We are all well aware of Australia’s ageing of the population and the significant challenges for our government, including greater demands on the public purse through higher spending on pensions and healthcare. But for investors and some companies, it will also create opportunities for those in that space.

There is no doubt the ageing population will be one of the strongest trends in Australia in coming decades. According to the ABS, the proportion of 65-year olds and older will rise to about 22% by 2061.

ABS Population Pyramid

Figure 1. Population pyramid showing ageing of the population: 2015 and 2061
Source: ABS

Retirees will increasingly live in retirement villages but shift into care when their needs increase. This will see rising demand for residential aged care, which underpinned the enthusiasm for Japara Healthcare (ASX:JHC).

The Company provides independent living, low and high care, Dementia and Alzheimer care, respite and extra services care. The Company operates through an aged care organisation, ACSAG and Japara Retirement living. The Company’s ACSAG provides Aged Care through a range of nursing homes with about 30 residences across Australia.

Investors may remember the strong debut in April 2014 . The stock closed its first day at $2.70, some 35% above its $2 listing price. The excitement JHC generated reflects the market’s belief Australia’s ageing population and the retirement of the great wave of baby boomers are creating major investment opportunities. It should be noted, however, JHC has traded significantly down on that big first day, which is a warning investing into this trend must be weighed against fundamental valuations. Buying a theme is dangerous if due regard to underlying value is ignored.

Given most aged care facilities are in residential areas, where property prices are appreciating due to low interest rates, operators which own their own properties can augment earnings with property price inflation and development profits.

The recent interim result was ahead of expectations on most metrics with strong gains in occupancy rates, operational places and operating earnings per occupied place. JHC estimates there will be 80,000 additional residential aged care places in Australia by 2022.

Government policies for controlled expansion of aged care places, initial licence requirements and ongoing regulatory compliance support high barriers to entry. The competitive process for new places favours reputable incumbents. Government funding provides the sector with long-term revenue certainty.

Ownership Disclosure: Clime Asset Management (Clime) owns JHC.AX on behalf of various mandates where it acts as an investment manager.