The Competitions & Market Authority (CMA) recently produced some interesting statistics on the current state of the care home market, some of which is shown below.
Value of the Care Home Market
The sector is currently worth around £15.9 billion a year and currently provides care for around 410,000 care home residents. Providing this care falls to around 5,500 different care home providers who between them operate somewhere around 11,300 care homes and nursing homes to meet this demand. Around 95% of these care homes are privately owned and operated with a few in charitable ownership. The remainder and very much in the minority are those Care homes that are directly operated by Local Authorities.
Although local Authorities handle the bulk of care home placements, when they require to place people into care homes they generally obtain these services from private care home providers.
Care Home Fee Structure
Data produced in 2016 shows that the average cost for someone who is self funding (paying the full level of fees) their care costs per week in England averaged around £846 which equates to about £44,000 per year. Since then, indications have been that these figures have been increasing at an inflation bursting rate of around 5%-7% per year.
Contrast this with what is paid by local authorities where they commission their care services to privately run care homes and only pay around £621 per week. This amount is only around only 73.4% of the average care home standard charge for self funding residents. This picture tends to show the future direction that care home operators will be forced to take if they are to remain profitable.
Considering that only around 41% of residents currently in care homes are self funding, it is easy to see why the care sector is in crises.
Population Growth
While the UK’s population continues to age and as the demand for care continues to increase, the types of care that is needed in the future for care will change. In 2015, the Office for National Statistics predicted that by 2025 there would be around 36% growth in the number of people that are aged over 85. This would take the total from around 1.5 million to over 2.0 million over that time period. This growth in older people is happening just now and will inevitably lead to a substantial increase in the demand for care home services.
Is Investing in Care Homes Sensible
Operating residential Care Homes is now likely to become a rapidly growing industry where demand for rooms will far outstrip supply for the foreseeable future. This makes care home investment an area that should demand the attention of investors looking to new markets.
While the UK Government remains unable or unwilling to raise the necessary funding to properly resource residential care in the UK it is likely that this problem will only be resolved through private investment.
Care care home providers are already recognising this and are responding by seeking the involvement of private investors who can purchase a room or rooms in their care homes through a type of buy to rent investment. In return, investors are being offered very high levels of return, generally in the range of 8% to 10% per annum on their initial investment with the investor having the possibility of additionally underlying capital growth over the period their investment is held.
For the investor, this works in a similar way to the residential buy to let market with the advantage of the investor being relieved from the stress of managing and maintaining the property, finding tenants and arranging disposal of the property at a point in the future. This is effectively a buy and forget situation for the investor making it very suitable for UK ex-pats and other overseas investors.
Some things to consider:
Investor Incentive – As we stated above, this type of investment works in a similar way to to the Buy to Let market where property is purchased to rent with the aim of achieving a monthly income stream coupled to property growth over time. However, that is where the similarity ends as the investor is in effect purchasing is a room within a managed care home establishment where the care home operates normally but provides the investor with an income.
Investment Capital – Investing in a room within a care home will typically cost in the range £50k to £80k but unlike standard BTL property investment, where the property can usually be mortgaged, these investments require to made in cash. Providing the care home you invest in is well run and profitable, you can expect to receive a steady annual income from your investment in the range 8% to 10% and perhaps higher with potential for capital growth at your exit point.
Exit Periods – When the investor takes ownership of the allotted room, the contract will specify the future dates when the investor can withdraw from the contract and there is no need to advertise the property for sale as the contract will set out the buy back arrangements for you to exit from the investment.
No Management Responsibility – Once again, using a typical buy to let property for comparison, with BTL you are responsible for obtaining tenants, negotiating rental agreements, maintaining the property, worrying about void periods and of course worrying about the legal challenges should you have a bad tenant.
With care home investment, all of these functions are automatically taken care of by the Care Home operator and the investor id completely free of these chores.
No Stamp Duty to pay – Unlike the additional 3% stamp duty hike that the chancellor recently applied to traditional BTL property purchases, there is no stamp duty applied to care home investment.
Do Care homes make for Good Investments
Normally when demand for a product outstrips supply by the levels that currently exist within this industry and where this demand is projected to rocket in future years, that product would normally be expected to increase in value and provide high investment returns. Unfortunately this has not been the past experience with the care industry and the well publicised funding crises, discussed elsewhere in this note, has left many Care Home providers, who depend on local authority placements, struggling to survive.
Part of the problem is that although around 90% of residential care is handled by privately owned Care Home operators, it is local councils who are responsible for care provision and who are funding the care of approximately 6 out of every 10 people in residential care homes. As we have already seen, local councils are effectively only covering the cost of care or even less than the cost, leaving the care home operator to make up the difference through its self funding residents.
The consequence of this is that what councils pay for those residents that rely on council support is well short of what people who are self funding pay, generally around 40% less and it is this drag on income that is giving Care Homes the problem. Remove this imbalance and care homes should be highly profitable.
The current spate of care home closures due to this imbalance taken together with the increasing numbers of people now requiring residential care, means that there are now huge opportunities for well organised care home providers to expand their existing facilities and develop new care home facilities in areas where there is high demand combined with higher proportions of wealth.
Where care homes are operating in good areas and with local councils now looking to increase council tax revenues to improve the funding of care, well managed care homes should do well and provide the investor with an interesting opportunity to diversify their investment strategy and at the same time, know that their investment is serving a good cause.