The much-talked-about demographic timebomb facing the UK as its population ages sounds like a good reason to get into the care homes sector. But are things really that simple? Christian Annesley finds out.
The South West has far more care homes than the national average – there are more than 600 in Devon and 200-plus in Cornwall – and the region will always be an attractive destination for the retired. But once you begin to dig you soon find that demand for care is driven by more than demographics.
With residential property prices now falling, property provision for the elderly is also starting to suffer.
“Anyone in the sector thinking of buying or selling at the moment has to realise that care home valuations are linked to property valuations – and so are coming under pressure,” says Matt Eves, head of corporate finance for Bath-based Target Accountants.
Robert Belcher, director for healthcare in property consultancy GVA Grimley, also makes the point that the health or otherwise of the housing market affects the sector indirectly.
“When people want to retire into care-assisted accommodation they are usually trading down in property terms. If the housing market is slow and they cannot sell that affects demand.”
Owners of care homes or alternative forms of assisted living for the elderly are under pressure on other fronts, too.
Tim Godfrey, the partner heading accountancy firm Bishop Fleming’s care homes team, says care home owners will feel the financial squeeze this year from downward pressure on fee levels and an increase in the national minimum wage, even before you factor in the effect of the credit crunch on the economy and housing market.
“The government’s Putting People First initiative, which released a further £500m to support living in the community, means care home owners will be more reliant on private clients,” he says.
“The introduction of fair pricing for fees is also leading to owners having to justify fee levels, so returns are coming under pressure off the back of below-inflation rises in fee levels in 2007.”
But are these short-term pressures outweighed by the prospects for long-term growth? Helen Joy, chief executive of Bristol’s Brunelcare, is one that thinks so, although she also admits that reading all the factors affecting market conditions and making the right choices along the way is never straightforward.
“The UK as a whole and the South West in particular is getting older. We will see a 40 per cent increase in those aged over 65 in the next 20 years. And as you head down into Cornwall, the uplift could be greater still.
“We will also see a related increase in those over 85, and that is crucial. Nationwide, the number of over-85s will nearly quadruple from 350,000 to 1.2m in the next two decades. Dementia is much more common at that age, and those that suffer with it need more intensive care.”
But these are changes to which Brunelcare and others are already having to adapt.
Joy says providers like Brunelcare have to try to get the balance right in terms of offering care home beds, sheltered housing for more independent older people and domiciliary care for those who need help but can otherwise live in standard accommodation.
“The old model of residential homes has gone. Extra-care housing – what we call very sheltered housing – is one way ahead. At the moment, our provision model is one third care homes, one third domiciliary care and one third very sheltered housing. Domiciliary care is growing fastest, followed by very sheltered housing, but we also have to keep an eye on local authority policy.”
Most councils pay private-sector and charitable care homes for beds, rather than running facilities themselves, but demand levels are hard for care home providers to gauge since councils will, at times, change their criteria for providing assistance to the elderly.
Douglas Webb, CEO of independent care provider Cornwall Care, says the days of councils taking out block contracts up-front for care homes beds are mostly over.
“In Cornwall, they haven’t block-contracted for years. Nowadays they do what they call spot purchasing, which means we care providers have to develop new facilities at our own risk and based on our own research.”
But Cornwall Care is primarily an operator of care homes rather than a developer. It runs 18 care homes, and a key challenge is to upgrade the facilities in the years ahead to provide the right kind of care long-term.
“We are a charity, which gives us a very specific social role and remit, but the decisions we take still have to work commercially,” says Webb.
“The margins in the sector are quite low, but care homes perform a key social function so you can’t just leave it to the market. What is happening with property right now means some commercial organisations may unravel, as the model they operate is predicated on property.”
Webb’s point is partially supported by recent history, with Southern Cross Healthcare, the UK’s largest operator of care homes for the elderly, forced in June to hold emergency talks with its banks after failing to meet a £46m loan repayment deadline. The highly leveraged company had been unable to sell property assets to fund its debt on a flurry of care homes purchases.
Companies like Southern Cross have grown through acquisition in recent years to lead the market in terms of beds. But King Sturge partner James Hanson points out the sector as a whole is still very fragmented, with the top 10 operators in terms of bed numbers operating only 22 per cent of the market – up from 15 per cent in 2003.
The numbers suggest that more consolidation may be on the cards when commercial conditions improve, but it also highlights how much of the market is still made up of owner managers running care homes that may not be suitable for conversion into modern facilities that best serve the very elderly.
All in all, unless the economy picks up, it is difficult to second-guess what the future holds, not just for the elderly but for those that care for them.