The Shoeshine Column: Hype turns to gripe in aged-care sector

Friday 15th June 2001

William Shakespeare divided the life of man into seven ages, none of which sounds terribly dignified.

The infant "mewling and puking" turns into "the whining schoolboy ... creeping like snail unwillingly to school." The lover "sighing like furnace" becomes the soldier "full of strange oaths and bearded like the pard ... seeking the bubble reputation, even in the cannon's mouth."

The best bit sounds like the justice, "in fair round belly with good capon lined" but after that the Bard goes gloomy again.

The sixth age "shifts into the mean and slipper'd pantaloon, with spectacles on nose and pouch on side, his youthful hose well saved, a world too wide for his shrunk shank; and his big manly voice turning again toward childish treble, pipes and whistles in his sound."

"Last scene of all, that ends this strange, eventful history, is second childishness and mere oblivion, sans teeth, sans eyes, sans taste, sans everything."

Shakespeare, of course, never worked in the aged care industry, where they're considerably more tactful about their customers. Nowadays if you're aged 65-74 you're "young old." At 75-84 you're "medium old" and at 85 or over you're finally "old old."

The sector has also had a strange, eventful history of late. After a tidal wave of hype in the late 1990s all of a sudden the sector looks distinctly out of favour.

Of the three listed companies Ryman Healthcare looks in the best shape. Following a decent if unspectacular profit result this week its shares picked up to 194c, but that's still 14% down on the same time last year.

Metlifecare hasn't fared so well. A recent rally has taken its shares to 135c, less than half the 280c peak they reached in late 1998.

Poorest of all has been Eldercare, the former oil explorer into which Eric Watson backed his retirement home chain in April 1999. From a high of 72c early last year the shares have plunged 82%, to 13c.

This isn't how it was supposed to be. From Metlifecare's listing in 1994 retirement home operators have pumped statistics at investors like demented firefighters.

In 1996 11.7% of the population was aged 65 and over. By 2031, according to Statistics New Zealand, the ratio is forecast to reach 22%. By 2051 it will be 25.5%, or 1.1 million people.

In 1987 20% of the elderly lived in residential homes; in 1999 the figure was 60% plus. In 1998 nearly 13,000 people over the age of 65 or around 3% of the country's elderly lived in retirement villages compared with 15% in the US.

The growth is coming, of course, from the ageing of the baby boomer population bulge and the rest home operators were going to surf the demographic wave.

Their target audience was sharemarket investors and for a while they were hugely successful. Now that bombed-out share prices are the order of the day those share punters are wondering what happened to those promises of fabulous profit growth.

The answer is that the promoters were too successful in selling their message.

New Zealand, according to Ryman, now has around 900 private hospitals and rest homes housing some 30,000 people.

That's an average of 33 people per facility, which is plainly too many. Those widely broadcast statistics have attracted a host of investors who have bypassed the listed companies and bought or developed facilities directly. A big shake-out is needed to put the industry back on to a rational and profitable footing.

Calan Healthcare Property Trust, for instance, has delayed for more than two years a planned new $30 million private facility next to Auckland's North Shore Hospital while it negotiates the closure of other capacity. As things stand, it says, it doesn't make sense to provide more beds when there are already enough.

Having oversold its story the industry now seems to have determined to play things down.

A press campaign conducted by the Private Hospitals Association a couple of months ago insisted investors were "misreading the demand for residential care" and "may come a cropper."

This may seem like an odd sort of a message from an organisation whose members need capital to maintain a share of a growing market. The intent, presumably, was to make bankers and equity investors more cautious about who they funded.

The association says "more and more elderly people are staying in their homes for longer and only moving into residential care when completely unable to manage at home."

"The length of stay and the number of beds needed is declining as people are only in care for the very last part of their lives," it said. It also makes the point the government has a big influence on the sector's profitability.

It has heard, it says, of existing contracts not being transferred when villages change hands and then being offered to the new owners at a lower price.

Around half of all residential care beds are funded by the Ministry of Health through subsidies.

Those subsidies haven't increased for four years. As Ryman pointed out in this week's announcement, the freeze has put "severe financial stress" on some operators in the sector.

The government has offered a 12% increase in subsidies for rest home beds over three years, but only if a decrease in hospital beds can be achieved.

It's tempting to wonder, if the association is right and there's an excess of private capital supply to the sector, why the government should subsidise at all, unless it's trying to meet social equity objectives by tinkering around with income and asset testing to get beds for lower socio-economic aged groups.

Having oversold itself in the 1990s the sector is now backpedalling furiously, trying to rid itself of excess supply. Free market purists will insist government involvement is distorting the sector's price signals. Shoeshine suspects it's a simple case of overhype.

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