Investors and developers are waking up to the massive potential offered by the embryonic elderly-care sector. The escalating problem of an increasingly aged population combined with elderly people’s desire for an alternative to institutionalised living means the care-home market is both growing and evolving.
Behind the increasing demand for all types of accommodation for the elderly are stark facts. The number of people aged over 60 living in the UK is set to rise from around 12m in 2000 to 18.5m by 2030, according to government actuarial statistics. And of these, roughly 2m will be over the age of 85.
“It is a biological time bomb,” says Dr Norman Oliver, projects partner at law firm Harper Macleod. “With a massively increasing elderly population, something is going to have to be done.”
Set against this background, care-home place availability has been diminishing. According to independent-care market researcher Laing & Buisson, 745 care homes closed in the 15 months to April 2003, resulting in the loss of 13,400 beds.
Registered care homes, particularly the “Mom and Pop” operated homes, started closing in waves in the late 1990s. They were weighed down by the cost of compliance with new government regulations on matters as diverse as room sizes and staff training. At the same time, profits were being squeezed by the underfunding of fee rates and the introduction of the national minimum wage. A buoyant housing market gave struggling operators an escape route, as conversion back to residential use became more profitable.
But during the past three years, the market has stabilised and improved as registered fees increased and the government backtracked on its highly prescriptive minimum standards.
Change in supply versus demand
“The market reached a tipping point, and supply and demand were suddenly in the operators’ favour,” says Henry Harris, head of healthcare at Edward Symmons. Whereas in 2000 a care home would have been valued at typically five times net profit, nowadays the multiplier would be seven or eight times net profit.
“For a hotel, you’d pay 10 or 12 times net profit. So, with the long-term demographics in your favour, a care home does look very attractive,” says Harris.
Richard Lunn of Christie & Co agrees, pointing to the firm’s care price index, which rose by 18% in 2003 and 17% last year. “Care has gone from being a very difficult sector to a very sexy sector,” says Lunn. “There has been massive investment from major private equity and venture capital organisations and huge funds like Allianz Capital.”
Specialist fund Quercus Healthcare Property Partnership, which was set up in 1998 by Quintain and Norwich Union/Morley, has £200m invested in elderly care and is looking for further investment opportunities.
Partly driven by the weight of venture capital invested, there has been large-scale consolidation among the bigger operators, says Knight Frank head of healthcare Julian Evans (see table of major operators, p104). Mergers and acquisitions have been a feature of the past year as the larger operators move to boost their critical mass through large-scale portfolio deals, such as Barchester’s £525m acquisition of Westminster Health Care and Four Seasons’ £116m acquisition last month of BetterCare.
“Some very high premiums have been paid because of the scarcity of quality, purpose-built care homes,” says Evans.
And with property yields hardening across the board, the care-home sector has caught the eye of entrepreneurial property investors, such as Nick Leslau and Tom Hunter, who, alongside Halifax Bank of Scotland, last month completed a £100m sale-and-leaseback deal with Southern Cross.
“I like the healthcare industry,” says Leslau, who nevertheless described as “rather boring” the 21-home investment. “It’s just another long-lease, decent covenant deal but in a sector that we like,” he says. “I’m not a rocket scientist but I do like the fact that we’re an ageing population and a wealthier population. Where are people going to go when they get older?”
Joint venture aims to fill gap
Attempting to fill this gap in supply are developers like Anton Bilton’s housebuilder Raven Mount, which has set up Raven Audley Court, a £100m joint venture with care-home company Audley Court (see box).
Raven Audley Court’s assisted living schemes sit between the McCarthy & Stone-type retirement/sheltered housing and registered care homes, and mirror the US-imported concept of “retirement villages”.
“We offer independent housing for sale on long leases but with qualified care staff,” says Audley Court’s Nick Sanderson. “Residents pay a fixed monthly charge for estate management, the emergency call system and communal facilities but can buy extra care.”
Claiming to be the pioneer developer of retirement villages in this country is Surrey-based company Retirement Villages. It opened the first of its four schemes, Elmbridge Village in Cranleigh, in 1981 with 228 bungalows and apartments sitting on a 28-acre site. Further villages at Berkhamsted, Chorleywood and Dunchurch provide another 451 cottages, bungalows and apartments.
The newest village is about to start construction at Taunton, where 83 cottages, bungalows and flats will be built in the grounds of the former Princess Margaret School and Blagdon Lodge.
Tom Frances of King Sturge expects the demand from operators for development land to drive prices up above £1m per acre, depending on location.
Savills’ healthcare director Iain Lock believes that in 10 years’ time retirement villages will be “the accommodation of choice for those that can afford it”.
“If the elderly are going to downsize and this type of accommodation is not built, they will compete with the first-time buyers and outbid them,” he warns. “I do see that there is a potential marriage between housebuilders and operators to develop retirement villages, which is one way for operators to get further sites.”
