The long term care sector is often held up us an example of a market which responds to a different set of dynamics to those which affect many other sectors. This is generally as a consequence of the “non-voluntary” nature of demand, that is to say those using the services do so through requirement rather than choice. The reduction in spending of disposable income, either as a consequence of availability or caution during the recession, impacts on other sectors simply because the purchasers of those products and services are able to make the choice about the level of expenditure they choose to make. In some cases it’s the Waitrose versus Aldi analogy and in others, such as cars, it is about whether to make the investment at all.
Whenever the time seems appropriate for another political push on the merits of domiciliary care, we are usually persuaded with a survey that tells us the vast majority of people, given the choice, would not go into a care home. Which is a bit like saying that none of us would choose to spend the night in hospital, until we are run over by a bus, when we are generally quite glad the hospital is there nevertheless. So long term care, we understand, is driven by demand through requirement. What we also understand is that requirement is set increase significantly. Laing & Buisson forecast demand for 36 000 more occupied places in 2018 by comparison to 2008.
In such circumstances it would be reasonable to expect that the level of supply of available beds would behave in such a way as to reflect that demand. Perversely however, it seems quite possible that we may be about to see exactly the opposite. A decade or so ago, capacity in the UK long term care sector was falling at an alarming rate, with some 10 000 beds per annum being lost through home closures. To some extent, this was an overdue correction caused by oversupply, however a number of converging factors including rising costs coupled with local authority budgetary constraints, forced the issue with many homes. A rapidly rising housing market provided an easy exit route of alternative use for owners and banks alike and insolvency practitioners were kept busy with individual operators and groups.
Having been through that period, which resulted in the loss of tens of thousands of places, the field was clear for new developers to clean up by building state of the art facilities which would capitalise on the widely recognised increase in the ageing population. It would be reasonable to assume that in a cyclical market, this proliferation of new builds would lead sooner or later to the closure of some of the older facilities and the supply of care beds in the UK would cleanse and replace itself in an organic way.
The risk is however that we are about to see a renewed increase in the loss of places through home closures without new development ever really having got to the stage of providing the alternative accommodation required. It is true that a number of entrepreneurial operators and developers have done very well out of the peculiar dynamics in the long term care sector and groups of new homes have evolved over the past five to ten years. Generally however, this has been on a regional basis and in total has only scratched the surface of potential demand. The most recent figures available from Laing & Buisson indicate there were 5 552 new places registered in the year to April 2008, which sounds like good news until it is set against the places lost through home closures which totalled 5 368. Even taking into account new beds added to existing homes, the market has been unable to do much more than tread water during the good times.
Unfortunately for care operators and developers, just when their own sector was crying out for new provision, the economy and consequently the housing market was strong. In simple terms, care home developers generally came second to house builders in the competition for land, which restricted the number of new care beds being built. More recently however, the collapse of the housing market could have opened up the way for care home developers as land values crashed and the competition retreated to lick its wounds. However just as the door appeared to be opening, it was slammed closed again. The banking crisis which created the opportunity also caused the lines of development funding to dry up. Only those with cash have been well placed to benefit and it seems that on the whole, developers of long term care places have had to endure the frustration of watching the opportunity pass by without having the ability to benefit as they would had the lending climate been “normal”.
Given the parlous state of the Treasury, it is inevitable that public expenditure will be hit and care home operators are likely to find a rocky road ahead when local authorities review fees over the next few years. If the impact of this fiscal squeeze has the same effect as in the late 1990’s, we are likely to once again see fall-out in the form of home closures. If there are signs recently of movement in the lending markets, these have been mirrored by signs that we have reached the bottom of the housing market. When it recovers, as it always will, developers of new care facilities will once again be competing with newly invigorated house builders. In essence, the supply graph of care beds in the UK over a 10-15 year period could look like a steep decline, followed by a plateau , followed by a steep decline. Overlay a demand graph doing the exact opposite and sooner or later something’s got to give.
Ian C Wilkie