With the UK population already including 1.2 million people over 85, and that figure set to quadruple in the next half century, it's not surprising that the care homes sector is increasingly being seen as the next big thing. But are investors and would-be entrepreneurs right to view it that way? Julie Hayes finds out.
The care homes industry is reshaping itself as increasing costs have pushed operators out of the market. The resulting undersupply of beds and escalating demand is good news for the bigger players in the industry, who are snapping up the opportunities.
While costs remain high, the ageing population is growing, so long-term high demand for beds will maintain care home operators' appetite for growth.
The current UK population includes around 1.2m individuals aged 85 years and over and this is expected to quadruple in the next 50 years, leading to a significant population aged 90 years and over, says Mark Tyler, head of healthcare at Atisreal in Leeds.
"Against this undeniable demographic pressure, the number of care home beds available to the general elderly sector had been gradually reducing for a number of years, although it has stabilised at around 420,000, following fewer closures and the introduction of more new homes to the market," he says.
BUPA Care Services managing director Mark Ellerby says the industry is in a good position and he expects it to be stable in the next year or two.
He says: "The care home market has over a ten-year period, come back from some quite dark days in 2000/2001, where margins were very low and beds were exiting the sector very rapidly. Margins have improved and we are seeing a reasonable return on capital."
There has been a period of consolidation and a number of large players have been established, which will help the industry continue to stem the contraction in the number of beds, he says.
Ellerby adds: "In the medium term, we are going to see more of the larger players getting bigger and smaller operators getting squeezed out further. Because of ever increasing regulation and the cost of regulation, they may decide they do not want to be part of the industry."
Tyler says the consolidation has been seen among both the larger corporate operators and regional providers, whose acquisition of stand alone homes or smaller groups has been a microcosm of the larger players. He says: "Previously more than 50 per cent of the market was made up of non-corporate operations with less than three homes in their portfolio, whereas more than half the beds are now provided by corporate operators."
Although Ian Wilkie, director of healthcare consultancy GLP Taylors in Leeds, predicts that in a post Northern Rock 2008, corporates will take a more measured approach to investment, which may open up acquisition opportunities for smaller operators. "Those deals could well be tempered, however, by a more cautious approach from banks, which although retaining a strong appetite for the sector, are likely to employ more rigorous scrutiny of opportunities and the valuations that support them," he says.
Some businesses were brought to the market late in 2007 as operators sought to exit before the changes to capital gains tax (CGT) take effect in April 2008. Wilkie says: "The corollary of the CGT effect is that we may see an increase in the number of individual units or parcels of homes sold out of larger estates. With an increasing emphasis on asset quality, larger operators assessing their options may take the opportunity to dispose of some of their older assets, paying the new flat rate of 18 per cent, rather than the 30 per cent that would previously have been the case."
NHS reforms focused on efficiency gains have meant most services have been outsourced to the private sector and Royal Bank of Scotland senior director of sector finance Doug Burns says the tendering of local authority contracts to private operators contributes to consolidation. "Where the local authority is carrying out a tendering exercise, the preferred providers are the winners of a block contract. But those who are unfortunate are left wondering what to do with their staff and we see consolidation, certainly among the smaller and medium operators," he says.
Private sector competition and the change in demographics means operators also need to adapt their services to more complex requirements.
Government priorities are driving domiciliary care in the patient's own home and Burns says that by 2026 more than 2 million people aged 85 will still be living in their own home.
Some care homes operators have adapted to provide domiciliary service as well as care homes, but even for those who don't, this trend will have a significant effect on their business.
Rebecca Rowsell, associate director of healthcare at Colliers CRE in Leeds, says there has been a drop in care home occupancy levels in the last 12 to 18 months, although this will probably increase again in the next 18 months.
"The current drop is in some part due to an increase in the provision of homecare services to those who wish to remain in their own homes rather than going into a care home."
Ellerby says both home and residential care will continue to grow because there is only so much that can be done in the individual's own home. He says: "Some of the people we care for are extremely frail, many are bed-bound and many are receiving nursing care, which is not really suitable for provision in your own home. It would cost you an absolute fortune."
And while those elderly residents who can are staying at home for longer, this means that when they do require residential care, operators will be required to provide more specialist services.
Dominic Donnini, regional development director for the North at Sunrise Senior Living, says the majority of the company's residents only go into a residential home when absolutely necessary. "Most are female and 85 or over. They may require some kind of mobility aid and they come to us as a matter of requirement."
Ellerby says while we are all living longer, we are not necessarily living more healthily and the increase in dementia seen in the last ten years is forecast to continue for the next 20 years.
The industry has reacted to this and has seen an increase in specialist care homes for dementia patients, but also for people with brain injuries and learning difficulties. Here the number of patients has also increased, causing a shortage of homes that can supply the necessary care and support, says Rowsell.
