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Clouds Yesterday, sunshine tomorrow?

Amanda Nurse tries to make sense of some confusing economic signals and asks what all this might mean for the sector.

It may not be much of a revelation but I’d like to start with a small confession. Amid the hurly burly of everyday activity, I occasionally permit myself something of a flight of fancy. I imagine myself, twenty years from now, sitting on a beach sipping a bitter lemon as I don’t drink alcohol, and looking back at what I hope I will be able to regard as having been a successful career. There’s one thing about the exercise that I’m sure about, even now; I will always be grateful that we started our business just in time to coincide with the worst recession since the 1920s. I believe there’s no better environment for learning what really matters, and for keeping you absolutely focused on business fundamentals – client service, cash management and good planning.

It’s all too easy, in dynamic and positive economic periods, for new businesses to gain a false impression of why they may be doing well. The inevitable tendency being that they are all too ready to ascribe their successes to their own capabilities rather than to the prevailing strength of the economy. Such self-delusion can have dire consequences when the conditions change.

While it can’t be described as fun, starting a business in difficult times has the advantage of not building any false impressions. I’m as happy as anyone that the economic data seems to be improving, unemployment is down, output is up and credit is starting to flow again. Of course, we have the London housing bubble to contend with and uncertainty over interest rates, but all in all there does seem to be some more confidence.

That said, there is a school of thought that sees the recovery as fragile, with the deficit still a dark cloud sitting over the economy. What sense can we make of all this as far as the care sector is concerned?

The honest response to that rhetorical question is that there is no short, simple or clear answer. As ever, changing conditions present opportunities for some, threats for others and question marks for all of us.

Recent market activity

We should take a look at what’s been happening in the sector in recent months. For starters, we’ve seen the entry of the American Real Estate Investment Trusts (REITs), who have made some significant investments. Deals have been done, amongst others, with Caring Homes, Avery Healthcare and Sunrise Senior Living. The REITs may have restricted their interest to the elderly care sector, rather than to specialist care, but we think that their entry will have a ripple effect because their intervention has the impact of reducing the volume of high quality stock available for those seeking acquisitions.

As opportunities for acquirers reduce, the natural impetus towards new development as a means of driving growth is obvious. However, this
comes with its own complications. The land market has moved significantly and the renewed confidence within the residential property sector means that the national house-builders are, if you’ll pardon the pun, dominating the landscape.

The net result is that land prices have risen significantly and this alone has a major impact on the financial feasibility of new build schemes for care operators and developers alike. Add into this particular equation a recovering construction sector which, after having been one of the most badly affected sectors of the past few years, is desperate to recover lost ground and to rebuild itself. As contract opportunities increase, confidence grows and build prices rise. It’s the unholiest of trinities.

I can’t point to empirical data to substantiate my point, but anecdotal evidence confirms it. I’ve been talking to contractors who are turning down work, who are only prepared to negotiate contracts and are steadfastly refusing to tender. How different from just eighteen months ago.

If limited stock, rising land and construction prices are bad news, something of a counter-balance can be found in the fact that there has been a reduction in the number of care homes falling into receivership. This is less to do with any improvement in trading and more about the quality of those operations left in the market after the ravages of the past few years.

Many of the businesses that went to the wall did so largely because of their financial situation. They were over-borrowed and would probably have been vulnerable to any negative change in trading conditions – not just a severe recession. Those remaining are characterised by much lower borrowings and by a commitment to the delivery of very high quality care. Those owners or operators who might have considered a sale in the recent past, for reasons of age or expediency, are now recognising that they can achieve positive returns and are considering alternative means of exit – via good succession planning, for example.

Current market trends

Looking over the site feasibility studies for proposed elderly care homes that we’ve completed in the last three years [Figure 1], it is interesting to see how the emphasis of operators and developers has changed over that period. In 2010, there was a clear focus towards the South East of England, and this area still remains a focal point for many operators. However, areas such as East Anglia and central London are now seeing increased interest. The majority of interest in central London has arisen from increased attention from overseas investors, who have better financial resources and who are less concerned by the price of land in this area.

East Anglia has historically suffered from poor quality provision even though there are some excellent pockets of wealth in counties such as Cambridgeshire. There are also other pockets of improved activity, such as Sutton Coldfield, north of Birmingham, which have seen increased interest over the period.

As anticipated, the focus of care home development broadly follows the wealth profile of the country. This is not surprising as the majority of operators remain focused upon the private fee paying market. Site values are increasing, with a growing number of sites transacting at over £50,000 per bedspace and this figure can be much higher in central London. Land values outside the M25 vary much more, ranging from £15,000 to £35,000 per bedspace.

Fees, of course, remain a sticking point and this is one issue that’s not going to go away any time soon. The conundrum for those delivering in the state-funded sector is how to balance fees that are controlled by the continuing austerity programme, with the demand from residents and relatives for improved facilities in order to keep pace with what’s on offer for private payers.

What does the future hold?

Based on the work we have carried out, we remain convinced that organisations will become increasingly focused on local demographics. If you draw parallels with the hotel sector, no developer would seriously acquire land believing they could create an opportunity that would suit Hilton or Premier Inn. Yes, both brands deliver overnight accommodation for paying guests but that’s where the similarity in their offering ends. They have different business models and different target audiences.

The same is true in the care sector. Detailed demographics provide the business case and give clear answers about the levels and the nature of demand. It sounds utterly obvious, and it is, but knowing the market is everything.

There will also be a focus on closer relationships with the health sector which will be driven by operators. The need for greater cohesion and integration between health and social care has long been a call made by operators, clinicians, relatives and politicians alike. It has been a slow train coming but to some extent it is now on the tracks and we are seeing care operators deliver services for increasingly high needs.

Change is there to be embraced and maintaining the current status quo for all of us working in the care sector is not really an option. The economy may be showing signs of recovery, the sector might be wrestling with the need to resolve the long-term funding question and to achieve clarity about the services needed, but change is inevitable. One thing that won’t change, however, is the extent of the demand and the challenge it presents to everyone connected with the sector.

Somehow that bitter lemon on the beach still feels like it might be a little way off.

Amanda Nurse is Founding Director of Carterwood.

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