What is UK Care Home Real Estate?
UK Care Homes provide accommodation and care for people who are unable to look after themselves. Some homes offer specialist care for people of any age, the majority are designed for elderly people over 65. The physical real estate plays an essential role in the delivery of quality care. Even the most talented team of nurses and carers will struggle to provide a good service in a poorly appointed building.
There are approximately 10,800 Care Homes across the UK, with 480,000 registered beds[1]. The total value of the market is estimated to be £18.0bn. UK Care Homes differ significantly in terms of amenity, age, size, and energy efficiency. These factors allow for a broad categorisation across three types, as shown in the table below.
Figure 1: Types of UK Care Home Real Estate
During the last 5 years, 34,600 Obsolete Care Home beds have been de-registered, meanwhile a total of 30,800 New Build beds were registered[2]. Overall, the net supply of new registered beds has been flat over the last 10 years, this is despite a growing demand for Care Home beds.
1. Spotlight: UK & European Care Homes 2022
2. Knight Frank 2022 UK Care Homes Trading Performance Review
Why is The UK’s Population Getting Older?
There has been a dramatic shift in UK demographics since the 1990s. The baby boomer generation, combined with improved life expectancies and lower birth rates has led to an aging of the UK’s population. In other words, the UK population has never before been so old, and it is forecast to continue to get older.
For example, in 1991 there were only six UK regions with 25% or more of the population aged 65+. By 2039, the forecast is for 236 UK regions to have a quarter or more of the population over 65 (red regions below).
Figure 2: Percentage of UK Population over age of 65, by Region
The consequences on the healthcare system, where those aged over 65 take up the majority of available capacity, is already creating significant pressure. The current Care Home bed requirements are not being met by the existing stock of Care Homes.
Figure 3: Current and Required UK Care Homes / Beds
Sources: Knight Frank, Laing Buisson, Tomorrow’s Guides, ONS, BMJ | * Excess deaths in 2020 have been built into this projection | ** Future supply is based on the growth rate seen between 2011 and 2021
How Does Care Home Real Estate Perform as an Investment?
As with any type of real estate, demand for the product or service produced by the occupier of the property is crucial to its long term success as an investment. All properties are exposed to market cycles, however, products or services that are based on “needs” rather than “wants” tend to perform better during economic downturns.
For example, fashion retail performance is highly-correlated with general economic growth. Investing in high street retail or shopping malls occupied by fashion retailers is likely to be highly cyclical. An economic downturn can quickly lead to a high probability of rental default and/or requirements for capital expenditure to maintain the appeal of an asset in a shrinking market.
Fashion retail is based on “wants”, rather than “needs”. Consumers will scale back consumption when times are tough and their near term “want” will go unsatiated.
In contrast to fashion retail, the provision of elderly care is a “need” and will remain relatively constant throughout the cycle, including during tougher economic times. This has indeed been the case over the long term, as shown in the chart below which compares the MSCI UK Healthcare Index with the broader MSCI UK All Properties Index.
Figure 4 MSCI UK All Property Index Income & Capital Return
Source: MSCI Real Assets, MSCI UK Annual Index
Who is the Tenant?
The tenant in a UK Care Home is often referred to as “the Operator”. Care Home Operators must be regulated by the Care & Quality Commission (“CQC”). The CQC conducts regular checks on Operators to ensure the service they are providing meets or exceeds minimum requirements.
Operators often prefer to lease the premises they operate from, so they can focus on their core business. Operators range in size from small family run single homes all the way up to very large international corporates. As can be seen in the chart below, there are a lot of small (<49 beds) operators, suggesting the market is highly fragmented and is likely to consolidate over time.
Figure 5: UK Care Home Operators (Tenants) – Broken Down by Size
What does a Typical Lease Look Like?
UK Care Home leases tend to be long-term (30 years+) agreements. Rents are initially set at a level which provides sufficient buffer between the operating cash flow (EBITDA) of the Care Home business and the rent payable each month. Rent will typically increase each year according to an inflation index, like RPI.
The long term nature of Care Home leases makes them attractive for investors looking for regular income. The purchasing power of the income is protected by rent increases that are linked to inflation.
Figure 6 – Typical UK Care Home Lease Terms
What are the Risks and Mitigants?
UK Care Homes are an operationally intensive asset class. Partnering with the right Operator is extremely important as they are ultimately responsible for ensuring that standards of care are maintained. As was highlighted during the Covid-19 pandemic, failing to provide adequate care can result in reputational damage to an investor.
We recommend conducting thorough due diligence prior to acquisition. Due diligence should cover a review of the physical building to ensure it will be fit for purpose going forward, and a review of the Operator to ensure they have the ability to manage a team that will deliver a high quality service.
Figure 7 – Risks & Mitigants
Investing with SIRE Capital Partners
Working with a specialist healthcare investment manager will ensure your objectives are well understood. In the current market it is important to work with specialists that can produce results based on the most up to date, informed and educated views.
Small incremental changes to terms can lead to larger variations in expenses and outcomes. We manage our clients risk exposures across the entire investment process. This covers all aspects of transaction management from deal origination, detailed underwriting, post due diligence checks, and ongoing asset and property management.
Sam Faulkner, CFA is a Principal and Co-founder at SIRE Capital Partners, working on Deal Origination and Asset Management.
Prior to joining SIRE Capital Partners, Sam was a Portfolio Manager at CBRE Investment Management. Investing on behalf of several large defined benefit pension schemes, Sam has been investing in UK operational real estate since 2017. At SIRE Capital Partners, Sam is focused on acquiring healthcare real estate that delivers attractive risk-adjusted returns for clients.
