Last Updated on May 10, 2016

Knight Frank has released its fourth annual review of the latest trends in the trading performance of the UK’s care homes sector. The Care Homes Trading Performance Index (CH-TPI) provides key performance benchmarks on staff costs, occupancy rates, average fee levels and profit margins (EBITDARM) across the care home sector. The sample underpinning the CH-TPI covers almost 60% of the care home beds provided by the UK’s major operators.

The 2015 Care Homes Trading Performance Review illustrates marginal increases in the rate of occupancy and fee levels accelerating in excess of RPI inflation. But they also point towards rising staff costs, and increases in the level of expenditure on agency staff, which has further eroded profit margins.

Dr Lee Elliott, Head of Commercial Research at Knight Frank said, ‘Typically there are clouds on the horizon, particularly in relation to staffing costs. Most notable here is the potential future impact of the National Living Wage. We anticipate changes in the index over the next few years as the National Living Wage becomes a reality and the extent to which additional costs are passed on to funders is bottomed-out. We are confident, however, that the sector will address this latest challenge and continue to perform robustly.’

Key highlights

• The overall care home occupancy rate increased from 87.6% to 88.3%.
• Personal care homes continue to demonstrate stronger occupancy than nursing homes, with occupancy rates of 90.4% and 87.7%, respectively.
• Average weekly fee levels are £675 for the UK as a whole. This is an increase of 2.3% from £660 per week in 2013/2014.
• In absolute terms, average weekly fees in 2014/15 remained much higher for nursing homes (at £699 per week) compared with personal care (at £587 per week).
• Average staff costs amounted to £21,756 per resident for 2014/15. Meanwhile, as a percentage of income, staff costs increased to 61.9%.
• The profitability of the care homes sector continues to be under downward pressure. Despite slight improvements in occupancy rates, EBITDARM as a percentage of income has slipped from 27.5% in 2013/14 to 27.1%.

Julian Evans, Head of Healthcare at Knight Frank commented on the trading performance outlook of the sector, ‘Within the last twelve months the UK healthcare arena has seen the resurgence of mergers and acquisitions; arguably back to the levels experienced before the collapse of Lehman Brothers Holdings in 2008. Healthcare continues to attract both domestic and international capital and is now firmly considered to be a core asset class.

‘However, this year’s announcement of the National Living Wage has caused angst in the sector and there is much anticipation of the Chancellor of the Exchequer’s approach to the National Living Wage in his Spending Review on Wednesday 25th November.

‘Notwithstanding the issue of the National Living Wage, appetite for UK healthcare fixed income, going concerns and development sites continues to attract global investors because of the sector’s defensive characteristics. Moreover, Knight Frank’s 2015 Care Homes Trading Performance Review demonstrates sustained robust performance. Given this, we anticipate increasing levels of new investors and deal announcements over the next twelve months.’

The full report is available on the Knight Frank website here.