The last decade has seen significant change in the care home industry. With the advent of National Minimum Standards came the NCSC, CSCI and latterly, CQC. Meanwhile, the economy has swung wildly. The confidence experienced mid-decade encouraged massive expansion of care home groups through acquisition at premium prices. In contrast, the lack of funding and general risk aversion seen over the past couple of years has seen the level of transactions fall back both numerically and in terms of price achieved. Despite these changes, the number of care home businesses failing has been low - surprisingly low. But things change and I think we may find that change is just around the corner.
The last few months have seen widespread reference to the reduction in local authority fee rate in the Wirral. Indeed, whilst fee reductions are extremely rare, Laing & Buisson recently reported an average UK fee increase for 2009/10 of just 2.6% (2.2% in England). This is a level of fee increase barely capable of covering increasing costs, never mind allowing for a degree of profit.
Not content with restricting fee increases, many local authorities continue to focus upon home care, with a long term care setting becoming a last option, used only when the individual has become extremely frail or in need of substantive nursing care. Ongoing HPC research confirms a continued trend in reduced local authority funded placements of the elderly. A random sample of local authorities throughout England has resulted in the following placement split when comparing the first 6 months of calendar year 2009 to the same period 2008:
With 60% of the sample following a policy of reducing new placements, the net overall interim result (as our research continues) indicates an 7.5% year on year drop in placements being made by local authorities.
We have seen, over the past decade, a sustained increase in the proportion of privately funded service users receiving long term care in residential settings. This proportion has increased from marginally over 30% in 1999 to a current level nudging 40%. Laing & Buisson recently projected a further 1.1% decrease in older people supported by local authorities in care homes between the start and end of financial year 2009/10. The significant fall in placements previously stated suggests that the decrease may be even higher.
The care home property market has, historically, been somewhat unsophisticated in comparison with other sectors of the commercial market. The buoyancy seen in recent years within the sector has allowed developers to take on sites at random and yet with a degree of confidence that a new home of reasonable quality would always fill. But times are changing. In providing advice to clients over recent months we have seen an increasing number of new care facilities where build up has been expensively slow or, worse, has stalled somewhere short of break-even point. The market has been awash with turnkey opportunities situated in marginal locations. With lenders being cautious, many remain unsold.
Developers and purchasers of going concern care homes have tended to be reactionary in the way that they have acquired land or businesses, driven largely by availability rather than suitability. But such random acquisition policy is increasingly failing in a fast changing market. Just ten years ago circa 70% of elderly long term care residents received funding. We will soon see a market where privately funded service users have an equal share of the market. They are generally not living in the same locations as funded residents and are unlikely to contemplate a move to a less affluent location. What may have seemed an acceptable care home development site 5 years ago may not be viable going forward.
A change of mindset is undoubtedly taking place within the sector, but it remains the case that a surprising proportion of developers and home operators do not apply the same rigour in the appraisal of location quality pre-acquisition as is taken for granted in other sectors. Admittedly, we are increasingly being asked to review location viability for clients but the true market leaders of the future should undoubtedly be taking the acquisition process to the next level. Reactionary acquisition is a thing of the past. The key to future success is a structured approach and careful identification and targeting of your target market, a strategy taken as read within most other areas of commercial property. At HPC we are working with a number of clients to formulate a medium-term target location strategy, each differing to reflect specific client service provision and requirements. Once complete, the template is set for targeted growth in optimum locations over forthcoming years, thereby mitigating future risk in a potentially uncertain economy.
All developers seek profitability. Historically this has been partially achieved through the acquisition of the cheapest sites available. Whilst prudent pricing of land will always play its part in successful development, those days are largely gone. In future, success will result from a carefully considered acquisition strategy, tailored to the needs of specific operators. There exists a massive opportunity awaiting any developer/operator partnership seeking to grow a first class group but good quality advice is key.
Nigel Newton TaylorSeptember 2010