In other cases, the building is completed, people paid entrance or monthly fees and moved in, but the development never got beyond 50% occupancy, which in turn drives the whole project into bankruptcy.  Once this happened, in most cases they would then try to change the financial parameters of the deal and allow some new residents to come in on a rental basis, which means the whole model of retirement community that was offered to the group was not the same as was promised.”

What happens when this would take place in the US?  Paul elaborated that “Very often a community like that gets stigmatized and become reluctant to move in. Meanwhile, tens of millions of dollars have been spent on buildings and communities that certainly don’t meet expectations in terms of the sales process.  That is in a mature market like the US.”  Amid stories about China’s real estate bubble, the potential that similar mistakes are being made by developers in China cannot be discounted.  What does this mean for potential investors and operators in the West who want to come into China?  First, due diligence on your potential partners is extremely critical.  That is a very different vetting process in China and is highly reputational versus the more formalized approach possible in the US or EU.  Second, one has to ask about timing.  If in fact this same sort of phenomenon is taking place in China, are you better off studying, researching and circling the field?

On this latter point, Paul added, “Unless you are really lucky, or have a really good handle of what people are going to do when you build your building, it is really important to do your market research.  Be sure you understand what kind of services they want.  I’m a little bit afraid some people are going to build gigantic projects, after all many have a beautiful piece of land and the authority to do it, but the market may not support the price level they need to make the ends meet financially.  It is a human nature issue, not a Chinese issue, not an American issue.”  Paul shared that one way to address this fear would be for China to adopt more of the sort of up-front market intelligence analysis that is now required by many American states.  He explained, “many states require that before you put a stick in the ground you go to the state with your project plan (financial feasibility study and market feasibility study) which looks at what you are going to build and how much it will cost to operate after 5 years.  You have to define your market, how many people in the geographic area are age and income qualified to move in, and then illustrate the penetration rate needed to fill the building.”  Only after these details are provided to the state can you get the necessary approvals to build.

Paul was quick to acknowledge that China will have to find a uniquely Chinese solution to meet its needs, or as he put it “I like to think that China is in a similar position that we were once in, and that there is going to be all kinds of experimentation.  There are going to be failures and successes, but overall it will be good because a vibrant industry will develop there just like it has here.  On my last trip to China I saw a proposed 3,000-unit retirement community.  Will that be successful or an utter failure?  I don’t know, but I do know that already what they are doing is different and I would encourage anyone who wants to get involved to take a hard look at consumer preferences and study demographics to try and figure out if you can fill up a place with that sort of size and scale.”

As happened in the United States, the senior care market in China is big enough that multiple models will emerge, and many players within each divergent model will be successful.  In reflecting on my research thus far, and Paul’s comments specifically, I do wonder if the Chinese real estate market is chasing senior housing as much to keep the proverbial ball rolling, and if so, whether objections from within the Chinese culture about moving into a retirement community have been given enough voice.  If China’s senior housing market is going through a similar hype cycle as we went through in the 80s, will it have the elasticity to absorb excess under-utilized capacity, refine the housing model, and continue on?  Time will tell, but for American investors and operators the message of up-front market research and due diligence hopefully comes across loud and clear after reflecting on Paul’s insights and experience.

Kevin has been exploring China for the past several years and shared his tentative plans for Waterbook’s Xian facility.  Planned on a 330,000 m² site approximately one hour from Xian, Waterbrook’s community will feature 576 independent senior living units spread across a blend of 1, 2, 3 and 4 bedroom units.  The Xian development will include an 80 bed aged care facility, although Kevin was quick to point out to me last week that they are not planning on building a hospital on-site; as he said, “hospitals are too specialized – we are not planning on doing acute care, rather just aged care – we want to leave hospitals to the experts.”  Kevin also understands that the closer your aged care facility is to what China perceives as a true hospital, the more complicated your licensing process becomes.

Scheduled to be built out over 3 years, the Xian project will result in 80,000 m² of saleable space.  Kevin shared with me one of the challenges he has faced in China are the regulations limiting how developers of senior care space (or any sort of real estate developments for that matter) approach pre-selling.  As western operators know, most of the time you have to presell 50% of the planned development before you can get the necessary financing; in contrast to this, China has what Kevin described as “a completely different model … the developer has to put up the entire shell then get a license to presell.”  But, he quickly added, even this has a caveat to it because “every city is different.”

Kevin’s Waterbrook Xian is definitely focused on the high end of the market, a sensibility he understands well based on what he has built in Australia; although, Kevin was quick to add that the scope of working in China can make even the most established operator or developer queasy.  He shared that at his end of the Australian market, “a big development would be 80 apartments.  In China they don’t want to talk about anything less than 300.”  He chuckled when we talked and added, “I have some potential Chinese developers who have approached me and are OK with doing just one or two developments to prove the concept, but I also have others who are confident they can build 100 different developments at one time!”

