Capital, equity key for sector viability
Sector needs to have a level of financial investability to meet growing demand and dwindling supply, says Grant Corderoy following the release of StewartBrown’s financial performance update.
The residential aged care sector continues to grapple with bed shortages – a trend expected to continue for the next 10-15 years unless the sector sees investment in new builds and renewals, the StewartBrown March 2025 report shows.
Occupancy has also reached 94.2 per cent.
Senior partner at the financial benchmarking service Grant Corderoy told Australian Ageing Agenda it’s clear that demand is going to exceed supply in both residential aged care and in independent living units, and for demand to be met over the next five to 10 years, improved profitability and increased equity is necessary.
“Now equity can come from borrowings, but it also might need some additional government funding, capital funding,” Mr Corderoy told AAA.
Mr Corderoy outlined three strategies that should be employed to address sector sustainability:
- make the development application process faster and smoother – which will require federal, state and local governments working together
- release crown land if there are available sites in regions where demand is high
- consider increasing the amount of capital grants for new builds, including for metropolitan areas.
“For the last few years those grants have been targeted more for regional and remote areas which I think has been important,” he told AAA.
“But we’re finding that occupancy is now getting very high in metropolitan areas and so we think that there have to be increased government grants, and also some more targeted to the metropolitan areas as well as regional and remote.”
Financial investability
The sector needs to remain both viable and sustainable. However, it must also achieve a level of financial investability to meet future demand, and to achieve continuous improvement and diversity of service levels, the report noted.
StewartBrown listed the minimum financial return that providers need to meet to reach a level of investability are:
- an average earnings before interest, taxes, depreciation and amortisation of $20,000-$22,000 per bed for residential
- 9.5 per cent return on home care revenue through a combination of pricing and efficiency improvements (Mar-25 had a 3.8 per cent return on revenue).
The cost of a new build is upwards of $500,000 per bed and that doesn’t include the land component, Mr Corderoy said.
“So, if we’re looking at an EBITDA return of $20,000 to $22,000, that represents around about 4 per cent return,” he said.
“Now 4 per cent return is not a high return, for example, if you are a listed entity unrelated to aged care… say in the health sector or any other sector, but we think that aged care is a long-term investment.
“But 4 per cent is a marginal return to encourage investability, so $20,000 to $22,000 is almost the minimum that we need per bed per annum to achieve a level of investability.”
Investability, Mr Corderoy explained, is a term that StewartBrown is now using often, rather than just viability or sustainability.
“We have to create a climate where existing providers will continue to invest in the sector and new equity will come in,” he added.
Hotelling supplement
The report said capital and equity will be key for the sector moving forward, and that further reform around the residential accommodation supplement and higher everyday living fee is needed.
The hotelling supplement will be increased to $15.60 pbd from 1 July 2025. This increases $0.25 per bed day to fund the remainder of the Fair Work Commission stage 3 decision, and $1.89 per bed day to fund higher costs of providing everyday living services, the report noted.
The report also found an average deficit of $6.60 per bed day and a deficit of $11.65 per bed day for those who do not charge an additional services fee, noting it as a sign the hotelling supplement remains insufficient to meet the Aged Care Taskforce recommendation that it should equate the actual costs of providing everyday living services.
Instead, StewartBrown has suggested the hotelling supplement increase by a minimum of an additional $8.00 per day.
Mr Corderoy – who was a member of the taskforce – told AAA the costs of everyday living services– which includes catering, cleaning, laundry and utilities – should be borne by the resident or the government, in the case a resident does not have the ability to.
“We think the bottom line is that we have to have the basic daily fee, let’s call it $64 a day, and the difference of the basic daily fee, the hotelling supplement has got to bring it up to that break even with us, and we suggest a slight margin,” he said.
“But at the moment, the hotelling supplement from July – that’s over $15 – is insufficient.
“So in other words, the difference between the basic daily fee plus the hotelling supplement is still less than what the costs of providing everyday living services [are], and that’s contrary to the taskforce recommendation, which the government agreed with,” Mr Corderoy said.
“So we’re saying that the hotelling supplement has to be increased, which means that if you’re a financially supported person, that will come, quite rightly, through the government subsidy, and if you’ve got the ability to pay it, [it would] come from the resident.”
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