Are Independent Care Homes Properly Valued?

Independent care home providers may be getting a rough ride in an increasingly polarised market.

A glance through the pages of the current commercial property press will reveal that demand for sites for new care home developments continues unabated. Full page adverts vie for attention alongside those of discount retailers and chain restaurants. The care sector is clearly an industry on the up, with an apparently limitless appetite for new development land.

Yet this is also the sector which sees daily reports of care home closures. At the time of writing, another has just come through on the news feed, along with the distress that inevitably brings. A relative of a resident describes it as a “horrendous situation”, and the care home owner says that there is no longer any choice, the funding levels being so low that they “will soon get into a situation where we can’t give the care required by law.”

What, then, are we to make of this Jekyll and Hyde business when it comes to valuing? We know that much of the new development is still following the private-pay market, abandoning the publicly funded sector on the basis that it lacks the ability to generate returns required by commercial investors. In turn, these brand new assets, delivering high profits, are valued at the very top of the market range, as we might expect. It is what is happening in other parts of the food-chain that raises questions.

New development still represents a relatively small percentage of total care home provision, so the values ascribed to such properties provide little in the way of comparable evidence to the valuer, other than in valuing similar assets in a rarefied area of the market. On the other hand, the pressure that we are seeing on some more aged property assets has created a trend amongst corporate operators for disposing of these. Many of these care homes are being sold off at heavily discounted levels, enabling some fortunate operators to pick up earlier-generation, purpose built care homes for values representing exceptionally low profit-multiples or prices “per bed”. Add the availability of this stock to the continued availability of over-leveraged businesses being sold off by administrators, and it is clear that there exists something of a discount market at present. That may not last forever, however it is a real feature of the current care sector.

The question is whether these sales function as valid comparables for the remainder of the market, any more than do the brand new, private-pay care homes. Should a successful, well run and profitable care home, owned by an independent operator, be assessed by the same parameters as under-performing assets being sold off by corporate operators in order bolster their balance sheets? It would seem unreasonable for that to be the case. These corporate disposals might almost be viewed as quasi-distressed sales.

Somewhere between the highest values of the shiny new assets, and the rock-bottom prices paid in the great care home sell-off, there should be a third tier. Independent operators, who maintain good quality care homes, deserve that recognition for their efforts.

August 2016