Based on his preliminary due diligence, Kevin anticipates that the majority of his clients will be self-funded (in other words, they and not their children will be the ones paying for their entrance and long-term care).  Planned to begin preselling in April 2013, the Xian development will reflect a proprietary relationship between Waterbrook and the Chinese real estate developer.  If you want to learn more about what that relationship is going to look like then stay tuned (or, come to the upcoming IMPACT Retirement Living World 2012 Conference in Shanghai at the end of this month and ask Kevin yourself!).

I wanted to get Kevin to expand on what he saw as the biggest challenges Western operators need to be aware of and he first brought up the issue of educating and training a work force.  Secondly, he added that in China operators would need to “take away the preconceived notions of what aged care looks like because at the moment, no one wants to put any of their families into a nursing home.”  But I found his final comments the most interesting and worth quoting at length:  “Before you get too far into China, it is very important for Western operators to be very sensitive that we have to acknowledge we don’t have an operating model for China … we have tools we have developed over years of running our own facilities – but what works in your country may not work in China … yes, we have all the skills to be successful in China, but you have to dismantle the building blocks of your business and rebuild your model from the ground up.  If you keep that attitude, they will respect you, and you will be successful.”

A Knowledge@Wharton article from last year made the point that China’s unclear regulatory framework has inhibited many outside investors from being able to deploy capital effectively, even though China’s updated foreign direct investment (FDI) catalog has moved such investments formally into the “encouraged” category.  The article quoted Peter Liu who had first hand experience with a for-profit hospital that did not receive the necessary licenses from the Chinese government.  He shared with Wharton, “Our team has been waiting for five or six years to open our foreign joint venture hospital and we still do not know when we can open.”

In addition, the Wharton article quotes a consultant with knowledge of another similar situation encountered by a group of investors from Arizona (the infamous Beijing International Heart Hospital):  “By the time it could get off the ground, its license had expired … the foreigners involved [in that project] are great examples of what not to do. They oversimplified how things work in China, invested too little and then ran out of money. They raised some more money but it was not enough. The license expired and had to be renewed. When push came to shove, the project took too long and its investors deserted them.”

It can be tempting to argue for how senior care is fundamentally different than the situations Wharton is describing and how reforms since early 2011 have made the relevant path forward easier to pursue, and in that sense the fact that Emeritus has successfully received their license should hold reason to be confident the process in the senior care space is more transparent than that private hospitals must face; however, long-time China experts know that trivializing the role of properly and pre-emptively embracing the necessary regulatory approvals for a senior care facility is not something that should be overlooked.  In this same sense, those familiar with China’s over-arching legal narrative know that what is promulgated from Beijing and what is enacted at the local level can be widely divergent; consequently, navigating the regulatory framework can be a devilishly local endeavor.

With this in mind, I was very eager to speak with Michael (Qin) Qu, a Shanghai based lawyer with the Co-Effort Law Firm.  For those not familiar with Michael’s work, he publishes a regular newsletter on China’s senior housing and care industry.  What I wanted to explore with Michael were the specific regulations and procedures that guide approvals of foreign owned and operated senior care facilities.

The first point that Michael made is that China’s approval process is different between for-profit and not-for-profit institutions (that has proven to be an important distinction for those in the industry who are familiar with the back story to Cherish Yearn).  A not-for-profit must obtain the approval of the Ministry of Civil Affairs and the local government; however, because few (if any) foreign investors in China’s senior care market are not-for-profit, this is less interesting than an understanding of the for-profit regulations.

Michael shared that as of today a for-profit senior care institution must secure the approval of the Ministry of Civil Affairs, the Ministry of Health, the Administration of Industry and Commerce and the Ministry of Commerce (MOFCOM).  The Ministry of Health will want to explore the nature of the healthcare services being provided in your facility:  if they determine your services are most similar to those offered by a hospital, you will be held to higher standards and the qualification process will be longer and more difficult.  In contrast to this, if you are offering what Michael called “in-house healthcare” then the qualification process for approval of an internal clinic is more straight–forward.  Michael was quick to add that in China, distinctions between nursing homes, independent living, assisted living and CCRC do not yet exist, so foreign operators should be careful in assuming those same classifications will guide the Ministry of Health’s view of what you are offering and what standards you will be held to.  Again, this question of how your facility will be classified is a great example of how regulations can – and will – be widely interpreted on a very regional basis.  Michael said that a foreign operator should plan on 6 months of back-and-forth with the relevant government agencies prior to receiving the necessary approvals.  As the market heats up, whether this time frame will contract or get drawn out is something western companies will want to pay attention to.

