Care homes and consolidation: what’s ahead for the sector

COMMENT It has been 15 years since we launched Target Fund Management, with an ambition to reform the delivery of senior living in the UK. In that time, we have seen a lot of change, and – despite ongoing macro-led challenges – we expect the care home sector to continue its upwards trajectory in 2024, driven by a number of supportive trends. First, a flight to quality. Wet rooms accounted for about 9% of the total bedrooms in the sector at the start of the 2000s, a figure that stands at 32% today. This acceleration of fit-for-purpose real estate is an unstoppable trend, and one that will continue throughout this decade. Last year was also revealing in terms of pricing and institutional demand for care home beds. As bond rates shot up, net initial yields inevitably moved out, but there has been a strong bifurcation between demand for older stock and modern purpose-built care homes, with very little institutional interest in the former. Moreover, although overall demand for modern purpose-built care homes fell, pockets of liquidity remained, underpinning a relatively modest 50-75bps of outward yield shift. This flight to quality will only be exacerbated in 2024. Beyond B&B Private-pay residents are rising. Since the 1970s, with greater prosperity and better transport links leading to a rise in international travel, former UK bed and breakfast establishments needed a new clientele and were repurposed into care homes. Government funding was often available for the fees, with a small private-pay element. Nearly 50 years later, the model has changed. Modern medicine has resulted in us all living longer, with people over the age of 85 now the fastest-growing demographic in the UK – and visiting a GP once a month on average. This has put considerable pressure on the NHS, with social care continuing to lag the funding for the NHS. As a result, forward-looking care home operators are increasing their proportion of private-pay residents to ensure security of income, with fee levels increasingly ahead of LA fee rates, reflecting the baby boomer generational wealth profile. Target’s operators are now more than 70% private pay, which has increased by 10% since 2020, with recent market commentary on expected restraint for public fee increases in 2024 further supporting this shift. Consolidation on the cards New development has slowed over the past 18 months, with the supply/demand imbalance of modern, sustainable homes acute. This part of the market should recover in 2024, as construction inflation falls and developers continue to search for suitable new sites for modern homes and sometimes for wholesale refurbishment of existing homes if space allows. After a Covid-led pause, there is likely to be further consolidation among operators this year. The UK care home sector remains highly fragmented, with 18% of beds run by the top 10 operators. But there is evidence that these operators are recognising the winds of change. While historically their beds have often had a preponderance of poor-quality en suites (no wetrooms, only WCs and handbasins) and often no en suites at all, the more established operators look to be making moves to acquire better-quality homes. HC1 acquiring Ideal Carehomes in 2023 was a recent high-profile example. Quality counts We are also seeing the largest operators looking to offload their poorer stock, reinvesting proceeds into modern and purpose-built homes with wet rooms. However, while we can expect more consolidation, we don’t see considerable scale advantages for the consolidators. Care is a very personal, service-led business, and enabling and engaged management at all levels is essential. Finally, while staffing will always be a focus for a successful care home venture, with more than 50% of income on average spent on staff costs, one of the powerful advantages of modern real estate is that it provides better working conditions for the employees. The sector should expect and plan to pay competitively for high-quality carers and staff, and for the middle and senior management at home level, and for homes with a high proportion of private pay, these costs are not just affordable, but essential. Many homes in the last 18 months have taken advantage of the changes in the UK government visa scheme, and this has enabled a well-qualified group of new and caring individuals to enter the sector, generally making staffing easier. Gordon Bland is finance director at Target Fund Managers