China is encouraging investment in senior housing as it tackles a looming demographic crisis, offering tax incentives and other benefits to attract foreign investors. The rules, however, are complex and potential investors will need to structure their business carefully to take advantage.
After almost four decades of its single-child policy, China is facing a shortage of families able to care for their elderly relatives. The annual birth rate has fallen from 18.2 per 1,000 people in 1980 to 12.9 in 2015, according to the World Bank, resulting in a so-called “4-2-1” phenomenon, where one child cares for two parents and four grandparents.
At the same time, people are living longer. China’s 220 million people over 60 now represent 16.3 percent of its total population, up from 10.3 percent in 2000. By 2020, that number will reach 248 million, equivalent to the current total population of Germany, France and the UK combined. By 2050, China will have 437 million people over 60, more than the total projected population of the United States.
The current supply of senior housing units in China is minimal, and most are provided by the government. In 2012 there were facilities for only one million across all of China – covering less than 0.5 percent of the 220 million aged population. That contrasts to the US, where 7 percent of the population over 55 live in senior housing.
Clearly, there is a significant gap between demand and supply. From a construction perspective, estimates suggest China will need another 4 to 5 million elderly beds by 2020, equal to around 100 to 182 million square metres.
While members of the younger generation are less able to look after their parents and grandparents, rising incomes mean that third-party services are now relatively affordable.
The Chinese government, always sensitive to issues that may contribute to a breakdown in social harmony, is encouraging domestic and foreign investment in senior housing.
The Law on Protection of the Rights and Interests of the Aged has introduced various preferential policies regarding electricity, land and taxation designed to support the further creation of social welfare institutions for the elderly. Reverse mortgages are now allowed, and basic pensions and old age allowances are coming into force.
Significantly, the 2015 update to China’s Catalogue for the Guidance of Foreign Investment Industries classifies elderly care institutions (“ECIs”) as an “encouraged” sector. That means the Chinese government is actively seeking foreign investment in this sector, and allows foreign investors to now operate through a wholly foreign owned entity (“WFOE”), rather than through a joint venture, as required for most real estate assets. Foreign investors are able to enjoy certain benefits such as tax incentives, cheaper land costs, simplified approval procedures or other favourable terms for investment in this sector.
In practice, however, foreign investors may be restricted in running a senior housing business in some locations. For example, at the time of writing, Shanghai requires foreign investors to approach the market through a Chinese-foreign joint venture, even though ECIs can be established as WFOEs in the Shanghai Free Trade Zone.
Land use rights have been strengthened, but foreign investors still face numerous restrictions in developing land in China. For example, foreign investors cannot apply for a licence to operate an ECI until a completed premises has been secured. Therefore, unlike the logistics industry, where foreign investors can acquire and develop land for self-use, it is almost impossible for a foreign invested ECI to engage in land acquisition and development.
The most recent guidance on land use closes some of the loopholes in the elderly care industry. In the past, private and foreign investors have relied on the provision of elderly care services as a way to develop real estate projects. To ensure that the approved ECI is actually used for its intended purpose, there are restrictions on the construction of each living room (limited to 40 square metres), and local governments are not permitted to approve any subsequent changes in land use zoning or floor space ratios.
Foreign invested ECIs will enjoy the same preferential treatment granted to domestic private ECIs, including exemption from, or reduction of, taxes and administrative charges.
All fees regarding electricity, water, gas and heat should be charged in accordance with that charged to residences, and local authorities are encouraged to provide discounts of administrative levies.
Elderly care services provided by private owners are exempt from business tax, and the transfer of building ownership or land use rights during the restructuring of an ECI is exempt from value added tax and business tax.
Local governments must also direct a portion of their funds to elderly care. The Ministry of Civil Affairs and the local government must use more than 50 percent (60 percent for Shanghai) of the welfare fund collected through the sale of lotteries for elderly care business and must raise the percentage incrementally as the elderly population increases. Among the funds to be dispensed, those allocated for the promotion of private investment must not be less than 30 percent. The funds may also be used to support private elderly care projects.
Despite encouragement of investment in the elderly care sector outlined in the Catalogue for the Guidance of Foreign Investment Industries, foreign investors will still need to enter into a Chinese-foreign joint venture to obtain the required license in some locations.
Foreign investors may choose to approach the elderly care market through the following models.
Foreign-Invested Real Estate Enterprise
Foreign investors may participate in senior housing as a real estate enterprise especially during the early development stage. There is no restriction on foreign-invested real estate enterprises obtaining land use rights for undeveloped land. Once the development is completed, the ECI can be leased to a third-party operator. If, however, the foreign-invested enterprise would like to operate the ECI business itself, it will have to expand its business scope and obtain the requisite permit and license.
As an encouraged sector, foreign investors into senior housing may establish a Chinese-foreign joint venture ECI. Investors may choose to outsource the operation of the ECI to an experienced operator, or hire employees to operate the ECI on its own.
Joint Venture with Insurance Institutions
Insurance institutions benefit from state support for investments in medical institutions and the elderly care sector. Taking advantage of upstream health insurance, maintenance insurance and elderly care insurance, sufficient capital and client resources could promote the development of the downstream senior housing industry and make such development sustainable.
Public Private Partnership
Just this year, the Ministry of Civil Affairs pledged to support the participation of private investors (including foreign investors) in the development of elderly care services through the public-private partnership model. The Ministry has also encouraged the build-operate-transfer (“BOT”) model, while public sector ECIs are encouraged to involve private sector players by way of contracting, associated operations, equity joint ventures and general cooperation. Where appropriate, governmental agencies are also encouraged to procure services from private elderly care service providers for the elderly, and public enterprises are being encouraged to convert their resorts, training centres, hostels and nursing homes into elderly care service agencies.
Foreign investors are also encouraged to scale up elderly care investment, develop franchises and cultivate quality elderly care brands in China. Foreign investors are also allowed to participate in the privatisation and restructuring of public ECIs. So far, few regulations can be referred to in detail.
The Long and Winding Road
Having long been dominated by publicly-run institutions yet significantly underfunded, the Chinese government’s recent legislative moves present a big opportunity for private and foreign investors in the senior housing market in China. Although a wide range of supportive rules and regulations have been recently issued, foreign investors will need to navigate these new policy changes very carefully.