I asked Michael what the typical problems were that he has seen thus far and his first comment was the lack of “specific criteria from the government on what is required to open a facility … this is one reason why it takes so long for the Ministry of Health to issue a license.”  Not to beat a dead horse, but Michael then added that even when the Ministry of Health grants the necessary license, the local government may not be sure this is the only approval needed for the doors to open!  In these cases, the best prophylactic is to get engaged early with your local government.  How local?  Michael commented that “it isn’t enough to work with the Shanghai government; if you want to open in Pudong, you need to be talking to the people in Pudong.”  For those unfamiliar with Pudong, one way to think about it would be that Pudong is to Shanghai what Brooklyn is to New York City.  Yes, that is how local you need to be thinking.

Michael helped add some additional context to the question of whether any existing regulations protected foreign operators from frivolous litigation.  In lieu of well-established, government backed assessment protocols, the possibility exists that Chinese could sue foreign operators for outcomes they believe to be inconsistent with promises made.  On that point, western operators have reason to fear being more susceptible to this problem given their reputation for high-quality as well as their supposed “deep pockets.”  Michael acknowledged that “we have seen lawsuits in private nursing homes and the outcome has always been in the favor of the elderly people.”  In his view, this is a manageable risk and one that will diminish over time as both the government and private insurance begins to formalize standards.

One non-regulatory but legal matter we discussed was the idea of counter-party risk, or as Michael described it, the “chemistry between the operator and real estate developer.”  What does he mean by this?  “A lot of foreign businesses get involved in China, but after 5-10 years the foreign investors want to transition into a Wholly Foreign Owned Enterprise (WFOE).”  Michael believes this process can be un-necessarily cumbersome if short and long-term goals are not aligned up front.  Sometimes, these risks are not understood on either side of the table:  the western investor may think such a transition is the natural order of things (or conversely, may genuinely want a long-term partner), while the Chinese real estate developer wants out of the investment within a time frame that leads them to not think long term about sustainability or quality of the proposed development.  In some ways, either a short or long-term time horizon may be palatable and workable, but as Michael pointed out, not getting this identified up-front can be problematic.  More so because, as he put it, “the payback period for the developments we have already seen get built has been much longer than we expected.”

Towards the end of our conversation, Michael shared the four areas he is monitoring to determine how the regulatory framework for China’s senior housing and senior care industries are going to evolve.  They are as follows:  the preferential policy for foreign operators in terms of taxes, subsidies and land grants, the welfare policy for elderly people without adequate savings, the ongoing efforts to develop a more comprehensive insurance policy, and the development of industry standards for healthcare delivery to seniors.  As Michael pointed out to me, each of these are currently immaturely developed in China, and private industry has a unique opportunity to step in and help shape the regulations that will guide the market for decades to come.

I first wanted to explore with Dr. Wang what she felt the most obvious missing gaps are in terms of education, certifications, or basic training in geriatrics within China.  Her answer was consistent with what Dr. Leng had shared earlier:  “[China] lacks a foundation.”  As Dr. Wang sees it, the right solution would be a “collaborative and coordinated service network system from China’s Department of Health … health insurance to deliver such a service (whether from government or the private sector), Ministry of Civil Affairs of China (a main government organization to develop and implement the elderly care policy related in China), Chinese Committee on Aging … and China’s high education and occupation education as well.”

Together, such an approach would, according to Dr. Wang, “develop the specific policy, law, regulation, management and monitoring strategy of all [the related] services and the labor force of professional care to take care of China’s elderly.”  Dr. Wang’s suggestion points to the issue of what the right role of the Chinese government needs to be in order to provide the context within which a thriving senior care market can evolve.  Within the senior care market in China, much of the dialogue over the most critical factors Beijing needs to evolve circle around land-rights issues, ensuring access and offering incentives for developers to build out additional senior care space and these are all certainly important issues for the government to address; however, what Dr. Wang points out are some of the other more intangible factors the government needs to address in order for the senior care market to successfully transition western practices into China.  The most obvious need is for the Chinese government to expand what it will pay for in terms of services.  Initially, this will likely involve an expansion of the New Rural Co-Operative Medical Care System (NRCMCS), both in terms of the aggregate total amounts the government will cover, as well as the type of services that will be covered.  Secondarily, the Chinese government will need to ensure it expands coverage for eldercare in general – whether through dedicated housing or in-home care providers.  Obviously, this sort of expanded services would be targeted initially for those most in need.

Beyond these factors, China needs to develop a group of regulations, ranging from assessment protocols to healthcare delivery protocols based on best practices, in order to protect the industry from un-necessary litigation.  The latter concern is of particular importance, as Western operators will be held to higher standards by the Chinese market.  In a space where outcomes are not fully understood by the Chinese themselves, it will be easy for litigation to arise in cases where expectations do not match outcomes.  The necessary arbiter in such moments will need to be a body of promulgated regulations from the Chinese government; in the absence of these, downside risk cannot be accurately calculated.

