FEATURE | Aged care: The longevity dividend

Additionally, the number of persons aged 80 years or older is expected to triple between 2020 and 2050 to reach 426 million.

In countries like Australia, that cohort of older people are also the most cashed up in history and expect a higher living standard even as they age.

This culmination of aging populations, wealthy retirees and constrained development pipelines has created a perfect storm for operators of aged care facilities, and one that investors can benefit from for years to come.

Quay Global Investors assistant portfolio manager Gavin Truong says there is significant opportunity, particularly looking at markets like the US and Canada, where aged care is more privatised.

"In the US and Canada, it's like private pay, so the tenant pays, there's no government involvement, and secondly, it's like a monthly rent, and then extra if you need care, so we like that, because it's a bit like residential and there's less regulations involved," Truong says.

Truong points out, now is a great time for investors as there is a huge wave of demand surging in the post-COVID-19 world.

"What happened to the sector, especially since COVID, is that supplies dried up. So, prior to COVID in the US, there was about 3% of stock being delivered every year, because COVID had an outsized impact on older people and on senior housing regulations, visitor requirements, tours, etcetera, was all stopped. Visitors were obviously not allowed, and people were concerned about moving into these places where you're with a lot of the public on a day-to-day basis. So, they'd rather stay home," he says.

"That dried up demand, and meanwhile the people were still getting sick and old and passing away."

Truong says during the pandemic, occupancies fell significantly to around the mid-70% range, which he describes as "pretty catastrophic" for the industry.

"That's a very low occupancy. But what's happened since then is because it had been such a bad time in 2020 and there was no new supply being built - and it takes three to four years at least to build one - demand is coming through now," he says.

"So, occupancies have recovered significantly from that 70% mark. Now, most of them are at the 90% to 93% mark. So, back to pre-COVID levels, and with that wave coming through of demand, we expect it to hit 97% within a few years."

Truong says because of this increased demand senior housing REITS have performed very well share price-wise over the past two years, and this is a trend that's expected to continue.

One such REIT Truong mentions is the Welltower REIT, which is up 300% in the past 24 months, and while that may be exceptional, share prices are expected to rise as demand continues to grow.

Truong says companies that operate in the aged care housing sector say market rents on average need to rise around another 20% to 25% for developers to be incentivised to build new assets - something which is expected to occur, due to the currently low supply.

Another thing to keep in mind, he says, is that Boomers are very wealthy in comparison to the generations that have come before them. They have huge housing wealth that they're liquidating as they reach retirement, which can now be used to fund the monthly rent requirements of these assets, even if they do grow 25%.

The possibilities for investors could be huge, and Truong says it is one of the biggest thematics playing out now in real estate, only just behind the data centre boom.

"The difference with data centres is there is a lot of supply in data centres right now, in fact demand is overwhelming that supply. Power shortages are keeping that supply kind of in check, but it's coming, whereas senior housing demand is stronger, or just as strong, but supply isn't responding just yet," he says.

"Some senior housing REITs are outperforming the data centre REITs, growing stronger forecast earnings, but you can buy them at higher initial implied yields.

"It's definitely a thematic that really resonates with investors, and with our clients, because it's something that's simple to understand, there's an aging demographic across the Western world."

The scope of possibilities

Sarah Shaw, chief investment officer and co-founder of 4D Infrastructure, agrees that the aging population is going to continue having an effect on real estate infrastructure - and not just for aged care housing.

"In developed economies such as Australia, Japan and parts of Europe, the most immediate pressure of an aging population is on healthcare and social infrastructure sectors - hospitals, aged care facilities, diagnostic centres," Shaw says.

According to PwC's Global Infrastructure Outlook, annual spending on health and aged care facilities globally is projected to grow by 73% between 2024 and 2050, driven in large part by the fact that over-65s will represent 20% of the world's population by mid-century.

"While aging populations are not considered a core driver of the listed infrastructure investment thematic, outside of social infrastructure, they may have a ripple effect across various infrastructure sectors," Shaw explains.

"Retirees travel more, supporting airport and toll road volumes. In Japan, where nearly 30% of the population is already over 65, accessible public transport has become a policy priority.