"We have seen a large increase in the number of care home operators interested in branching out into the provision of specialist care. Due to advances in surgery over the last ten years, more of us are surviving serious accidents with head injuries that would have previously proved fatal. The rehabilitation of brain injury patients following discharge from hospital is an area that many care homes have had the foresight to develop," she says.
"However, service providers also require the necessary level of expertise to operate specialist care businesses, so there are barriers of entry unless operators have a proven track record of specialist care provision."
The expectations of private clients and competition for local authority contracts has also forced operators to raise standards above and beyond government regulations.
Ellerby says the UK is far ahead of many other parts of the world in terms of quality of provision, with most care homes having upgraded to offer single en suite accommodation.
"If you go abroad, you still see people in multi-bed wards of six to eight people. It looks like a hospital ward, but they are actually there for long-term care."
But he says that while they want to continue to build excellent facilities, the private sector has to be incentivised to do so and funding is still a major issue in building and running care homes.
"The majority of beds in this country are paid for by the state through local authorities, which are, as ever, extremely tight with their budgets and find it very difficult to pass on rate increases to their suppliers. Local authority fee rate increases are failing to match care home cost inflators," he says.
He also says that local authority fees are patchy with some authorities paying more than others. A study by GLP Taylors found average fees ranged across the country from £3520 to about £3300 per bed per week.
Employment is the largest running cost a care home operator faces, because it is by nature a labour intensive industry. Angela Gorton, head of employment at Fox Hayes, says this cost drives wages down, which causes other employment issues.
She says: "The industry is fairly low paid, which results in a high turnover of staff if employees manage to get better paid jobs, and this is not providing continuity for patients."
Working time regulations can also be a worry when looking at overlaps in cover and hand over sessions. Staff may have to sleep on site or be on call, therefore operators have to be careful they do not break regulations in terms of the hours their employees work or the breaks they are entitled to.
Where operators do pay above the minimum wage, Ellerby says that the increases from 5 to 10 per cent have caused cost pressures because the differential in pay, which makes them attractive employers, gets eroded and additional paid leave further increases costs.
Operators are building more homes, but the industry is finding that developments are expensive and land is scarce.
Ellerby says: "Our build programme is not going as well as we'd like because it is very difficult to get land and construction costs are escalating at about 10 to 15 per cent every year, whereas our fees are relatively static."
He says the planning process also obstructs them, with different local authorities having a different take on planning, particularly with regard to environmental issues.
But Michael Coates, commercial sales manager at Thirsk-based construction company, Severfield-Reeve Projects, says there is still strong demand for both the building of new care facilities and the refurbishment of existing homes to conform to new regulation.
Coates says the trend among operators is to opt for state-of-the-art facilities which exceed minimum standards to futureproof developments against further requirements. In which case, he says: "Some older buildings are difficult to refurbish and in some cases it is easier and more economic to knock existing facilities down and start again."
Donnini says Sunrise Senior Living does look to build on brownfield locations, but it will not reuse any building, making the average development cost £325m. He says: "Our elderly residents deserve the best we can provide and the best way to deliver that is by developing from scratch and building new. This allows us to build accommodation that falls in line with regulations and we can make it sustainable."
Ian Wilkie says the sector looked particularly healthy in comparison to the general climate in the commercial property market in late 2007 and he forecasts development activity will increase in 2008.
"Healthcare provides good asset backing for lenders and by the nature of its stock has virtually no "sub-prime' or marginal loans that might be seen in other business sectors such as retail or catering," he says.
Housebuilders are the industry's main competitors for prime development sites, but Rowsell says that while they are still competing, housebuilders are becoming particularly restricted by the obligation to provide affordable housing. "This is eating into the profitability of some residential schemes and therefore affecting the buying power of housebuilders," she says.
But Burns says affordable housing also works to bring the two sectors together.
"We're getting our healthcare operators talking to property development clients about joint opportunities. The housebuilder has to have a level of affordable housing and a care home could satisfy that affordable housing requirement. Where the cost of land is a prohibitive factor in terms of building new units, operators are also having a good look at their existing sites and seeing whether there's a possibility of extending those or building new units in grounds already have," he says.
Rowsell says that with the UK property market stagnating and housebuilders struggling to sell existing stock, their rate of development has slowed slightly, allowing care home operators to catch up.
"Although it is early days," says Burns, "it would seem viable if house prices continue to fall, that housebuilders may look at the profit margin in development sites and see it's not cost-effective to do it at the current time. In which case they may flip it on to a health care provider, but that depends on the individual site. There is still a very healthy appetite from our health care and housebuilding customers for borrowing."