Dr. Wang pointed out that while the West has what she calls “two legs” for addressing elderly care issues – a medical model and a community model – China really only has a family model.  As she put it, “all services related in the long-term care for the elderly have only depended on family.”  Because the family has acted as the caregiver, China has not prioritized clinical geriatric training like it needs to.  She added, “Regarding the government officers in China, physicians and nurses, most of them have not had an opportunity to get a better education and training to update their professional knowledge and skills related to the gerontological / psychosocial and geriatric care because the Chinese traditional family care model has been [the] only access or resource … There has been no need for them to update their knowledge and skills … due to a ‘blank area’ in the programs of long-term care for the elderly in in China.”

During a recent meeting in Beijing, I learned a bit more about China’s last two attempts to create certification programs for their elderly nurses; the gist of both attempts was that nurses who were already serving in state-run nursing homes could essentially pay to get a certificate rather than a disciplined certification program built around new training that elevated nursing standards.  Dr. Wang added some additional comments on the Chinese government’s recent efforts:  “Regarding nurses, the Department of Health has mentioned [this need for training and certification] in the previous five year nursing plan … but has not implemented it well in the real world … China put it again in the [most recent] Five Year Plan, but no specific resources or training curricula were developed … the government’s five research projects in nursing care planned in the Five Year Plan has not included the training and education / research in geriatric nursing … especially for Alzheimer’s and Dementia care … so there is a blank space in China.”  She went on, “China’s nurses have not provided the bed-side assistants for the patients in hospitals, especially for the elderly patients.  All such services have been provided by family members or paid caregivers from outside … The nurses seriously lack professional knowledge about the nature of nursing and the skills related due to their poor education and training, especially for elderly care.  They believe it is a responsibility for the elderly’s family and not the nurses, whether in an acute or chronic care setting.”

Thus far, western operators who have expanded into China – Cascade / Emeritus, China Senior Care, Right At Home, and pioneering entrepreneurial endeavors like PineTree, have all had to prioritize finding, training and retaining nurses and assisted living helpers in ways that reflect the under-developed nature of China’s nursing industry.  I believe looking at both Dr. Leng and Dr. Wang’s comments over the last several weeks, a pressing need and opportunity exists for a consortium of western nursing schools, certification agencies, and possibly even NGOs to begin finding ways to significantly expand China’s geriatric nursing capacity.  In some ways, the model between PUMC and John Hopkins needs to be expanded a hundred fold in order for Western CCRC and in-home care models to be successfully expanded into China.

The latest BHF event is coming up this Wednesday in Beijing (so TOMORROW, BEIJING TIME). See below for more information. If you want to be added to the Beijing Healthcare Forum mailing list please send a message through our contact form. Include your email and the words “Sign me up for BHF”  or something similar in the body of the message.

Beijing Healthcare Forum is proud to present:

“A Discussion with Robert Scherpbier: Chief of Health, Nutrition, Water Environment and Sanitation, UNICEF China”

Date: Wednesday, May 2 (please RSVP no later than 13:00 on May 1)

Time: 8:00pm, come early for food, drinks, and more networking
Location: Moment Cafe, Sanlitun SOHO B1-525 (Building #5)
(From the main entrance opposite of YaShow, go down the stairs, follow the river and make the first turn on your left.)

Robert will be discussing UNICEF’s work in China as well as his experience collaborating with government bodies to demonstrate the public benefits of health, nutrition and sanitation developments.

(You can find an interview with Robert here, where he talks about “stunting” in China.)

Speaker’s Bio

Robert Scherpbier leads UNICEF’s work to provide the Chinese Ministry of Health with empirically-based policy advice on best international and local practices in maternal and child health, nutrition and sanitation.

Prior to joining UNICEF, Robert was a medical officer with the World Health Organization (WHO) for 14 years, and during this time he also served as editorial advisor to the Bulletin of the WHO.

Robert has a MPH from John Hopkins University, a degree in medicine from Utrecht University in The Netherlands and a diploma in tropical medicine at the Institute for Tropical Medicine in Antwerp, Belgium.

See his full profile on UNICEF’s website

Few people are better positioned academically, professionally or personally to speak to the question of geriatric care standards in China.  As an academic geriatrician, Dr. Leng is a Professor of Geriatric Medicine & Gerontology at John Hopkins University School of Medicine.  He holds a M.D. from Jiangxi Medical College with subsequent medical training at the Peking Union Medical College (PUMC).  His PhD is in immunology and molecular virology at Texas A&M with additional postdoctoral fellowships at Yale and John Hopkins along with residency training at Columbia University.  Professionally, Dr. Leng is affiliated with China Senior Care, the Hangzhou operation spear-headed by Mark Spitalnik.  He has also received a grant from the prestigious China Medical Board to work with PUMC in helping develop their geriatric training regimen.  But all of these accomplishments aside, Dr. Leng’s personal experience may be the most important.  Upon one of his returns to China during his studies, he saw first-hand the impact Alzheimer’s was having on his father.  As Dr. Leng put it to me last week, “it was heart-breaking to go back and see him in China, but for him to not be able to recognize me.”