"There is also growing demand for upgraded and expanded utility infrastructure as older demographics may relocate outside major cities. That said, we do not consider this social trend a primary driver of infrastructure investment plans."

Looking ahead as the population continues to age, Shaw believes listed infrastructure is at the start of a significant long-term investment cycle, and demographics are one of several structural forces behind that.

"We see five interconnected drivers of infrastructure demand: technology and digitalisation, decarbonisation, replacement of aging assets, population growth - particularly in emerging markets - and the ongoing emergence of the middle class as core long-term, structural drivers of infrastructure investment," Shaw says.

"Direct exposure to social infrastructure such as healthcare or aged care assets is limited in listed markets. The listed infrastructure universe is predominantly made up of utilities, transport assets, communications towers and pipelines, essential services whose earnings are typically supported by regulation or long-term contracts. Aging populations may play into this picture, but in and of themselves are not the primary driver for listed infrastructure specifically."

As Shaw explains, looking back around a decade ago, aged care infrastructure was largely a policy discussion in developed markets. Discussions were around how to fund it, where to build it and who would operate it. Today, she says, the conversation is more urgent.

"Populations have continued to age faster than facilities have been built, and the funding gap has widened," Shaw says.

"In Australia, the aged care royal commission highlighted systemic underinvestment. In Japan, healthcare spending is projected to reach ¥83 trillion by 2040, roughly 1.5 times its 2020 level, with the over-85 cohort driving the sharpest increase in demand."

Shaw adds that investors interest in infrastructure more broadly is strong, and within that demographic-linked infrastructure is attracting attention.

However, she says it currently still remains a relatively niche allocation within listed infrastructure portfolios.

"From an investment perspective the challenge is that much of the social infrastructure directly serving aged care is unlisted or government-owned," she says.

"Hospitals, nursing homes and community care facilities are not typically part of the listed infrastructure investment universe."

Health is wealth

People are living longer, and that's partly because they are healthier and because medical technology has improved exponentially.

When one thinks about aged care, it's not simply the facility they may one day choose to live in, it's also about medicines, treatments and overall health.

This is another major opportunity for investors to start looking at.

One such investor is Betashares investment strategist Hugh Lam. Lam says the Betashares DRUG ETF capitalises off these drivers while providing investors with the diversification they seek.

"Healthcare as a sector, more broadly, within portfolios really provide us diversification benefit. And what I mean by that is typically healthcare provides generally defensive characteristics compared to other sectors like technology, which are typically what we call high growth," Lam says.

"During market downturns, more resilient sectors like healthcare and consumer staples will tend to do quite well. So having that within a portfolio during those times can be really handy."

Lam says the longer-term drivers behind the healthcare sector are not expected to slow down anytime soon.

"The aging population is naturally going to be a key driver in terms of healthcare spending. By 2030 we're expecting one in six people will be over 60 years old, and in developed market nations like Australia, people aged over 65 years old will account for about 40% of healthcare spending," he says.

"And for those people becoming a lot more health conscious, that's going create a pretty big market in terms of healthcare spending. So those are the longer-term trends that are going to support healthcare."

Within the space, Lam says the use of artificial intelligence (AI) will also become a driver as healthcare companies harvest its uses. Lam says it's expected to have quite an impact on the sector.

He says AI is already being used in the healthcare sector to detect cancers at an earlier stage and help with radiographic imagining.

And all of this also leads into what Lam says is one of the leading indicators for future revenue: research and development (R&D).

"Naturally, these companies need to spend a lot of money researching and developing new drugs as we see different kinds of diseases come into the job. Generally, R&D is going to be supportive of future earnings, because if you're going to create new drug products you can then sell to market, that's an important step. So, it's a leading indicator for future revenue," he says.

Currently the DRUG ETF is investing in the major health players in the US and Europe, the likes of Johnson & Johnson, UnitedHealth and AstraZeneca.

"We're really trying to find this is exposure to the global healthcare theme through a simple wrap up in an ETF," he explains.

Some others, like American Century vice president and senior client portfolio manager Jim Shore, like to get a bit more niche.

