For Merrill Gardens, the next big senior housing opportunity could lie in China.
The Seattle-based senior housing provider manages a 215-unit rental community in Harbin, China, with another two senior housing projects slated to open in the months ahead in Suzhou and Guiyang, China. Those forthcoming projects are with investment partners China Life, a state-owned insurance company, and China Railway, a state-owned railway enterprise, respectively.
Despite its growing presence in China, Merrill Gardens’ current strategy there is still best described as more tortoise than hare, according to Cole Wright, managing director of China operations at Merrill Gardens. But that could change in a short amount of time.
“It’s slow, and it’s a growing focus,” Wright told Senior Housing News. “Depending on what kind of pipeline we see, and we’re starting to see more of a firm one, we would be willing to put a lot of capital to work in China. And if we do that, the relative importance of that [market] could grow quickly.”
Over the next two to three years, Merrill Gardens expects a total project cost in China of anywhere between $60 million and $100 million. That’s still a far cry from the amount of capital spent on Merrill Gardens’ U.S. operations, where it manages 30 properties, 27 of which it also owns. This year, it expects to deliver two U.S. communities, with five more in the works for 2019.
And while China remains a small part of the company’s focus, there are some potential projects on the horizon, including a management agreement for a project in Guilin, a strategic partnership for several leased projects in Xiamen and an investment deal in Zhejiang province, Wright said.
Slow and steady
Part of the reason why Merrill Gardens is interested in China relates to the sheer size of the untapped market there. Roughly 1.4 billion people live in China, and like in the U.S., a large portion of the population is aging rapidly. Unlike the U.S., however, there is a lack of true independent living, assisted living or memory care options for those older adults to choose from.
“The China senior housing market, just as a general point, is going to be massive, no matter how you look at it,” Wright said. “That doesn’t mean it’s going to be massive for us, but as a whole, it’s definitely going to be a big market.”
There are also few senior living operators, domestic or foreign, who understand how to make the traditional senior living business model work in China, he added. And that hasn’t changed much since Merrill Gardens first established an office in Shanghai in 2010.
“In China, with large metropolitan areas, and very little competition, it’s a different kind of development environment, and it’s a different kind of operating environment,” Bill Pettit, president of R.D. Merrill Company, the parent company of Merrill Gardens, told SHN.
Some of Merrill’s bigger competitors in China include Starcastle, a joint venture company owned by Fosun Group and Fortress Investment Group (NYSE: FIG); Cascade Healthcare, which is owned by Seattle-based Columbia Pacific Advisors’ Columbia China subsidiary; and Tucson, Arizona-based Watermark Retirement Communities, which in 2014 formed a joint venture with Taiping Insurance to manage Taiping’s senior living projects across China.
Many other companies who touted burgeoning China operations just a few years ago have fallen off the radar.
“There’s a million ways to get rich overnight in China, and this is a hard way to do it,” Wright said. “So there’s a high degree of attrition.”
Despite the presence of some major players, the Chinese senior living market is still in its relative infancy. This, coupled with the fact that China’s consumer class is rapidly growing, makes having a foothold in the country a good long-term idea, according to Pettit.
“The investments in China are really set up for patient capital. Our horizon is a decade, not a year,” Pettit said. “We’ve invested a lot of time over there working to make sure we understood the model that might be most successful.”
One reason Merrill Gardens believes China is a market worth staying in for the long haul relates to the success of its managed community in a residential development on the outskirts of Harbin, a city that holds more than 10.6 million people and is located in the northeastern part of the country. That community already has 100 or so lease-ups—a relative success for a property located on the edge of one of China’s secondary markets, Wright said.
“If you can do it in an out-there market … I don’t see why you couldn’t do it in a lot of other markets,” he added. “You can do this thousands and thousands of times, all over the country.”
But there are also many challenges in addition to those opportunities. For one, developing in China is not as easy as scouting for a plot of dirt on which to build. The complexities of buying land from the government, obtaining permits and getting licensed make it almost necessary to partner with a local organization, Wright explained.
And despite the growing spending power of China’s consumers, senior housing still isn’t as ubiquitous or luxurious as it is in the U.S. Average unit size, for example, tends to be much smaller. And most Chinese senior living communities don’t come equipped with as many resort-style amenities as those in the U.S.
“You’re looking for that group who has that spending power to be at the high end of the market, but the high end is not like it is here,” Wright said. “On a person-by-person basis, the spending power is not comparable in any way.”
One way Merrill Gardens hopes to distinguish itself from its competitors is by offering memory care services—something many of the company’s competitors there do not do. The provider also plans to run its China operations similarly to how it operates in the U.S., and it plans to do that for the long haul.
“We’re committing in a way that’s not looking for a short-term turnaround and not looking for a quick buck,” Wright said. “You’re building something there that will be part of a future.”
But even if Merrill Gardens’ push into Chinese senior living makes more of a ripple than a splash, that’s okay, too—there’s plenty of market share to go around.
“There’s just right now a bottomless well of possibilities to keep doing this,” Wright said. “Even though there are many much larger, well-resourced firms out there, we don’t need to be the biggest player by any stretch to still have it be worth our while.”
Written by Tim Regan