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How will bank lending affect future care home supply and infrastructure?

How will bank lending affect future care home supply and infrastructure?

The following article appears as the headline feature in the September 2012 issue of Care Management Matters Magazine

How will bank lending affect future care home supply and infrastructure? This is a question that troubles many executives in the care sector. Ian Wilkie speaks candidly to CMM about recent dialogue with Paul Burstow on this very subject.

During a recent Adam Smith/LCS event at the House of Lords, I was able to put a question to Minister of State for the Department of Health, Paul Burstow, asking whether he would be able to address the impact the lack of available bank debt was having on the development of new infrastructure in the care home sector. Not content with his appeasing reply at the time, I followed that up, as I believe this is a problem which may be below the radar, yet which could have very real repercussions for the sector and purchasing commissioners within a relatively short time-frame.

I subsequently sent an email to the Minister, setting out in more detail the issues facing the sector. In fairness to him and his department, I received a lengthy response which ran to over 1000 words, and yet in many respects the anodyne content of this seems as concerning as the issues themselves. The reply, wilfully or otherwise, dismisses the fundamental fact that we have an ageing care home infrastructure in the UK which is not being replaced at anything like the required rate to meet demographic change.

Supply and demand

To put that in context, there are currently around 465,000 elderly care beds in the UK across private, local authority and not-for-profit providers. If we were to say that 50 per cent of those were sufficiently modern to be considered ‘future-proof’ (I doubt that the proportion is as high, but let’s play safe), then that leaves 232,500 which will need to be replaced within the next few years. In the year ending 2012, HPC research reveals that, excluding those ‘new’ beds which were simply re-registrations of existing homes, there were only 3,660 beds* registered by CQC in new homes. As CQC only covers England, that number could reasonably be adjusted up to 4,350 to take into account the entirety of the UK. At that rate, it would take over 53 years to replace current aged bed-stock. I would suggest that long before that was completed, the other 50 per cent would also need to be replaced. This calculation relates only to existing provision and takes no account of new development required to cope with demographic changes.

I emphasised these points in my enquiry to Mr Burstow, highlighting the issues thus: the difficulty in replacing this stock now is twofold:

Firstly, the barriers to entry are significantly higher than when we last saw a surge in new registrations, in that virtually all new beds will now have to be purpose built. This has the inherent problems associated with finding suitable land, obtaining planning permission and construction. By comparison, it was a far more simple process to register converted properties in the late 1980’s and early 1990’s;

Secondly and perhaps more significantly, it is clear that there is very little appetite at all on the part of the banks to fund development of new care homes. The banks will say that as a consequence of the requirements they must meet under their commitments to Basle III legislation, there is simply no point in looking to fund such development due to the onerous amounts they must offset against development funding. I believe this is due to there being no demonstrable historical cash-flow in such cases and they are therefore treated differently to, say, a going concern business. Indeed we are actually now seeing a decline in the number of planning applications for new care homes nationally. Ultimately therefore, I believe the summary of the situation looks something like this:

1. Increased loss of beds from the sector due to lack of investment in estate since the banking crisis, squeeze on public spending, natural obsolescence of ageing property stock and increasingly aggressive approach to insolvency on the part of banks;

2. Increased barriers to entry due to requirement for all replacement stock to be purpose built with attendant land and planning requirements;

3. Very little appetite on the part of banks to support new development due to Basle III legislation and wariness of un-proven cash-flow;

4. Net loss of beds from sector against a backdrop of rising demand (really kicks in 2014/15) leads to shortage, thus driving up cost of beds to purchasing commissioners;

5. Another investment ‘boom’ cycle in care leading, potentially, to a similar situation to Southern Cross.

Corporate solution?

The response from The Department appears initially to fall back on the corporatisation of the sector as the answer: ‘There has been quite extensive investment in residential care provision in England during recent years, particularly with the entry into the market of a number of major corporate providers, which have built many new homes and modernised existing ones. A great many of the places registered today are not the same places that existed 20 or more years ago.’

No-one could dispute the entry to the market of corporate providers which has driven the development of new homes, but that has been a trend for over 20 years now. Indeed it has been the case for so long that it is many of those developments from the early days of corporatisation that will themselves need to be replaced, purpose-built or not. First generation corporate stock will become obsolete as surely as many period properties.

By way of further explanation, the Department’s response reached into the annals of policy history: ‘In response to the rising cost of care, the Government initiated a series of reports, culminating in the 1989 White Paper, Caring for People. The Community Care Act 1990, which followed, required that the needs of people who required care should be assessed by local authority social services departments, which would then be responsible for purchasing, providing or arranging the necessary care. The emphasis was placed on caring for people in their own homes. Following the staged implementation of the Act in the early 1990s, the residential care sector began to shrink, as more people were cared for at home and demand for residential care started to fall.’

I wasn’t sure what to make of that to be honest. So what? It didn’t address the fundamental concern about provision of appropriate buildings for those whose dependency is such that they can’t be cared for in their own homes. It is as if someone was sent to filing cabinet marked ‘Care in Crisis 1999’, blew the dust off the file and copied the answers from there.

Angling for housing-based solutions?

The key may be in the reference to care at home, a subject returned to more than once later in the reply: ‘Whilst the Department does appreciate that there will always be a need and a place for care and nursing homes, the Department supports the design of specialised housing which specifically meets the needs and aspirations of older people.... the Department is sponsoring the Housing our Ageing Population Panel for Innovation award at the 2012 Housing Design Awards. The role of effective housing in supporting independent living will be discussed in the Government’s forthcoming care and support White Paper...’

So a very clear statement in favour of housing based solutions rather than residential care. In case the point had been missed, the final paragraph leaves little room for doubt: ‘It is far from being a given that increasing demand will ‘really kick in’ from 2014-15’. Demand for social care generally is expected to rise as the number of older people increases, but we do not expect a sudden increase in demand for residential care from 2014-15. Whilst it may be the case that the ‘baby-boomer’ generation will start to retire around this time, few if any of these people are likely to need to go directly into care homes. Even if they do develop a need for care at some point, the Department considers they are far more likely to choose one of the modern housing-with-care options....than care in an institutional setting.’

It seems therefore, according to the Department of Health; that the ‘unintended spike in private residential care provision’ (yes, really) was brought under control by historical policies introduced under the last Conservative Government; that we shouldn’t concern ourselves too much with future provision as we will be pursuing housing-based solutions and that those who do need residential care are alright, because the corporate operators have got that ball. Well, that’s OK then.

Except it isn’t. The care-at-home versus residential care debate is wearisome and we know that it is dependency and needs which dictate the appropriateness of the setting. That will always include the requirement for some form of long-term residential care. The top four corporate operators account for less than 20 per cent of bed provision, and all group operators (three or more homes) less than 60 per cent. There are well over 200 operators in that category, yet only 67 new homes were registered by CQC in the last financial year. The fact is, new development is being strangled by lack of development finance, and that has been the case for a number of years now. The property estate in the care home sector is beset by inertia and there is only so long the existing infrastructure can cope.

There are a wide variety of innovative design solutions which incorporate both housing and residential care models in 2012. The fact is that these will remain largely on the drawing boards of architects until the government wakes up to the very pressing need to facilitate financing of new development in the care sector.

* New home registrations with category limited to Older People, Dementia or Older People and Dementia

August 2012