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Damjan DeNoble: Chinese investors see promise in US senior care

Major players in China's senior care industry have shown an increasing appetite to invest in the same area in the U.S. as they seek to diversify outside of the mainland. This includes real estate developers such as China Vanke, Greentown China Holdings and Sino-Ocean Land as well as insurers Anbang Insurance Group and Union Life Insurance.

     Other Chinese groups are putting aside capital pools in the hundreds of millions of dollars to invest in U.S. real estate projects, with $150 million the most common sum being thrown around. Sources say that an unnamed major Chinese conglomerate has created a $500 million fund exclusively for senior care investment in the U.S. and Australia.

     As the first great wave of American baby boomers starts to move into senior living properties, this new appetite for investment is being welcomed by a U.S. senior care industry desperate for new sources of growth capital since the retrenchment of traditional bank lending stemming from the global financial crisis.

     Anticipating a boom in senior care, industry CEOs want flexibility and feel pressured by demands from domestic investors with equity valuations now stretched. They have started to look toward China, and Asia more broadly, for financing, hoping that such new investors will demand less control.

     One American senior care group has signed a letter of intent with a top Chinese developer to manage several senior care projects in China, hoping that this strategy will create enough trust to ask for investment from their Chinese partner in time. It is likely that other U.S. senior care companies across America, in the midst of a recession-proof period of growth and with confident forecasts of future growth ahead of them, are going to become similarly aggressive in securing funding.

     Indeed, Matthew Whitlock, vice-president for property group CBRE, said that half of all inquiries for investment into America's senior care in the first six months of 2015 came from "Chinese institutional investors, including insurers, money managers and large publicly-owned Chinese real estate companies seeking to partner with experienced U.S. seniors housing operators."

     The question on the mind of American operators should be, "What is motivating Chinese investors to invest?" Informal interviews with representatives from a handful of Chinese investment funds reveal three clear motivations.

Reasons to invest

The first is straightforward: to earn an attractive yield denominated in U.S. dollars. The majority of Chinese companies involved in the domestic senior care industry are familiar with the recession-proof resilience of America's senior care market, which has sustained high growth rates since 2008.

     Conversely, Chinese companies that own real estate domestically are struggling to create cash flows owing to record housing inventories. Influential Chinese business magazine Caixin recently ran a report that showed that even in hot real estate markets such as Shenzhen, it can take 18 months to sell a new apartment. In this scenario, investing in U.S. senior care makes sense.

     Second, like virtually all other companies and institutions in China, Chinese companies are seeking to diversify away from the domestic risk of political uncertainty, currency fluctuations, slowing growth, rising debt levels and the transition from a manufacturing to a service economy. One executive at a closed-door meeting said she expected her company stock to take a 15-20% hit based on currency fluctuations alone in the next two to five years. Throw on top of this fears that China's target of average growth of 6.5% through 2020, as set out in the country's new five-year plan, may be unachievable, and the need to invest abroad is compelling.

     For Chinese companies with active plays and plans for future expansion in the senior care market in China, another motivation for U.S. investment is to improve their ability to profitably manage such operations. This is something they can learn from U.S. establishments. Over a million square meters of new senior living facilities came online in China between 2011 and 2015, nearly all of which were built by companies with no previous senior care experience.

     In the past, the companies could have held on to their real estate holdings and on appreciation alone made a tidy profit. But now, with the real estate market saturated, the problem is that China does not have the human resource capacity and institutional knowledge reserves needed to run profitable senior care services. When Rubicon Strategy Group conducted a year-long site audit of China's 25 oldest senior care developments, not a single one reported turning a profit, even after operating for more than five years.

     Chinese investors wish to invest in American senior care so that they can build bilateral relationships with operators and managers. Time is of the essence: China's demographics and strong political support will push the senior care industry into a prolonged expansionary period through 2050 when the country's elderly population will peak at more than 460 million.

     Chinese companies with senior care holdings do not have many other options to bridge the knowledge gap. Bringing American talent to China has largely been unsuccessful for myriad reasons, most especially cultural differences.

     Experienced American senior care operators have seen little reason to take on the risk of overseas expansion, given the demographic trends of the U.S. Despite recent reforms which have allowed 100% foreign ownership of Chinese senior care businesses, the realities foreign operators and owners would have to face on the ground when competing with local companies have made this option unpalatable.

     American senior care companies should understand Chinese investors are coming to America for the right reasons.

Damjan DeNoble covers Asia health industry trends at Health Intel Asia, and is a consultant to Chinese companies investing in U.S. senior living and medical facilities

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