Geriatrics remain a field that is in need of extensive development in China, a point that simply cannot be over-stated as Western operators begin to more aggressively expand in the country.  Dr. Leng shared “The problem there is no standard training curriculum for geriatricians.”  As a discipline, geriatrics in China is not well organized.  A doctor in China would have the opportunity to specialize in a particular field that would be identified as a geriatric area; the example Dr. Leng offered was cardiology.  The problem with this is that most cardiologists see older patients anyway, so while the Chinese medical system may think it is educating people in the field of geriatrics, the sub-specialty of cardiology actually predominates.  Consequently, as Dr. Leng said “the functional aspects of falls, dementia, frailty and other age-related specific syndromes are not really addressed.”

This has created a number of problems, not least of which is the paucity of good research in the field of geriatrics within China’s medical and academic institutions.  The little geriatric care that does exist tends to be that provided for former high-ranking Party and PLA officials.  Dr. Leng commented on this “[because of this] there is no real scholarly exchange because all the medical records or clinical data is confidential.”  In order to address this problem, Dr. Leng has been working since late 2010 with the China Medical Tribune to publish a special geriatrics series, as well as hosting a conference by John Hopkins and the China Geriatric Society late last year, all of which is designed to get across the basic principles of geriatrics to China’s medical community.

Our conversation naturally transitioned to what Dr. Leng sees as the key challenges facing developers and operators who are eager to expand into China.  His answer on this point is worth quoting at length:

            “Number one, the geriatric work force is not there.  Physicians, but physical and occupational therapists, dietitians, social workers, nursing aids – we just don’t have that in China.  When we had the project funded by the China Medical Board in 2006, we included 12 doctors at the hospital plus 4 nurses.  We need both in terms of the workforce if we are to provide quality senior care in China.  Those ‘nursing homes’ [I see being built around China] are really disturbing to me.  When I went to Beijing and saw all the high rise senior housing being built – you can name quite a few of them – the problem is you don’t even see a clinic near-by.  The people move in there, and when they do they are physically just fine – they are highly functional – they don’t need much.  But within 10, 20, and 30 years, when they are in their 70s, 80s, or 90s, how are these people going to get their healthcare support?  Obviously, the whole thing is not set up right.  They do not have a good healthcare management or provider or training or even source of healthcare providers for the system.  Tailoring to the high end, is there a big enough market?  Simply copying [what worked in the West for developers] will not work.  My vision is getting to the grass roots in the community and formulating a network there.  From the hospital care, and outpatient clinical care, answering the question of how do you train the geriatric workforce?  The model in the US – we train, we get the geriatric principles to the doctors – but also training the nursing aid and the nurses and promote some of the novel geriatric care models.”

None of what Dr. Leng had to say suggests the China senior care industry is not a compelling opportunity, but developers and operators are going to have to be increasingly mindful of the wide gaps that exist between how China trains its doctors and nurses in geriatrics versus how this is handled in more developed economies.  I know from my own research that many early entrants into China have incorrectly assumed they can access a basic pool of skilled healthcare and semi-skilled vocational workers in the senior care space; the unfortunate reality is that in both areas, China’s geriatric workforce needs major improvements, a realization that might well suggest where even more exciting and lucrative business opportunities might exist.

The opening senior care presentation was from Nie Meisheng, the President of the China Real Estate Chamber of Commerce.  Meisheng’s presentation was a very fast overview of their services, which range from helping developers build a business plan, capitalize it, and get the right licenses.  During the presentation, the questions Meisheng raised about what she admitted were the big unknowns relative to China’s senior care market at one hand perfectly capture the under-developed nature of this market, while also illustrating the opportunity.  Her questions were all the right ones, yet also some of the most basic (What should a planned community look like?  What services should be available to residents?  What is the right operational model?  Who is going to pay?  How much are they going to be willing to pay?).

The first panel focused on architectural questions unique to senior care.  Given the large number of Chinese real estate developers and architecture firms in attendance, this was of obvious interest.  Branyo Dvorak, Mark Hebden and Paul Donaldson all reinforced the need for architecture to be the by-product of a coherent business plan, a process that needed to be iterative, but always in sync with the operational model and market research that was guiding the development.  This subtle point, one easy to overlook, remains a concern as China’s developers have already shown a willingness to get too far ahead of either a solid demographic analysis of their target market, or the operational model that should flow out of this target market analysis.  Chinese developers tend to begin with the end in mind, a point of view that will be challenged by senior care’s unique needs.  In China, and in particular within the real estate industry, too much capital has historically been richly rewarded simply by pursuing the strategy of “build it and they will come.”

The most interesting opportunity the architects pointed out was the possibility that China could be the first country to really pursue an “aging in place” development model.  In other developed economies, this is possible once customers move into an independent living facility that is capable of migrating to an assisted living model as they age.  In China, it might be possible for residents to move into a community as young people that is designed to allow them to never move, to truly age in place.  The phenomenon may sound uninteresting to Westerners who value moving up to bigger and better homes during their lifetimes, but in a market like China where real estate transactions are more involved and rare, this might be an ideal venue to pursue what one panelist called “true lifelong aging in place” developments.

