Leading specialist adviser for buying and selling businesses, Christie & Co launched its 2023 Care Market Review report in October. Rob Kinsman, Regional Director for Healthcare at Christie & Co, shares the latest findings and offers his advice for providers looking to buy or sell in 2024.
Earlier this month, Christie & Co launched our 2023 Care Market Review report which analyses a range of topics relating to the UK healthcare business market, including healthcare capital markets, land and development, the transactional market, operational costs, shifts in local authority fee rates, operator sentiment, and the finance landscape.
Healthcare capital markets
The first half of 2022 reflected the peak of the market, with the economy in an optimum low-interest rate environment and average UK Bank of England base rates at 1.7%. UK Government gilt yields were tracking at 2.2%, and super-prime yields within the UK care home sector had compressed to record low levels for best-in-class assets.
Entering 2023, the market began to adapt, 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 continuing to face significant headwinds – in particular, construction cost inflation and the cost and availability of capital – the care home development market remains active and continues to transact a high volume of new-to-market beds within the UK. 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 to investors. This additional liquidity, accompanied by the continued imbalance between demand and supply of market-standard beds to cater to 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 (first half of the calendar year), we found:
- Instruction volumes had rebounded, sitting 70% ahead of where they were in H2 (second half of the calendar year 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 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 conducted by our network of healthcare valuers – shows a large 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 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 14%, on average. 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
As for our 2022 report, this year 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 in the UK 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 a section 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.
Buying and selling in 2024
If you’re considering selling your care business in 2024, here are some things to consider. In an environment of higher interest rates, the ‘stress test’ banks apply in assessing a new lending opportunity comes under greater scrutiny and the provision of regular, up-to-date management information is more important than ever. Purchasers and lending institutions are increasingly requesting quarterly profit and loss accounts, giving them the visibility and confidence to meet sellers’ expectations on price and make a deal happen. It is also beneficial to be able to evidence historic occupancy levels to show how the care home has traded in the past and the ‘story’ of the business leading up to the current day. This will help buyers and their lenders determine the sustainable level of trade under new ownership and the serviceability of the buyers’ loan.
CQC compliance and the ability to clearly demonstrate this to buyers and their advisers is also crucial. Operators may consider commissioning a mock inspection to be able to evidence ongoing best practices and robust governance policies.
An effective ESG (Environmental, Social, and Governance) strategy has become increasingly prevalent in the sector and the CQC is now assessing the environmental impact of the business in its ‘Well Led’ criteria. Operators might consider seeking advice on how to improve the green credentials of their care home(s) as well as their staff policies to ensure a positive contribution to reducing the negative impact on the environment (such as sustainable energy, transport, waste etc.). Lending institutions are also paying greater attention to this fast-moving area.
Over the past few years, we have seen a greater level of scrutiny on fire compliance. Sellers need to evidence a current fire assessment with any recommendations actioned.
A potential longer-term challenge for operators seeking an exit is assessing their day-to-day involvement in the business. The number of owner-operator providers in the market continues to be relatively low and if an operator is looking to sell their care home and is also the registered manager this might limit the pool of buyers. Clearly, some care homes do not have the size to employ a registered manager, however, when scale allows, owners who are also the registered manager of their service should consider succession planning and how buyers will view the business without their ‘owner-input’.
When planning the sale of your care home, there are many aspects to think about and the preparation phase is key. Early engagement with an experienced sell-side team (agent, accountant, and solicitor) will go a long way to ensure you maximise the value of your care home.
A key concern for buyers in 2024 remains the uncertainty surrounding inflation, the cost of debt, and bank appetite in the sector. Appointing an experienced finance broker to provide options in an increasingly complex market can often be hugely beneficial.
For the full report, which also includes a view of the German care market from Christie & Co’s new Head of Healthcare in German, analysis of the healthcare insurance market from Christie Insurance, Christie & Co’s key market activity, and a feature section on Care Home Open Week 2023, visit: www.christie.com/care-market-review-2023/