The UK Care Market: 2023 Review
By Rob Kinsman, Regional Director – Healthcare, Christie & Co (www.christie.com)
We recently launched our 2023 Care Market Review report which analyses a range of topics relating to the UK healthcare business market. Here are some of the key highlights…
Healthcare Capital Markets
Entering 2023, the care market adapted, with buyers returning albeit with yields adjusting to reflect higher costs of capital and the changing market environment. Positively, despite the macro-market challenges, there is good demand for care home opportunities, with investors attracted by the strong needs-driven underpin of the sector coupled with long-term index-linked cashflows
Land and Development
The underlying business case for purpose-built care homes remains robust, with a continued need for future-proof market-standard beds in many locations across the UK. Despite operators still facing significant headwinds, the UK care home development market remains active and continues to transact a high volume of new-to-market beds. Sentiment remains positive, with more operators prepared to take leases on new build assets as a way of achieving growth, resulting in an upward movement in rental levels over the 12 months to June 2023.
We are starting to see more domestic and international capital entering the market, attracted by the defensive characteristics of needs-driven Operational Real Estate and the excellent ESG credentials new care homes offer investors. This additional liquidity, accompanied by the continued imbalance between demand and supply of market-standard beds to cater for the rapidly ageing demographic, will support sustainable levels of transactional activity for consented care home development sites in both the short and long-term.
Transactional analysis
When analysing the UK’s elderly care going concern market between 2019 and H1 2023, we found:
• Instruction volumes had rebounded, sitting 70% ahead of where they were in H2 2022
• There was a rise in the number of larger care homes (60 beds or more) going up for sale
• Only 3% of our transactions were to first-time buyers, this is around a third of the proportion in 2022
• There was an increasing number of transactions concluded by the larger companies and corporates
• Independent buyers remain our most active buyer group, accounting for 34% of Christie & Co healthcare deals in 2022 and 36% in 2023
• In 2022,13% of the sales we completed were on a closed basis, this increased to 18% in H1 2023
• In H1 2023, 45% of closed care home deals we were sold to care providers for ongoing care use and 55% were purchased for residential conversion
Operational Costs
Analysis of our consultancy data – which looks at profit and loss accounts from the hundreds of formal valuations – shows a significant increase in costs for care home providers between 2021 and 2023. This clearly reflects the wider economic challenges with labour supply constraints and rising energy prices, and the care sector has a greater exposure to a material shift in these costs.
We found that registered managers’ salaries, on average, increased by 13% between 2021 and 2023. There are even greater wage pressures on kitchen staff, with head cook wages increasing by an average of 14%. The situation with maintenance staff is also acute, with wages rising by 18%. An analysis of utility costs shows that heat and light costs have also increased by an average of 19% on a per-occupied bed basis.
Local Authority Fee Rates
We conducted and analysed a Freedom of Information Act survey – covering all local authorities across England, Wales, and Scotland. This revealed:
• An average residential fee increase in England of 9.5% compared with 5.4% in 2022/23
• An average nursing fee increase in England of 8.1% compared with 6.8% in 2022/23
• Fee rate levels remain a challenge in some areas, with the increases being insufficient to offset inflationary cost pressures
• The burden on the self-funded client base is likely to rise, with the majority of providers achieving private fee increases of 10% or more
Operator Sentiment
We also interviewed a cross-section of local and regional providers and found that 46% of operators have achieved a reduction in agency usage over the last 12 months, whereas 28% stated agency usage had increased. Private fee rates increased across all country regions, with 43% of operators reporting a 10% or above increase in private fee rates. Only 9% of respondents reported increases of under 5%, compared with 31% with local authority fees.
Additionally, 38% of operators said that their occupancy levels have increased, while 70% stated that it has returned to pre-pandemic levels.
The Finance Landscape
Historically, whilst in low interest rate margins, lenders have applied a higher interest rate or a ‘stressed margin’ to calculate affordability. However, we are now operating in a new stressed rate environment, which has made lenders look in greater detail at a business’s ability to service their current levels of debt, as well as any potential increases.
Results of a survey of local and regional providers conducted by Christie Finance in July 2023, found that 38% of respondents are looking to buy a care business in the next 12 months, 30% of which will seek finance to do so. When asked about the confidence they have in lenders to support their plans, 46% said they are very confident, 18% said not confident, and 36% remained neutral.