I particularly enjoyed hearing from Christopher Alberti of Cascade Healthcare.  The first western operator to receive a license to operate a senior care facility in China, Cascade is positioning itself to be the first western operator to prove they can build a viable business model within the country.  Obtaining this license is one of the major unknowns that western operators remain concerned about.  While the licensing process is not a well-trod path, Chris did say that when the time came, the relevant officials in Shanghai were extremely professional, easy to work with, and eager to see the licensing process go forward.

As has been previously written in Long Term Living Magazine, Cascade is starting small:  they are rehabbing an existing hotel conference building and will offer 100 beds in 60 units.  Scheduled to open in July of this year, Cascade is the operator and development the industry is watching.  They are intentionally starting small and will focus on assisting Chinese families who can no longer provide the necessary care for their elderly parents in their homes.  This can be short-term rehabilitation care, or longer-term more involved high acuity care where recovery is not possible.  Care will be provided 24/7 and the facility will offer a variety of on-site clinics.  Cascade has, according to Chris, the capital to build “another 30 facilities [of similar size] over the next several years.”  Their model emphasizes location of the operation within the community, hence the likelihood that future developments will take place in under-utilized existing real estate shells where they can avoid the difficulties developers have had getting senior care facilities located within existing community centers.

I was intrigued to hear Paul Gordon of Hanson Bridgett.  Paul literally wrote the book on how to design and implement the real estate and operating model for senior care in the United States (no, seriously, he actually wrote a book on this).  Paul shared that what he sees happening in China roughly parallels what he saw happen in the United States, starting in 1985.  Then, the United States real estate market had badly overbuilt and had excess under-utilized capacity sitting around.  Looking for new markets to explore, there was a “surge of interest” as Paul put it, in senior housing.  He went on to ask the audience if this “didn’t all sound familiar?”  Obviously, this same thing is happening in China.  Paul shared with the audience that in the United States in the mid-80’s, developers “had known financing, great development ideas, built buildings, but no one came.”  (emphasis mine)  Why was this?  According to Paul, not enough due diligence had been done over what sort of build-outs were going to be most attractive to the target market and the locations of the actual developments were not convenient either for residents or for families to visit.

Is this same set of issues presenting itself in China?  My own opinion is that yes, the same issues are occurring in China.  I also harbor reservations about whether the Chinese market will prove to be as elastic in its ability to absorb the necessary adjustments to the senior care model.  In this vein, Chip Marshall of Merrill Gardens China voiced his concern that China is going to “get rich before they get old.”  This concern, coupled to what he described as “suburbanization going on at very rapid rates” and the “hundreds of millions of Chinese not living near their children” are concerns that the market will need to work through.  I found Chip’s closing statement powerful and worth quoting at length:  “yes, senior care has a real estate play … but it is also a restaurant, hotel and hospital all rolled into one … my biggest fear is that developers will see it simply as a brand of their real estate business … you need to have very high standards set … if the business model isn’t right, membership fees are not going to be high enough and elderly Chinese are going to discover that their needs are not going to be met because the operating model is not sustainable.”

Patricia Will, the President of Belmont Village, made a comment in closing that is very near and dear to my own research:  the need for trained staff to support China’s senior care industry is acute.  As she said on Wednesday, “recruiting and retaining staff in a high touch business is a challenge even in the United States … in China, the bigger the scale, the bigger the issue.”  Throughout today’s meetings, the chronic need for China to develop a trained workforce was a consistent and repeated theme.

This has become a mantra of my research, but the meetings and conversations from Wednesday’s event in Beijing reinforce the need to be cautious, patient, and sequential as western developers, investors and operators expand into China.  As Chris put it, “the inflationary rate of return on capital for real estate developers is over; now, this is a low rate of return business … we have not yet seen a viable business model … [people] need to slow down and get a business model that works … it is our obligation to get this right, otherwise this will just be a land grab, something this country has seen plenty of in its past.”

On Wednesday, April 25th, 2012, I will be on a breakfast panel discussing “Doing Business With China” as part of the Economist’s Business Without Borders breakfast series. This event will take place at the Alexis Hotel, at 1007 First Avenue, in Seattle, Washington.

My co-panelists will be the following:

• Ted C. Fishman, Author of two highly acclaimed books, China, Inc. and Shock of Gray: The Aging of the World’s Population and How it Pits Young Against Old, Child Against Parent, Worker Against Boss, Company Against Rival, and Nation Against Nation.  Though I have long been impressed by Mr. Fishman’s writings, I have actually never heard him speak, so I am very much looking forward to hearing him at this event.

• Julie Felss Masino, Vice President of Starbucks’ Global Beverage Group and former Vice President of Marketing and Category for Starbucks in China.  I saw Ms. Masino give a great speech at this year’s Wharton China Forum, so I can assure you of her bona fides for this breakfast.

