Who would invest in UK nursing homes in the face of a “care crisis”?
It has been a horrible year for nursing home sector in the UK. Who would want to be an operator? The answer may surprise you.
According to a report by the National Care Forum (NCF) occupancy among not-for-profit care homes has slumped to 79% from about 90% in 2019. Given that an average facility needs roughly 89-90% occupancy to achieve good EBITDA and 82% to break even, this is not good news. On top of this the cost of providing care has increased by an estimated 10-15%, due to both the cost of PPE and higher staff costs, while payments have increased by only 1-2%.
Structural problems have further damaged the sector with local authority rates having been frozen since 2010, due to budget cuts of 20% between 2010 and 2020. Most operators aim for a 50/50 private pay and local authority split, unfortunately private payors are likely to have the most choice in when they enter nursing homes and so have put off entry during the pandemic. The sector also received little comfort from chancellor Sunak’s recent budget, where he heroically kicked the difficult challenge of social care further down the road.
The growth of domiciliary care also means that AVLOS is likely to fall further in nursing homes. Since 2019/20 an additional 1.9 million requests for adult social care support from new clients have been made, an increase of 6% since 2015/16 according to a recent white paper released by the UK government. This has largely been driven by a desire to stay home during Covid, where people felt safe and secure compared to the alternative- nursing homes.
Domiciliary care operators also suffer from staff shortages and low margins, with the vast majority operating at the 3-7% EBITDA level and some smaller providers failing to cover expenditure. Despite this, they are still the more attractive option than nursing homes and so have had a relatively strong year. This raises the question: Can the nursing home sector continue to be viable without reform?
Large French nursing home operator Korian, appears to think so. Korian entered the market in February 2021 acquiring a high-end chain of six nursing homes. Alongside this has come interest from Belgian REITs, Aedifica and Cofinimmo, with Aedifica acquiring three UK care homes for £40m in January 2021. For these opco propco deals to be successful, the operating company needs to be able to run the facility at a profit. These investments indicate that large foreign REITs have faith in a UK recovery – and tenants’ ability to pay.
The truth is probably that certain parts of the UK sector are attractive, one advisor on UK nursing homes tells HBI that high-end private pay facilities can command rates of £1,500-2,500 per week, and, at this rate, investment is more appealing. The new entrants to the market are likely betting that as the wealthy baby boomer generation starts to retire, such rates will become more common in the coming 20 years. However, this is little comfort to current operators with more Local Authority funded residents, many of whom are struggling to stay afloat.
We would welcome your thoughts on this story. Email your views to James Elliott or call 0207 183 3779.
