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Care market analysis: Reflection and 2022 forecasts

What impact has the pandemic had on the care market? Mike Hodges, Managing Director of Healthcare Consultancy at Christie & Co, reflects on 2021 investments and explains what providers should be aware of for the year ahead.

The care market in 2021

Throughout the pandemic and despite many challenges, the care sector has proven to be exceptionally resilient, with care providers and their staff playing a vital and inspiring role. This has also been seen in the transactional market, with 2021 witnessing a resurgence of previously paused mergers and acquisitions activity at a multitude of levels.

The year has comprised a number of landmark deals, including the arrival of European investors such as the French healthcare fund, Pierval Santé, which acquired a group of Care UK investments from Legal and General in a deal brokered by Christie & Co. Separately, the major Belgium fund, Cofinimmo, marked its entry into the British market with the acquisition of three modern care homes let to Country Court Care.

On the operational side, 2021 has also seen the arrival of Korian, one of the largest European consolidators, with its acquisition of Berkley Care Group, a high-quality platform operating at the private end of the market.

What has also been very encouraging this year is the strength of activity and positive sentiment in all segments of the market, where the main underlying theme is strong demand from well-funded purchasers. This, coupled with a shortage of stock, has ensured that pricing has remained strong, a trend that is illustrated well by reference to Christie & Co’s market activity.

Christie & Co is routinely responsible for selling more than 50% of all individually transacted deals in the UK market and, in 2020, Caring Times’ deal analysis showed that our business was responsible for 62% of homes transacted. During 2021, we have run several major divestment projects on behalf of a variety of corporate clients whilst being extremely busy in the regional transaction markets. When analysing the deals we concluded year to date, two very interesting statistics jump out. The first is that the average number of offers for transacted assets has increased to 6.2. This is notably ahead of the 4.7 seen last year and is higher than the pre-pandemic position of 5.8 in 2019. The second key statistic, which is an analysis of the agreed sale price relative to the asking price quoted, is that year to date, we have achieved on average 95% of the asking price quoted, further reinforcing the strength of buyer demand.

Development and Investment Activity

2021 has also been an extremely busy year for our development and investment team. This has been fuelled by operators, investors and developers taking a longer-term view in the knowledge that there are material shortages of future fit market standard beds in many parts of the country, coupled with increasing demand as the number of people requiring care is anticipated to steadily increase over the coming years. Additionally, the pandemic has highlighted the need for greater infection control measures and such design features are now being integrated in new schemes which are shaped by evolving operational requirements. These are much easier to incorporate into new build developments than retrofit into existing converted assets.

Some areas of the South East have seen high levels of new build activity and specialist developers are now branching out further into pockets of the North and South West of England. These regions have seen much less development activity in recent years but continue to have strong demand drivers and an undersupply of market standard bed capacity.

Land availability in locations with compelling underlying demographics remains scarce and securing planning permission continues to be a highly protracted, costly and uncertain process. Due to these factors, land values for sites with planning permission have continued to increase with recent deals in the strongest locations being upwards of £60k per bed and, in some cases, notably higher. We anticipate demand to remain robust for the foreseeable future.

From an investment perspective, the year has seen a broadening array of investors active in the market who are attracted by the long-term needs-driven fundamentals of the sector. The increased demand and lack of alternative opportunities for investors is resulting in yield compression across the spectrum of covenants and is also creating additional liquidity in the sector, allowing operators to undertake strategic growth plans, particularly through the use of forward funding structures.

Operational Factors

Whilst the positive transactional market environment is extremely encouraging, the sector is not immune to challenges facing many parts of the wider economy. These include labour shortages, global supply chain issues and energy cost increases. Such factors have an impact on existing trading businesses and, also, the development of new care homes where we are seeing a trend of build cost increases and delays due to challenges associated with sourcing skilled labour and building materials. The challenges facing the construction industry have recently resulted in the failure of one major contractor with recent tenders coming in at – or in excess of –  circa £130k per bed. It was not long ago when build costs were much nearer to £100k per bed.

Operationally, the labour challenges play out with a shortage of care, domestic and nursing staff. There is strong competition for good-quality staff, and, with a significant level of current vacancy rates, we are already seeing upward pressure on staff pay rates leading to higher costs. This will be exacerbated by increases in employers’ national insurance contributions following the Government’s Build Back Better programme as announced in September. Wage inflation, along with other cost increases, will create inevitable pressure on operating margins unless revenue growth is sufficient to offset the extra cost.

Positively, operators are now reporting strong levels of enquiries with many advising that these are at – or are close to – pre-pandemic levels. Encouragingly, this appears to be translating into good admission levels, although several operators have referenced a surge in respite cases as residents and their families seek reassurance via an initial shorter stay ahead of committing on a permanent basis.

What to look out for in 2022?

The level of fee rate increases for the year ahead is hard to call. The Government’s announcements around funding reforms are unlikely to have any tangible short-term impact on the social care sector, with a number of operators working on the assumption that local authority fee rate increases are likely to be modest and not at the level required relative to the level of cost inflation anticipated.

Private fee rate increases are likely to be more pronounced. We are hearing proposals in the range of circa 5% to circa 8%, although much will depend on local market dynamics relative to each care home.

These points aside though, with new well-funded participants entering the market coupled with strong activity from a wide range of longstanding operators, investors and developers, we fully expect 2022 to be a busy year transactionally.

One particular feature of 2021 has been the relatively cautious approach of many lenders due to an understandable focus on supporting existing customers rather than actively seeking new business. We are already seeing a change in this dynamic although, equally, we also expect to see an increase in the number of consensual exits as part of de-leveraging strategies, particularly as loans reach maturity.

Mike Hodges is the Managing Director of Healthcare Consultancy at Christie & Co, a leading specialist adviser for buying and selling businesses across a range of sectors. Email:   Twitter: @ChristieCo

About Mike Hodges

Mike was appointed a Director of Christie & Co in 2005 and is a qualified Chartered Surveyor with 24 years’ experience within the healthcare sector, establishing and leading Christie & Co’s Healthcare Consultancy Business. Mike’s market knowledge spans elderly and specialist care, as well as hospitals, children’s homes, day nurseries, schools, pharmacy and dental. Mike has worked in the UK and Germany, developing expertise in business turnaround and recovery following secondment to a restructuring team following the global financial crisis. Mike acts for a wide range of operator and investor clients and sits on Christie & Co’s Management Board.

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