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How will the
Australia. If 25 per cent of those bond-
payers die or depart in the first year of
operation of the Australian Pensioner
Bond scheme, then some $3 billion may
be paid out. If the interest rates are at
the CPI level or, at best, neutral between
bonds and periodic payments, then
perhaps only $1.5billion - half that $3
billion - may come back to providers to
replace those lump sum bonds.
Now, much of that $12 billion in bond
money is expected to be in banks, paying
down borrowings used to build those
services, or actually in the 'bricks and
mortar'. That is, after all, the primary
purpose of bonds. So, let's say two thirds
of bond money would be used to reduce
borrowings and one third would just be in
investments, earning interest for providers.
The upshot would be that Australia's
residential aged care sector would have
to borrow a further $1 billion in just 12
months, to cover the reduction in current
bond holdings. That would mean borrowing
$1 billion in one year that would not be
used for any new buildings or upgrades at
all -- just to refinance reductions in bond
holdings on existing bed places.
The most recent Department of Health
and Ageing (DoHA) figures - 2009/10 -
show that around $1 billion was spent in
one year on building new residential aged
So, a successful Australian Pensioner
Bond scheme coupled with a low
CPI-type interest rate for 'grossing-
up' periodic payments could give rise
to a doubling of monies needed from
financiers: $1 billion for building new
places and $1 billion to refinance
depleted bond levels. This is before
consideration of money needed for
rebuilding and upgrades. On the positive
side, the providers can now set the
periodic payment at a commercially
appropriate rate to allow an income
stream that can repay principal and
interest. Bankers we have spoken with
are positive about this type of lending.
GOOD NEWS FOR SMART
Here is the good news for retirement
villages. Firstly, the PC recommends
removing regulatory restrictions on
community care packages and residential
care places over a five-year period.
Already retirement villages are moving to
secure marketing and price advantages
through access to home care packages.
Success stories in southern Queensland
and elsewhere have seen retirement
village operators facilitating delivery
of CACP, EACH, EACHD and veteran's
packages in care-in-village apartment-
style complexes. They are popular and
some are sold out within months.
Secondly, retirement villages can
continue to require that new residents
pay lump sum ingoing contributions,
while residential care may have to accept
changing their financing model to one
where many or most new residents elect
to pay periodic payments.
And retirement villages can continue
to require retentions in the form of
deferred management fees, while the PC
recommends the abolition of retentions on
bonds for aged care facilities.
In short, retirement villages could
readily access and commence co-located
residential care services in a deregulated
environment and be ideally suited to
maximise occupancy from their existing
aged consumer group.
The need for residential aged care will
grow, the market will remain vibrant
and strong and the uncapping of
accommodation payments will be very
positive to the growth of high care services.
This change, to help keep the high care
building program going, is particularly
important since DoHA stopped the very
good alternative of expanding partial bond-
taking extra services as the primary way of
getting new high care places on the ground
in most metropolitan areas.
However, if I see any biggest winner
from the recommended PC changes, it is
the Australian retirement village sector,
provided the sector moves to embrace
greater levels of care (and, thus, frailty)
on retirement village sites.
James Underwood is Director of James
Underwood & Associates. n
"If I see any
PC changes, it
is the Australian
the sector moves
AAA | MAY--JUNE2011 | 55
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