• Leo Abruzzese, Director, Custom Research and Editorial Director, Americas, for theEconomist Intelligence Unit.  I do not know Leo, but I am a longtime (and huge) fan of both the Economist and the Economist Intelligence Unit (seriously though, who isn’t?). Mr. Abruzzese will be starting the event by speaking on the global economy and then moderate the China panel.

The Puget Sound Business Journal does a nice job describing this event, as follows:

The Economist Intelligence Unit is hosting a complimentary breakfast meeting for senior executives. EIU director global forecasting, Leo Abruzzese, will present the Global Economic Outlook for 2012 and beyond followed by a highly participatory panel discussion on doing business in China. Top industry experts including Julie Felss Masino of Starbucks Coffee, New York Times best-selling author Ted Fishman, and Dan Harris of Harris & Moure will provide insights into Chinese innovation, the realities of the Chinese economy and an exploration into the way human capital is employed to find success.

The Economist Intelligence Unit has this to say about it:

Doing business in China: Decade of the dragon

The staggering growth of the Chinese economy offers unique opportunity for foreign enterprises nimble enough to take advantage of rapidly changing circumstances and unorthodox ways of doing business. In fact, China offers companies an opportunity to scale very quickly. China can be a risky place to do business—the normal rules of intellectual property do not apply. Cultural mores and personal relationships are vitally important. This session is a deep dive into doing business in China, including insights into Chinese innovation, the realities of the Chinese economy, and an exploration into the way human capital is employed to find success.

Benefits of attending:

Gain insights from the Economist Intelligence Unit about the economic landscape in 2012 and beyond
Hear from leading experts about the outlook for China
Learn about the impact of government regulation on foreign capital
Discover how others are creating sustainable expansion strategies
Network with senior level executives about the opportunities and challenges of expanding into the region

I hope to see you there.

St. Luke’s operates its eldercare operation as a not-for-profit, in partnership with a variety of partners.  The facility we saw, one of the 11 St. Luke’s operates across Singapore, included partners from the Serangoon CCC, Bless Community Services, and Trinity Methodist Church.  The 11 facilities currently operate at 99% capacity providing day-care to seniors.  They are all divided into two spaces:  a rehabilitation area and a community area.  Overall, St. Luke’s is the biggest provider of senior day-care in Singapore.  Each of the 11 facilities is placed to serve the community within a 5-7km range.  St. Luke’s provides transportation, if needed, to and from the facility with 22 micro-vans.  They focus on those who can socialize and are ambulatory, although some 30% of their clients have dementia.  It is interesting to note that these 30% are fully integrated into the services provided by St. Luke’s; in fact, as one of the team managers pointed out, they tend to be the most ambulatory of the entire group. 

Within each of the facilities, a variety of preventative and restorative services are available.  The objective of St. Luke’s is to keep its clients within the community for as long as possible, and to keep out of the nursing homes until absolutely necessary.  Across the 11 centers, they employ 130 staff, with an average staff-to-client ratio of 1:6 (the Singapore ministry mandates 1:8).  This depends on level of care, so take that with a small grain of salt; but every facility has a minimum of 10 staff members, and most have 12.  They can and do rotate staff depending on the profile of the current clients at the various sites.  At the time of our visit, they were caring for 712 clients, of which 250 had dementia (slightly higher than their historical average of 30%).  200 require nursing care, and 495 need rehabilitative therapy.  St. Luke’s will provide some 2,700 rehab sessions monthly, with a 95% equipment utilization rate.

As of today, St. Luke’s model is not-for-profit, although it does charge for services.  Only 80 of its 712 clients receive direct government subsidization.  Standard care is $35SGD/day, including lunch, or $600/month for 5 days a week, or $400/month for 3 days a week.  Transportation is an additional $200/month based on going to the facility 5 days a week.  There can be additional fees, based on level of rehabilitative or memory care services, which can add an additional $200/month.  The standard fees include breakfast, lunch, tea, active rehabilitation services, and group outings.  Many family members (between 20-30%) will have a live-in helper come to with their elderly parents some days, which St. Luke’s encourages.  Both in an attempt to create additional revenue streams and encourage active ageing, St. Luke’s has opened its gym to younger people in the community as well as family members who may want to encourage their parents by participating in their preventative therapy.

Overall, these fees pay for 2/3 of a client’s expenses.  The other 1/3 is covered by fundraising, corporate sponsorship and philanthropy.  While only a small number of St. Luke’s clients receive direct government sponsorship, the Singapore government does provide subsidies in the form of rent control.  The director who provided our tour shared that they paid approximately $800/month for a space that would otherwise cost upwards of $20,000/month without government subsidization.  Apparently, the Singapore government’s most recent budget will add additional subsidization for programs like St. Luke’s, but the Managing Director who provided our tour was a bit cynical about this:  in his opinion, whatever additional budget monies were provided would be offset by lower subsidization of the rent.