"We're looking for companies that we believe are going to deliver an acceleration in earnings growth or an improvement in their business fundamentals, and sometimes that can be supported by a thematic, including demographics to aged care, and then where we think that improvement is sustainable, at least for the next 12 to 18 months," Shore says.

"With that as a framework, we are seeing opportunities within healthcare and within real estate as well. We're looking at those companies we think are good operators of skilled nursing centres, nursing homes, assisted living. But there are also some healthcare-related names that are more focused on that older demographic that we think will be increasing."

Shore says one such investment they have made was in Guardant Health, a diagnostic testing centre for cancer, though with a patient population primarily skewed towards those aged 65 and older.

"It's a growing demographic. We also think they have some novel diagnostic testings that provide better value-based outcomes, so it's not particularly expensive, and if it can detect cancer earlier, it can lead to less costs down the road as well," Shore explains.

Shore says they are also looking into some interesting biopharma companies that he believes are also making some interesting novel drugs.

"The sweet spot for us would be those that are not only expanding lifespan or healthspan but also targeting the older demographic as well. We'd like to have both, where they are treating certain types of cancers that will allow people to live longer, that is a benefit for society, as well as participating in a population or a demographic that is growing much more rapidly than other parts of the of the demographic spectrum," he says.

"So, we're looking at it from multiple different angles... but we do see these areas of the market growing more rapidly given the demographic tailwinds."

As Shore puts it, investing in companies that are producing healthcare options for younger demographics could be an additional tailwind for many aged care infrastructure-related names in the future.

The message seems clearcut: the healthier people are, the longer they live.

Bringing it home

While most investors are looking overseas - where the aged care sector is more privatised than we see here in Australia - there is an opportunity for advisers to help the aged care sector at home be more sustainable.

JBWere investment adviser Casey Ratcliffe works with aged care organisations to help them invest and create a more sustainable business.

"With an aging population, the demand is only going to increase. What we have found from our clients is that the residents, as they move in, have a higher expectation of what aged care means and what should be provided through that. So, there seems to be a high watermark coming through both facilities, but also care," he says.

Ratcliffe says JBWere is a leading wealth manager in the sector, working with 70-plus aged care organisations, which are primarily not-for-profit. On behalf of them JBWere manages just over $2 billion in investments.

"This is significant growth area for JBWere, over the decade that I've been working with aged care organisations, and what we've found now is there is increasing activity, but also increased engagement, inbound queries, finding out what is possible within the sector, and what investments are appropriate to meet those needs," he says.

"What we often talk about with aged care clients is trying to make them become more self-sufficient and sustainable over the long term, to be able to help their communities. That's the focus I look at and enjoy the most with what I do."

Ratcliffe says between issues with government funding and the current high inflation environment, that sustainability aspect has become more difficult to meet.

As he explains, what was once a simple task of investing the money in products like a term deposit, that is now not the optimal option.

"The way we look at these portfolios is different to, say, a university endowment fund or private client. Firstly, the source of the funds are different, a mix of inbound contributions from residents such as deposits or bonds which are required to be paid back to resident families, operational savings, bequests and fundraisings, and they all have different liquidity and regulatory requirements, so it is a very different portfolio mix to what I would construct for a private client, saving for retirement,"
he explains.

"When they understand their returns are being eroded by inflation, they're looking at options to maximise returns to help bridge the gap, and that's why I say there's more inbound queries now and engagement."

Ratcliffe says aged care facilities have become more investment focused as a result of a challenging operating environment.

He says he sits down with the boards and executive committees on a regular basis to align their capital with their purpose.

"From that perspective, we categorise capital into three pools, being working capital, a short-term pool and a long-term pool.

"Working capital is really not about an investment return, rather it's about ensuring short-term requirements are covered.

"The short-term pool is anywhere from one to three years requirement and primarily targets yield enhancement versus cash and term deposits.  This pool invests in fixed income securities that exhibit high daily liquidity.

"The long-term pool can relate to targeting CAPEX. A lot of these organisations will have five-to-10-year strategies of improving dated facilities that would give them the opportunity to have a more balanced or growth focused portfolio, which would be in a mix of asset classes, being domestic equities, international equities, for example," Ratcliffe says.