industry & reform
RAD LEVELS
Excluding supported residents, the ACFA 2018 report reveals that as
at June 2017:
• Regional areas: 35 per cent of the residents chose full RAD and
24 per cent combination RAD and DAP.
• Major cities: 45 per cent of the residents chose full RAD and 22 per
cent combination RAD and DAP.
The ACFA report also reveals that the average RAD is around
$100,000 lower in regional towns than in major cities.
A point worthy of consideration for long-term providers is
that RADs ultimately have to be repaid. When contemplating
redevelopment of RAC facilities which are past their use-by date,
incumbent providers, particularly not-for-profits with RAD liabilities,
perversely find that they are at a competitive disadvantage to
new entrants.
DEVELOPMENT CONSIDERATIONS
Unlike metro developments that often run headlong into town
planning challenges, development of RAC facilities in regional areas
is often welcomed by city councils that are highly supportive of the
benefits a new service will bring, such as providing further opportunity
for frail aged people to stay within the community they know, and
the long-term employment opportunities. This can be expected to
contribute to a faster passage from concept to commissioning.
Suitable land in regionals is easier to come by and much less
expensive than in metros. There is better opportunity to develop
single storey, on-ground car parking, which results in much lower
construction costs. In contrast, because of constraints on land size,
metro developments often need to be multistorey with basement car
parking, which adds substantial construction costs per bed.
A short-form estimate of the post ‘ramp-up’ investment return
for a metro vs regional RAC investment opportunity is shown in the
table below:
Table 3: Indicative business case – greenfield metro vs regional
Number of beds
Development cost
Land $’000 per bed
Building $’000 per bed
Total development cost (note 1)
Total development cost $’000
RAD flow
No of full RAD equivalents
Average RAD
(assumed for new builds)
Net RAD inflow $’000 (note 2)
Metro
Regional
new beds new beds
100
100
a
b
c=a x b 75
325
400
40,000 15
260
275
27,500
d 51 36
e
f=d x e 550
28,243 375
13,331
Net investment g=c-f 11,758 14,169
Net investment per bed $’000 h=g/a 118 142
Occupancy % (note 3)
EBITDA pb post ramp-up $’000
(note 4)
EBITDA/ Net investment return
(note 5) i 94% 96%
j
K=i x
j/h 19 21
15% 14%
StewartBrown’s financial survey shows superior financial performance
for providers operating in metro areas relative to regionals. Rather
than location, StewartBrown attributes significant contributing factors
to financial performance as:
• stronger commercial management at facility level
• newer builds or major refurbishments that have amended
the building design to be more efficient in resident and staff
movements
• increased use of technology as an aid for delivering care (31 March
2019 survey). Source: The Ageing Equation analysis and sources as noted below.
Notes: The costs of land and building per bed varies substantially depending
on the quality of the RAC building and location. Discussions with providers
suggest big city construction costs exceeding $300,000 per bed are common.
Discussions with quantity surveyors indicate a cost impost for basement car
parks alone of around $50,000 to $75,000 per space.
The ACFA 2018 report reveals that the average RAD is around $100,000
lower in regional towns than major cities. For new builds in regions, the analysis
in the above table assumes higher than average RADs and greater utilisation of
RADs as accommodation payments in metros.
Occupancy for a new build is assumed to be higher than average stock.
Earnings before interest, tax, depreciation and amortisation (EBITDA) is
a proxy for operating cash flow and commonly used as a measure of RAC
investment return and valuation. In this analysis, the regional EBITDA is
greater than in metro areas because of the assumed greater contribution of
accommodation supplement (income) and lower RAD level. The assumed
levels of EBITDA are in the order of industry first quartile before corporate
overheads, i.e. incremental earnings.
The post ramp-up EBITDA is the projected level of EBITDA upon achieving a
normal level occupancy and operating efficiency.
Discussions with providers with large portfolios reveals that there
is no regional disadvantage contributing to financial performance,
with RACs in relatively small communities often outperforming
metro facilities.
Residential aged care nursing and caring is demanding work both
physically and emotionally. One of the factors that impacts staff
adversely in metro areas is the onerous time and cost travelling to
and from work, particularly into affluent city areas. The ‘travel time to
work’ proposition in regional areas is generally much better than for
metros. A new RAC in a regional location may be for some potential
staff an enticing tree change opportunity. On reasonable assumptions, Table 3 indicates a similar post
ramp‑up return on investment in a regional area compared with a
metro area. In addition, a regional business case relative to metro
case will rely on a lower level of RAD liabilities which (as noted earlier),
to the chagrin of incumbents facing redevelopment of RACs past
use-by date, ultimately must be repaid.
The 2019 ACAR round demonstrated government intent to support
the need in regional areas for new RAC facilities. For organisations
contemplating growing their RAC portfolios, analysis of factors driving
demand and financial performance suggest there is a compelling
business case for ‘going up the country’. ■
A BUSINESS CASE FOR GOING REGIONAL Safdar Ali is the director and founder of The Ageing Equation, a
consultancy specialising in quantitative and qualitative market
catchment studies to support business cases for independent living,
assisted living and residential aged care developments.
OPERATIONAL CONSIDERATIONS
A business case for investment in residential aged care is usually
supported by a discounted cash flow analysis (DCF) prepared to
project cash flows over the long term (say, 30 years).
agedcareinsite.com.au 11