New demographic drives new care home investment opportunities

A new demographic wave is opening up new care home investment opportunities, reveals new research from JLL.

The report highlights both rising fees, occupancy levels and, as a result, profitability. Occupancy levels have gradually increased over the last three years, led by the East Midlands (92 per cent). There has also been a gradual increase in average weekly fees over the past three years, helping to combat a 7 per cent rise in the average staff cost per resident to £19,078. Indeed, the introduction of the National Living Wage (NLW) in April 2016 is having a “huge influence on staff costs” this year, with research suggesting that for most operators, Local Authority fees would need to increase by a minimum of 2 per cent per annum simply to compensate for the effects of the NLW.

Non-staff costs per resident fell from £5,114 in 2014/15 to £5,054 in 2015/16
Despite various challenges, EBITDARM* remains robust. The average stands at £9,054 per resident per annum which is 3 per cent higher than the previous year.

Nursing homes and residential care homes are seeing only marginal differences in profitability, concludes JLL, but says there is “great cause for optimism” in the sector.

Phil Hall, Chairman of JLL’s Healthcare team, comments: “While there are of course challenges for the industry including wage inflation, the introduction of the NLW and lack of qualified staff… since March this year we have seen positive fee increases from local authorities and NHS Chief Executive Simon Stevens is to be congratulated on recognising that more funding is needed for social care to address strains across the NHS.”

The UK’s ageing population is driving demand for care homes but also polarising the market. An increasingly wealthier elderly demographic, meanwhile, is driving a gap between the private pay market and the socially funded market, with private pay supporting above inflationary increases in private fees by up to 5 per cent per annum, while the average social fee increased by 2.3 per cent.

“Investors have tended to focus on the best in class homes in the market with private pay customers due to this increased polarisatio,” comments Joe Guilfoyle, Head of Healthcare Corporate Transactions at JLL. “However, there is now a lack of available high quality portfolios remaining for investors to target. As a result, private equity investor focus is now turning to those with the development and operator skills to create the next generation of high quality care homes. There are now new opportunities emerging in the mid-market.”