Last Friday I had the pleasure of touring Cheerful Court, one of the two model eldercare facilities in Hong Kong operated by the Hong Kong Housing Society (HKHS).  I want to be sure and publicly thank Joe Christian, Partner at DLA Piper in Hong Kong who specializes in the China eldercare market, for making the introduction and facilitating my visit.  Joe is one of the world’s leading experts in China’s eldercare market and has been very generous with his time while I have researched this market opportunity.

HKHS currently operates two eldercare facilities in Hong Kong:  Cheerful Court and Jolly Place.  Cheerful Court houses 400 people in 333 units, Jolly has 243 units.  Two types of residential housing are available (a one bedroom and a flat).  The split is roughly 1:3 studio:one-bedroom across both facilities.  Both feature a variety of design features that make it ideal for elderly people.  These include a non-slip bathroom floor, a bathroom door featuring two-way hinges and locks, all appliances in the kitchen being run off of electric, and nurse call buttons strategically located around the rooms.  To give you an example of costs, the typical kit for the one bedroom is $600,000 HKD.

Rights of ownership terminate at death and are not inheritable.  The base management fee is $1,260 HKD/month, with a basic care fee of $300 HKD/person/month additionally.  Most residents also have some sort of domestic helper, whether one they pay for themselves or one that might be shared with their adult children.  Most people familiar with Hong Kong have frequently seen the Philippine maid pushing an elderly Hong Kong patient obviously not their parent around during the day.

These fees do not include healthcare; consequently, as the inhabitants age and require additional medical care, the fee structure grows to include a variety of medical services ranging from basic social workers interacting with the patient providing counseling to more expansive hospice care.  Fees for this range from $10,000 – $30,000 HKD/month.  In order to make sure patients are financially able to meet their needs, the HKHS requires that the elderly patients have net assets in the range of $1-5 million HKD.  If they have less than this, the income of the children can be used to qualify.  In such eventualities, the children’s income must total $29,000 HKD/month.

Roughly 10% of the population in these two facilities has some sort of dementia.  Over 90% of the population is over 70 years of age, with the average age being between 72-73.  The facility I toured featured a library, computer laboratory, music room, pottery / craft room, a clinic where beauty treatments, traditional Chinese medicine and dental services could be accessed.  Throughout the facility there was an obvious attempt to provide small children with areas where they could play both inside and outside while visiting their grandparents.

Hospice care is available within the facility in what could be termed a very traditional late-stage hospice facility.  According to the Area Manager, stays here tend to be on average three months long although they have had some stays that approached three years.  If you choose and have the resources to do so, you can have hospice care provided in your room.  Current turnover is 4%, much lower than they originally anticipated.  Their projections were 10% turnover in ten years; given the project is seven years old, it is possible this number could increase.  It will be important to watch this given the role turnover plays in calculating anticipated ROI on eldercare operations in China.

These two facilities are only seven years old and fill a much-needed gap in the Hong Kong market.  Historically, two solutions have existed for eldercare in Hong Kong:  very basic care in a NGO sponsored nursing home or private care at home.  The latter was only affordable to the very wealthy, and the former is what most lower income elderly found themselves in at the end of their lives.  As a consequence of this segmentation of the market, the middle class was actually finding they did not have good options for their care.  In many ways, this paralleled the same phenomenon Hong Kong saw in its housing market in general:  plenty of cramped and ill-suited space for the poor, great choices for the wealthy, but very little for everyone in-between

To deal with the housing problem, the Hong Kong government created the HKHS.  In the immediate aftermath of World War II, the HKHS was designed to help transition people out of tent cities into formal housing.  Their mission then adjusted to help transition impoverished areas of Hong Kong badly in need of restoration into areas of affordable housing for the middle class.  Because of their experience and overall sensibilities towards how to address middle-class housing problems, the HKHS has been tasked to do something similar for the middle class and its pressing eldercare issues.

To grease the wheels, the Hong Kong government sold the land for these two first facilities to the HKHS for $1 HKD each.  The HKHS has a ten year management contract with the Hong Kong government to provide eldercare services in these two facilities; but the Area Manager who I met with led me to believe that as of year seven, they are not yet profitable.  Some of their struggle to achieve profitability is a reflection on them learning more about what he called the “software” of the eldercare business.  Namely, their lack of experience hiring, training and managing the necessary group of specialists who know how to deal with the unique needs of elderly people.

According to the Area Manager, they are good at the “hardware” of eldercare – the building’s operation and maintenance; but the “software” remained a problem, and one he felt that even in Hong Kong they were struggling to understand.  In his view, these problems would be even more extreme in China, making the need for trained people who know how to work with elderly people even more acute in the mainland than what he has seen in Hong Kong.  Additionally, some of the profitability challenges are related to government’s involvement in these first two projects.  Because the government provided the land at $1 HKD each, they have the ability to stipulate how much the HKHS can charge for their services.  As the HKHS discovers new costs and refines their business model, they are coming to find that they need to raise prices more than their contract with the Hong Kong government will allow.

The HKHS’ response to this has been to tell the government that the next two facilities they build (one in Tanner Hill and one in Tin Shui Wai – approximately 600 and 1,000 units respectively) will be on land they purchase at market prices.  As a consequence, the HKHS will ensure the government can no longer set prices.  The HKHS anticipates having to move up-market when these facilities are completed and in anticipation of this, has roughly doubled the income qualifications necessary for being housed in their next two facilities ($5-10 million HKD of net assets).

The Hong Kong market illuminates some interesting points about the broader opportunity in the Chinese market.  First, longer life spans need to be incorporated into the financial models that guide eldercare investments.  The HKHS’ experiencing a 4% versus 10% turnover has very real financial implications that can complicate the ROI on a privately funded eldercare operation.  Second, the role of government was initially helpful but has become burdensome as the investment matured.  Hong Kong’s government is a relatively sophisticated and well-run bureaucracy, leaving the question of how the Chinese government greets these same questions a major unknown.  Third, as of yet, a true middle class solution has not – in my opinion – emerged from the HKHS’ experiment.  The HKHS has elected to focus its next investments on a higher income demographic, something that obviously does not address the Hong Kong’s policy mandate to find affordable eldercare facilities for the middle class.  Fourth, and I would submit most important, even in a developed market like Hong Kong, the soft skills necessary for training elderly care operators remains an unmet need.

http://old.cncaprc.gov.cn:8080/en/info/1650.html