At last! As general optimism in sector recovery grows, HPC highlight data from the first quarter of 2013 suggesting that our aspirations may well become reality.
Each property advisor has their own opinion on key indicators of forthcoming market activity and growth. One of those key indicators is undoubtedly planning activity, a reasonable pointer towards future development.
Recent years have seen a distinct lack of willingness by banks to lend for development (in the care sector and beyond) and this has consequently impacted upon planning activity. A study of planning applications* reported by the national construction data providers Barbour ABI within our sector over recent years identifies a clear trend to be continuing into the first quarter of 2013.
Whilst 2008 to 2010 saw application levels remain steady despite economic conditions, this was largely due to the misconception held by many residential developers that the care market was a safe alternative into which undeveloped sites could be sold. However, following that initial activity post 2007 banking crisis, care associated development has fallen away as a direct consequence of economic conditions and reduced lending. But now, for the first time, we are seeing a sustained increase in activity, possibly reflecting the much heralded renewed lending appetite held by high street banks. At last, our analysis suggests that the general perception of an improving market may be underpinned by sustained positive activity.
Detailed scrutiny of the applications over the first quarter of 2013 makes for interesting reading - no more so than in respect of geography.
It is no coincidence that Laing & Buisson have consistently reported the North East as having the highest proportion of single en-suite bedrooms over the past decade. The region was subject to a level of phenomenal care home development during the period due, to a large extent, to the mix of cheap land and successful entrepreneur developer/operators. Developers often gave limited thought to supply/demand dynamics, reliant in many instances on a build/kill philosophy with the anticipation that outdated facilities would fall out of the market. A successful outcome was rarely guaranteed and a number of modern purpose built facilities in the region continue to struggle for occupancy. Indeed, Laing & Buisson research in 2012 shows the region to have the lowest occupancy nationwide.
Over recent years instructions from our own clients have confirmed the increasing appetite for knowledge within the care home market. For decades the major retailers have known all but the inside leg measurement of the potential shopper before moving into a specific location. Operators and developers of care homes now appreciate the necessity for understanding the likely local client’s profile, the supply/demand dynamics, fee level potential and commissioning strategy. In effect, therefore, it might be claimed that it is the economic meltdown of recent years that has (finally) brought an increased level of sophistication to the sector.
The breakdown of reported planning applications (Q1 2013) is interesting when considered by region:
South East - 25%
East of England - 12%
North West - 12%
South West - 11%
East Midlands - 9%
West Midlands - 9%
Yorkshire & Humber - 7%
Wales - 6%
Scotland - 5%
North East - 4%
With local authorities experiencing huge budgetary restraints, operators have become increasingly focused upon areas with a level of affluence likely to support a strong self-fund market. The general national demographic breakdown is for such areas to be in the south of England and it is unsurprising that the South East has attracted such interest.
However, what is of more interest is the level of activity when put into context with the regional populations. All things being equal one would, once again, anticipate more development per capita in the affluent South East as operators focus on the privately funded service user. The actual findings are very different: (See graph above)
Our interpretation of the data is that the pursuit of appropriate development sites in the South East has been restrained to a degree by land prices which remain at a level that cannot be counter-balanced by anticipated profitability post-development. In other words, despite an increase in market sophistication and focus, a trade off has occurred due to a shortage of available affordable/viable sites, leading to a disproportionately high level of activity in regions which would be considered second tier from an affluence perspective. It is also interesting to note that, despite having potentially the lowest land values, the North East, Yorkshire and Humber have very much fallen out of favour with an increasing number of care developers.
*Detailed and Outline planning applications in respect of care home and extra care development for the first quarter of each calendar year.
Nigel Newton Taylor is a Chartered Surveyor and Director of HPC.May 2013