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Elderly-care providers at the luxury end of the market can offer investors particularly attractive yields. One such operator is Sunrise Senior Living, which prides itself on being the largest “senior living provider” in the world, with more than 400 communities in the US, Canada, Germany and the UK. “Traditional property yields are being compressed so investors are looking for safe, secure investments offering better returns. Here the basic property asset is a sound one and the yield and income [that investors] can see is fantastic,” says UK development director David Driscoll of his firm’s high-end product. “With a sale and manage-back we can offer investors an 8% or 9% yield.” Founded in Northern Virginia in 1981, since moving into the UK market Sunrise has developed homes in Sidcup, Virginia Water, Elstree, Purley and – last month – Banstead. Homes are under construction in Bournemouth, Edgbaston, Fleet, Guildford, Southampton and Esher. Armed with a £715m development-fund package for expansion in the UK and Germany, Sunrise looks set to meet easily its UK target of developing six assisted-living care homes each year. Sunrise’s latest acquisition is Bracken Hill House, the former home of the University of Bristol’s Botanic Garden. Bought last month for over £3m, the 5-acre site includes a coach house and lodge, glasshouses and woodland as well as the main house, which was built in 1886 for tobacco heir Melville Wills. Driscoll says that Sunrise typically looks for sites of an acre or more on a main road in a prime residential area, on which it builds a 60,000 sq ft building redolent of “the rich family’s house on the hill”. “A typical Sunrise would involve a site cost of between £2.5m and £6m depending on the location, and a total development cost (including site price) of around £20m,” he says. Rooms or suites in the development are leased at around £700 per week – plus extra for any care required – with occupancy rates across the company running at more than 90%. When full, each property goes into a special purchase vehicle and a majority stake is sold to a third party, with Sunrise taking back a 30-year management agreement. |
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Raven Audley Court will start on site in September with the development of 83 assisted-living units at the 220-acre High Royds Hospital site in Menston, near Leeds. It will be the first time that assisted living has been integrated into a mixed-use development, which includes family houses, shops, offices and a school. “Assisted living unlocked the planning consent on that site,” says Audley Court’s Nick Sanderson. “The planners wanted to see the continuation of the existing C2 use, employment generation and not much traffic generation.” While most admissions to a care home come through crisis, Sanderson says he wants his residents to make a lifestyle choice. “We want to make environments that are so attractive and stimulating and offer so much support that residents can come to us very positively.” Typically, the company targets C2 sites of a minimum of 3 acres, often on the edge of town but close to the major population centres. The average scheme size is 70 to 100 units, with a historic building often housing the communal facilities. Audley Court already has schemes in Tunbridge Wells and Harrogate and has just started developing 30 assisted-living units in Flete House, South Hams. Further sites have been secured but are awaiting planning permission for 62 units in Maidstone, 72 in Wantage, 90 in Matlock and 72 in Sevenoaks. |
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Number of homes and beds operated by independent sector care home operators with 1,000+ beds, including most recent financial results, as at 7 April 2005 |
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Operator |
Homes |
Beds |
Revenues (£m) |
Pretax profit (£m) |
EBITDAR* (£m) |
EBITDAR* (as % revenue) |
|
ANS |
45 |
3,145 |
77.7 |
12.5 |
22.1 |
28 |
|
Anchor Trust (C1) |
99 |
3,841 |
205.9 |
43.3 |
46.3 |
22 |
|
Ashbourne |
194 |
10,300 |
n/a |
n/a |
n/a |
n/a |
|
Barchester (including Westminster Health Care2) |
163 |
10,004 |
n/a |
n/a |
n/a |
n/a |
|
BetterCare Group3 |
28 |
1,956 |
43.8 |
6.9 |
8.7 |
20 |
|
Bondcare (including Helen McArdle Care) |
46 |
2,580 |
n/a |
n/a |
n/a |
n/a |
|
BUPA Care Homes (Care First Group) |
258 |
17,700 |
419.8 |
41.8 |
89.0 |
21 |
|
Care UK |
90 |
2,895 |
136.1 |
10.7 |
27.9 |
20 |
|
Craegmoor |
318 |
5,878 |
158.6 |
-14.3 |
33.6 |
21 |
|
Excelcare Holdings |
45 |
2,000 |
28.4 |
0.4 |
1.1 |
4 |
|
Four Seasons Health Care |
314 |
15,509 |
276.3 |
12.9 |
72.1 |
26 |
|
Leonard Cheshire |
86 |
2,070 |
126.4 |
8.0 |
n/a |
n/a |
|
Life Style Care |
22 |
1,668 |
35.0 |
2.5 |
11.0 |
31 |
|
Methodist Homes for the Aged4 |
59 |
2,372 |
46.6 |
5.5 |
2.1 |
6 |
|
Orders of St John Care Trust |
55 |
2,260 |
31.5 |
1.4 |
n/a |
n/a |
|
Paragon Healthcare Group |
200 |
1,600 |
75.3 |
-2.8 |
14.4 |
19 |
|
Quantum Care |
26 |
1,388 |
29.4 |
1.1 |
4.4 |
15 |
|
Runwood Homes |
24 |
1,357 |
24.3 |
1.6 |
3.6 |
15 |
|
Somerset Care |
43 |
1,220 |
31.0 |
2.1 |
4.0 |
13 |
|
Southern Cross Healthcare (including Highfield Group5) |
360 |
17,100 |
n/a |
n/a |
n/a |
n/a |
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1Charity 2Westminster Health Care is owned by Barchester Healthcare 3Registered in Northern Ireland 4EBITDAR relates to care homes only 5Subsidiary of NHP Source: Laing & Buisson * Earnings before interest, tax, depreciation, amortisation and rent. Indicates the underlying level of profitability of a business |
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