workforce
Clever finance
Providers need to be creative to fund the expansions necessary to meet an ageing population’ s increasing demand for services.
By John McCarthy
In light of growing demand for services, NAB Health has released its Aged Care Insights Paper, looking at how providers can tackle this increasingly important issue. Aged care is one of the fastest-growing sectors in Australia, with the number of Australians aged over 65 years estimated to double by 2055. There are only 200,000 residential aged-care places, but the estimated population growth calls for an additional 76,000 facilities to cater for the demand. This has been calculated to cost about $ 33 billion if the target is to be met before 2026.
One of the biggest challenges providers are facing right now is how to fund growth. At NAB Health, we have identified options that providers can consider to grow successfully.
SHIFT YOUR FINANCIAL STRATEGY Of late, boards have taken a more sophisticated approach to financing growth, which is driving a sharper strategic and operational focus; something that not-for-profits and smaller family operators have to keep in mind, while still meeting their social mission and growing demand.
The growth aspirations of the aged-care providers need to be measured, to retain the ability to generate surpluses that can be invested back into their businesses. They must raise sufficient alternative sources of capital. These aspirations, however, should be bold and stretching, noting that there are multiple sources of capital available and a strong appetite for healthcare assets.
It may be uncomfortable at first, but once a strategy is re-evaluated and put into place, it makes things much easier for everything else to fall in line.
PROVIDE SERVICES WITHOUT OWNING THE PREMISES In the US and the UK, there is a clear delineation between being a real-estate owner and being an aged-care provider. This means providers don’ t have to own their own premises to offer their services. This split frees up more capital for operators to reinvest into their facilities and growth.
While banks and other financial institutions are still providing debt facilities, providers should also look for alternative funding sources for growth, which is why a new model outlined is becoming increasingly popular in Australia. These providers have acknowledged they don’ t have the funds to acquire property while simultaneously investing in their facilities, which in turn leads to assessing whether property sale and leaseback is right for them.
Aged-care providers who have adopted this model have reported positive feedback, and we can expect more Australian providers to move in this direction, despite initial difficulty in changing their thinking.
ALTERNATIVE FUNDING SOURCES In Australia, there is such a strong demand for Australian healthcare assets that aged-care providers can look to alternative funding sources to invest in their business. There are services provided to find the right partner who shares the same values and strategic approach, while maximising price and value for the providers. Additionally, there is much interest from offshore investors and local players, providing a wide choice. However, it is important to understand that while there may be an influx of investors, the window of opportunity to engage with them is not infinite.
EXPANSION INTO NEW AREAS OF GROWTH While reinvesting into core business facilities is often the first investment most businesses choose to make, there is another alternative to expand into new areas of operation. Home care is one sector where many aged-care providers are looking at increasing their involvement, something the government is also supporting.
Providers need to ensure they have the technology and materials needed to successfully integrate into new areas, in order to run an efficient operation.
INVESTING REFUNDABLE ACCOMMODATION DEPOSITS In such a historically low interest-rate cycle, the traditional areas of investment for refundable accommodation deposits( RADs) are no longer achieving the returns that providers have budgeted for, despite their diverse and conservative portfolios.
It’ s necessary to reassess investment management strategies by gaining a thorough understanding of the organisation’ s objectives, the minimum level of liquidity necessary to repay RADs when residents pass away, their time horizon and return expectations, all of which have a bearing on the creation of strategy.
Additionally, providers need to analyse the most appropriate asset allocation within the bounds of the investment strategy, to properly select the right assets for their portfolio.
It is imperative that providers understand their portfolio, the logic behind the recommendations being made, and also the importance of having an established process for ongoing management of said portfolio. That process should include comprehensive investment analysis and performance reports, for continuous assessment of whether their investments are right for them. ■
John McCarthy is head of corporate health at NAB Health.
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