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The Prospects for Investing in Land and Development Within the Care Home Property Sector: The Big Picture – A Better Protected Future?

6 December 2018

Britain’s ageing population has been well documented in recent years, and the residual effects of the post-WW II baby boom combined with higher standards of living and advancements in medical care have all contributed to the 70,000 additional care home bed spaces (equivalent to circa 1,000 new care homes) which the UK Government acknowledges will be required during the next five to seven years [Source: Laing & Buisson Research].


Even this statistic assumes that none of the UK’s existing stock of care homes will close, but the reality is that more bed spaces have been deregistered than new ones registered during the last ten years, due to the Care Quality Commission clamping down hard on poor standards of care and accommodation – the days of converted Victorian mansions smelling of cabbage (and worse) are distinctly numbered. Operators are turning to purpose-built facilities offering lower maintenance, long term adaptability and better economies of scale at an operational level.

Hospital bed spaces are not being released for new admissions precisely because there is a vast undersupply of available care home bed spaces. This shortfall in provision is starting to close, albeit very gradually, as the number of new care homes schemes coming through the planning system increases – the year to April 2018 saw a modest net loss of just 388 bed spaces, compared with 2,612 for the previous year [Source: Knight Frank Research].

However, the overriding message must be that Britain urgently needs more care home bed spaces, and the concerted attempts by operators and developers to close the gap in provision barely scratches the surface.

Potential Challenges

Local authority fee rates have increased by an average of 3.3% over 2017 and 2018 to date, whilst average staffing costs as a percentage of revenue have risen by around 5%, largely as a result of the implementation of the National Minimum Wage [Source: Christie & Co Adult Social Care Report 2018].

Operators whose business models are predicated towards the private pay market and the Southern half of the UK have coped much better with these cost increases, where the average fee income per privately-funded resident has in many locations risen by over 10% during the last two years.

Furthermore, the sector has greatly benefitted from increased occupancy rates, which have risen for the sixth consecutive year, to 89.3%. In overall terms, around one third of care homes make an operating profit of between 20% and 30%, and around one quarter make between 30% and 40%, which is indicative of demand at the premium end of the market in affluent locations for a luxury specification, good quality food and activities [Source: Knight Frank Research].

Like all sectors, Brexit presents its challenges for care home operators, most notably in terms of the continued sourcing of nursing staff from other EU countries. The absence of a definitive deal has caused new nurse registrations from other EU countries to fall by around 19% between 2016 and 2018 [Source: Christie & Co Adult Social Care Report 2018]. The UK Government has however, taken steps to plug this gap and the Nursing and Midwifery Council announced in September this year that nurses and midwifes trained outside the EU will, with immediate effect, be allowed to apply to come and work in the UK immediately after qualifying.


Stagnation in the housing market and the prospect of a house price crash potentially brought on by Brexit is another concern, since most care home residents are to some extent reliant on the release of equity from their homes to fund their care. However, such a crash would need to be significant before its effects are felt in most parts of the UK.

Transactional Activity

2017 saw specialist property contribute a record 28% towards all UK property investment transactions, of which healthcare made up around 8%, firmly elevating the sector to mainstream status.

The last two years have seen competitive bidding for several large care home portfolios, and November 2017 saw a record price per bedroom achieved for the fourteen mature trading assets and development pipeline of Porthaven Group Holdings, which was acquired by Fremont Realty Capital.

Net Initial Yields for income-producing care home investments have compressed over the last 12 months. A package of four care homes across Bedfordshire and Hertfordshire pre-let to Baycroft (One Housing Group), was forward funded by Aviva’s Lime Property Fund for £71m, 4.0%. Similarly, a yield of 3.6% was purportedly achieved for a mature trading asset let to the large RSL, Anchor, in Esher. There have been a string of forward funding deals with Care UK between 4.5% and 4.75% whilst emerging covenants in the market place are typically between 5.25% and 6.00%.

The market for sites with the benefit of planning consent has never been stronger, with at least four or five offers received for every opportunity presented, even in the less salubrious towns.

Perseus’s Response

The prevailing market conditions present several opportunities for Perseus to capitalise on.

The last three months have witnessed house builders reducing their offers or withdrawing entirely from many land deals, offering potential for Perseus to be more competitive by comparison across more regions of the UK, especially the South East. This is supported by the fact that planning permissions for care homes don’t typically attract planning gain contributions of any significance, nor any affordable housing or CIL.

Generally, care homes are a relatively ‘easy sell’ at a local political level, which has seen the Perseus management team obtain several planning permissions at Planning Committee, despite recommendations for refusal by Planning Officers in some cases. This has included sites located in the Green Belt, where it was successfully argued that the social need for care home bed spaces together with the significant employment generation should outweigh the need for a rigid application of protectionist Green Belt policy.


Whilst the South East of England still offers excellent scope for the development of additional care homes in most towns, some areas are becoming oversupplied (the ‘triangle’ around Ascot, Camberley and Woking). Perseus has therefore turned its attention to acquiring new opportunities in the northern home counties and even further afield, where operators are taking advantage of the increased profitability levels afforded by better fee income to staff cost ratios.

With the burgeoning leasehold market, the prospect of realising a developer’s profit over and above the uplift in land value following receipt of planning permission has never been better. There is now a strong business case for assembling portfolios of pre-let development opportunities.

All considered, Perseus looks forward to 2019 with well-founded optimism and a business plan focused on a sector largely driven by necessity as opposed to consumer choice. It considers itself better protected than most from whatever Brexit throws at us.