Care Home Management

The Care Home Decision Makers’ Magazine

Insight & Analysis

Social care: catching the investor’s eye

We are used to hearing about the challenges care home operators are facing in terms of frozen local authority fee rates, the recruitment crisis and lack of long-term Government strategy. But earlier this year sector experts revealed that market trading in social care had returned the same levels as before the recession in 2008.

This new narrative is backed by the fact that UK care homes accounted for 60 per cent of all healthcare deals last year. Furthermore, a flurry of long-term investors have entered the market, led by Australian infrastructure fund AMP Capital.

But is everyone enjoying the benefits of this recovery? And where does the truth lie: that the market is failing or flourishing?

One provider that is performing well is Barchester Healthcare. Supporting more than 11,000 residents in over 200 care homes, this operator’s residents are a mix of both local authority and private paying clients. CEO Dr Pete Calveley (pictured) said: “Our experience has been one of improved year-on-year trading for several years, with trading now significantly better than pre-recession.”

However, he warns that there is a  widening gap between care home operators which rely mainly on local authority placements and those where self-paying clients make up most of their customer-base. Dr Calveley said:  “I do believe [the market] is becoming more polarised, certainly in terms of capacity change to meet increasing demand over the foreseeable future: capacity is diminishing in the local authority markets and increasing in private pay markets. This is unsustainable if we, as a society, wish to deliver the same outcomes for the population as a whole.”

Peter Jennings, director of healthcare corporate finance at accountancy firm Grant Thornton, agrees that there is a big gap between the fortunes of those providers who rely on local authority and NHS placements for their incomes and those whose clients are mainly self-paying.

He told CHM Online: “I think it is still massively polarised but it is getting a bit more blurred. Impact REIT (real estate investment trust) and The Carlyle Group are investor-focused on the local authority market. There is definite investment interest in developing groups that are not private-pay.

That said, though, declining profits in the authority-funded sector are driving providers towards services for private clients, Jennings believes. “All providers are trying convert as much as possible as they can: there are quite a lot of challenges around National Living Wage and other issues. We think [social care] is a good place to invest but we recognise there are short-term issues, Those with a good business models, low staff churn and good weekly fees are doing well although some are still not at 2008 levels.”

Market faith
One investor demonstrating faith in the UK care homes market is Target Healthcare, a REIT that in September announced it had acquired a care home in Powys, Wales and a development site in West Yorkshire for a total of £17.1m. This takes its portfolio to 52 operational care homes and seven developments, leased to 21 tenants and with a combined value of around £385million.

Chief executive Kenneth MacKenzie said that, in terms of value, yields are back to they were years ago due to interest from long-income funds. He said: “They are investing into services rather than just real estate.” He added that there was a “little bit of a herd mentality” with more investors flocking after one or two had proved successful with this strategy.

“If you try to see it from the operator’s position – they are in a more difficult position. There’s been no recovery for operators in nursing homes and older facilities.”

And not everyone was taking a positive view on the care homes market. MacKenzie cautions that banks will now only lend up to 65 per cent LTV (loan to value) and there was still a mood of “investor beware”.

Despite this, Dr Calveley believes that the future for care homes looks good. “For high quality, efficient providers that invest in their workforce and their facilities, the outlook for the care home market is very positive”, he said.


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