There comes a time in life when it’s just one thing after another. An ever-lengthening list of woes makes daily tasks more difficult. Then there is a crisis, such as a bad fall. Unsteadiness, frailty and a collapse in confidence soon follow.
Recognise the problem? Think again. This isn’t a description of the residents of UK care homes – it could be a description of the UK care home sector itself.
The collapse of care home provider Southern Cross reminded well-wishers that the nursing care business needed care of its own. Since then, a squeeze on local authority fees and new legislation have taken their toll. Unwelcome news stories about poor standards of care – the closure of homes run by Castlebeck Care attracted wide publicity – have left the business wobbly and confused.
“The nursing home sector has taken a hammering in the past two years,” says Craig Woollam, head of healthcare at Savills. “Southern Cross, Castlebeck, rising care costs, falling local authority fees – it’s been non-stop.”
Paul Farmer, Birmingham-based health care specialist at GVA, says the latest crisis has not come without warning. “Since the mid-2000s, we have had a healthcare sector in disarray, first thanks to the Care Standards Act,” he says. “Political and financial pressure is pushing everything towards standardisation and homogenisation because smaller independent providers are finding it harder to cope with the legal and financial pressure.”
Although many of the top 30 elderly and nursing care businesses continue to make money, it is not so easy for their independent competitors. Richard Green, a healthcare specialist with Yorkshire accountants Garbutt and Elliot, says his clients are facing shrinking profit before interest, taxes, depreciation, and amortization (EBITDA), and are under pressure to cut costs. “It is getting more difficult to make it pay,” says Green. “A nursing home offering nothing special might be looking at EBITDA as a proportion of turnover of around 10-15%, perhaps as high as 20% if they offer dementia care. But the red lights are occupancy levels below 70-75% – they probably won’t be making money – and they have to be good at collecting their debts when occupants die. It’s getting harder to make a profit all round.”
Not every nursing care operator is squeezed so thoroughly – the top 30 firms are doing better, with EBITDA as a proportion of turnover around 35%.
Although local authority fees are contracting, they are doing so unevenly and, after legal action, rather less steeply than expected this time last year.
According to market analysts Laing and Buisson, baseline local authority fees increased by an average of only 0.3% in 2011/12, compared with an estimated requirement of 2.8% to meet rising costs.
But judicial reviews of council decisions to freeze or cut fees are pushing them back up. Leicestershire County Council has agreed to raise fees for 2011/12 by 5.3% and for 2012/13 by 2.6%.
Perfect financial storm
Savills’ Woollam says: “There has been a lot of talk of a perfect financial storm of low fees and high gearing, and although the problems haven’t gone away, recent fee decisions represent an olive branch.”
Julian Evans, healthcare specialist at Knight Frank, has studied figures that deliver a similar message. He says: “In the £8bn worth of healthcare deals we advised on in the last 12 months, we saw an uplift in local authority fees of 1%, and a 5% rise in private fees. So the financial outcome has not been as bad as expected, even if the local authority rise is below inflation and in some cases we’ve seen fees plunge, by as much as 28%.”
The nursing homes best able to survive or thrive are those in recently built premises. Evans adds: “About 85% of the UK nursing home stock is either conversions of older premises or former local authority buildings, and much is nearing obsolescence. The top 30 nursing home providers are mainly in new builds, which trade more effectively.”
Phil Hall, director of healthcare at Jones Lang LaSalle, says thinking about quality is the only way for the care sector to solve its dilemmas. “For many years, the main aim of many owner/operators (and their banks) was to increase the size of their business,” he says.
“Less attention was given to the quality of the assets acquired. Today, we are seeing a change of focus. Investor and lender demand is primarily for good-quality, well-performing homes. Most savvy investors appreciate that investing in quality improves financial returns. It is a pity many local authorities fail to see this, despite their rhetoric.”
National weighted average nursing fees are about £800 a week, rising to £1,100 or more in London and the South East. But fees in much of the country, especially the North and the Midlands, scarcely justify new quality development.
The answer could be alternative funding methods. Jeremy Tasker, head of healthcare at Colliers International, says new entrants are looking at financing nursing care projects. “Lack of funds from traditional sources means only a few care home operators are able to build,” he says. “Barchester is notable, and there are a few others, but the list isn’t long. We are starting to see new private equity houses coming into the market, and this could allow the mid-range corporate operators to grow.”
As hopes for funding improve, the £825m purchase of Four Seasons Health Care by Guy Hands’ private equity group Terra Firma is being interpreted by some as a confidence boost in the care sector.
Henry Harris, head of healthcare at Edward Symmons, says: “The sale took place quicker than most predicted, and the price is realistic. While Four Seasons is undoubtedly well run and has well-maintained assets, it does not operate in the upper echelons of the private pay market or exclusively from units with 60 beds-plus, purpose-built since 2002. So it demonstrates the inherent strengths of the core mid-market.”
The UK nursing home sector is still unsteady and may need a walking frame for a while yet. But if the flow of money improves and the bad publicity stops, it could soon be skipping down the corridor.
New laws
Legislation could be about to change the way the nursing and care home sector works, and how much it costs.
Details of the government’s new Adult Social Care Bill are still awaited, but Gareth Morgan, director of healthcare at specialist Aitchison Raffety and a familiar face in the world of care policy, says the private care sector should not expect too much. “The hope for the new bill is that significant resources for adult social care will be used more efficiently, but with most of the funding coming via local council social services departments, whose budgets are being cut, that is just a pipe dream,” he says.
The likelihood is that resources will move towards care homes and away from expensive nursing homes, says Morgan.
The controversial 2012 Health and Social Care Act promises to reshape the NHS, but the future of the UK’s health infrastructure remains far from clear.
Big names like Lend Lease feel the new NHS structure could be helpful because direct access to clinicians, estate directors and financial directors, through clinical commissioning groups, could make for better decisions.
But it probably won’t make decision-making any quicker.
Money matters
New sources of finance could help to solve the funding crisis that is holding back the development of new nursing homes.
Cardiff-based Castleoak Group, a specialist care and nursing home builder, has teamed up with the Bridges Sustainable Property Fund to build three green care homes. The last of these, at Oak Grange, Mollington, was handed over last month.
Now Castleoak has launched the CarePlaces Fund, also with Bridges Ventures. With modest levels of debt gearing, the fund has £80m to support new developments, with three under way.
The latest development is a 60-bed home in Ludlow for operator Barchester.
Castleoak chief executive Melville Knight says: “To obtain funding, you need to be a specialist with a track record, one that the banks and the operators understand, because that really matters these days.
“Our partnership with Bridges is one way to meet the challenge of sustaining new development on low local authority fees, although it has to be said that development in the southern half of the UK is dominant, where private fees make development more viable, and I don’t see that changing until local authority fees increase. We all have to hope that the government’s response to the Dilnott report into funding adult social care provides some answers, and some new money.”