The role of profit in healthcare is a contentious issue, as America’s most recent attempt to reform its healthcare system made clear.  If one looks at St. Luke’s, a model that uses non-profits as a vehicle for delivering senior care that is indirectly subsidized by the central government may have application both in emerging economies like China, but developed nations like the United States and Europe as well.  Yes, St. Luke’s receives subsidies; but it also charges enough to cover the majority of its operating expenses while covering its additional costs by local community involvement.  This may not work for everyone, but it does suggest one possible role for non-profits in what will need to be a multi-fronted holistic solution to the world’s senior care crisis.

Within China, real estate developers are, as she put it, “… eager to release the value of the land they have been holding whether or not they have experience [in the senior care market].”  Ms. Chau went on to state “too few talk about their operational model – no one really has experience running an aged care facility in China, which means they don’t know if they can really find the right people or whether they really have the right model.”  Much of this is consistent with a market early into its high growth and rapid expansion phase; however, voices of experience like Ms. Chau also recognize that if the market expands too aggressively with too little in the way of support infrastructure, the concept of senior care could be damaged within China in ways that no amount of high-end luxury CCRC developments will be able to resolve.

Thus far, western developers and operators in China have elected to pursue the high-end, five-star luxury market.  There are multiple reasons for this, not least of which is the role of the Chinese government as a payer is irrelevant.  Candidates for this sort of high-end luxury CCRC likely fall into two categories:  the first are wealthy elderly people and the second are wealthy children who wish to honor their parents by putting them into a high-end development.  Ms. Chau believes focusing purely on the high end of the market might overlook the extent to which elderly Chinese do not want to be a financial burden to their children.  In addition, she shared “older people of today do not want or aspire to the luxury lifestyle.  Their comfort zone is within their old community.”  During a subsequent interview with me, she shared that “the big players are focused on the high end because otherwise, the numbers don’t work; however, while the high end segment of the market does have money, the questions are whether you can find them and whether they are really willing to pay the premium … after all, these are people who have lived very humble lives and many will wonder why they should change this as they grow older.”  She went on to remind those in the audience that “families in China are used to being separated.”  I have written previously about the idea of “fatal flaws” within the CCRC model in China, and it is worth reflecting on whether Ms. Chau’s comments further reinforce the need for western operators to think seriously about penetrating the middle segment of the market earlier than they may have originally planned.

The balance of her presentation asked eight questions she believes successful CCRC developers and operators in China will need to ask and answer.  First, whom are you serving?  Do you really understand the expectations of your target market?  Second, how are you planning to handle ageing in place?  If your development starts out with active seniors, where do they end up within your CCRC?  Does your development fully support active ageing?  Third, does your development take into account environmental factors?  The example she presented was whether an outdoor balcony was included.  In Xian this might not be necessary, but in Foshan it would be considered mandatory.  Fourth, what sort of food services will you include?  She mentioned one development that had invested over $1m in a canteen, only to see it sit un-used.  Or, in another more humorous example, the CCRC in Taiwan that had a communal kitchen (sounds like a good idea, right?); the only problem was the old people ended up fighting in the common area over who had the rights to use the common equipment and cooking area!  Fifth, the role of the clubhouse in your development.  Ms. Chau pointed out that as just one example, CCRCs in Northern China needed to consider whether they could support the cost of filling a swimming pool over the long term.  For those familiar with China’s major water issues, this is nothing to gloss over.  Sixth, does the development convey a sense of community to the residents?  Are they in a similar economic situation?  Is their convenient access to shopping, banks, etc.?  Seventh, is the community actively engaged with the residents, or eager to see the CCRC as part of its overall development?  And eighth, is their proximity (but not “nearness”) to a hospital?  Just like in the west, easy hospital access is important, but making it too close can send a bad message to the residents.

During our one-on-one interview, Ms. Chau made another point that I think is worth focusing on as investors:  as she put it, the 5-star luxury hotel market in China has had 30 years to get where it is at now.  The 5-star luxury CCRC model is still highly immature, and the easiest place to see this is in the paucity of staff available to serve the senior care market.  She also made the point that as developers and operators build up their local staff they will need to deal with the problem of employee retention.  As she put it, once they are trained it will be very difficult to keep them, especially if they have been trained in the United States or Australia.  This phenomenon is one many western operators of other branded products or services have had to deal with and will likely result in early-stage wage inflation that needs to be incorporated in financial models.

None of these comments should dissuade investors and operators who want to get into the Chinese senior care market; rather, they should inform and guide the patience and humility of the plans you make.  As Ms. Chau put it to me, “the critical mass is in finding a solution for the middle segment of the market.”  She was also quick to point out “over 90% aspire to stay in-home – that in many ways is the aspirational brand for senior care in China.”  With this in mind, it should not be a surprise if the Chinese government comes to incentivize community-based care centers and in-home care versus residential solutions.