US investors snap up UK care homes
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Earlier this year a Wall Street hedge fund best known for its role selling the Hollywood film studio Metro-Goldwyn-Mayer bought 27 care homes for the elderly across Britain.
The deal was the second in the UK’s £15.1bn-a-year care home market in less than a year for Anchorage Capital and widely seen as yet another sign of the growing interest in the sector by foreign investors.
With the number of people aged over 65 expected to rise from 10.6m in 2010 to 16.1m in 2035, demand for care homes is already outstripping supply and the concern is that the ageing population will overwhelm capacity.
This is creating a global appetite for investment in Britain’s care home sector, with real estate investment trusts from North America stepping up their involvement in the UK market in the past two years.
Hedge funds from the Asia-Pacific region as well as investors from the Middle East seeking sharia-compliant opportunities have also joined more traditional investors such as pension funds in the UK.
Julian Evans, head of healthcare at Knight Frank, says the grey market is particularly “hot”, not least in wealthy London and the southeast, where the number of self-paying customers seeking hotel-style residences for their later years is expected to grow.
The increasing investor interest may come as a surprise to people who equate the sector with a raft of scandals over the mistreatment of patients. Earlier this year the BBC exposed yet another case of abuse at a home for the elderly in Britain when undercover cameras videoed staff mocking patients and ignoring their pleas for help.
But Mr Evans says the reality is that demand outstrips supply for both self-paying customers and elderly people whose case is funded by local authorities. “A lot of investors see the scandals as a bit of a positive because the negative publicity has created less competition in an incredibly crowded commercial property market,” he says.
A key attraction is the long 25-30-year leases in the sector, compared with traditional core commercial sectors at six years. Yields in healthcare also tend to be higher, and they benefit from a long-term fixed income.
Rental levels for modern homes in London and the southeast stand at around £9,400 a year per bed, and £9,800 a year per bed respectively, much higher than the rest of the UK, according to Knight Frank. But although London remains a hotspot, it is “not necessarily the best deal”, Mr Evans says. Buyers are beginning to look outside London where yields are higher, particularly cathedral cities such as Cambridge where there are a lot of elderly people.
Much of the interest remains in the opportunity for property investment rather than the running of the care home in itself. The wave of healthcare real estate investment trusts that have crossed the Atlantic from the US are interested in sale and leaseback deals – buying the homes then leasing them back to the owner, taking little interest in the management of the care home business itself.
“The collapse of Southern Cross gave the sale and leaseback model a bad name in the UK market for a couple of years, but there is a feeling that lessons have been learned,” says Vernon Baxter, editor of Health Investor magazine. “US investors have decades of experience in these types of structures and tend to take a more proactive approach to understanding and overseeing the operating model.”
Their interest is also fuelled by low US interest rates, which are keeping the cost of debt low, giving them an advantage over their UK rivals. With the Reit market in the US booming over the past few years, there is also a shortage of stock to buy in the US so they now require new homes for their cash; while the familiar culture and common language are also appealing, says Knight Frank’s Mr Evans.
The Reits have succeeded in carrying out several large deals in a sector that is still struggling with the fallout from over-leveraging during global credit crunch days.
Last July, for example, the Los Angeles-based Griffin-American Healthcare Reit II bought a subsidiary owning 44 freehold elderly care properties off Caring Homes Group, the trading name for Myriad Healthcare, for £300m under a 35-year sale-and-leaseback deal. Before that the Ohio-based Health Care Reit bought the UK operations of Sunrise Senior Living and its five luxury care homes for £154m.
According to Laing & Buisson, providers of healthcare market intelligence, the arrival of more mainstream investors in the care home market could boost provision and quality, and should bring greater transparency and governance rules in a sector that has been traditionally opaque.
Nevertheless the market remains polarised with most investors interested in high-quality care homes, where income is generated by self-paying clients, rather than local authority homes, says Justin Crowther, analyst at Catalyst Corporate Finances.
“There’s plenty of money out there for good-quality, high-end nursing homes but for the poorer condition local authority market it’s much harder. There’s an issue around local authority payments, which are being cut, and the domiciliary – home care – market is taking away some of the market share,” says Mr Crowther.
This is reflected in the profitability of the private pay-focused Barchester Healthcare which outstrips the other big players in the sector. Four Seasons Health Care, Bupa Care Homes and HC-One all have more exposure to local authority customers.
“What we are continually seeing in the healthcare market is local authorities wanting more for less,” adds Mr Baxter. “Consequently, the majority of the long-term capital that is entering the market is being directed to providers who are targeting wealthy areas where healthy margins can be maintained.”
Staff remain one of the biggest costs even though the industry is one of the biggest users of controversial zero hours contracts and low pay. In 2012, the overall cost of care home staff stood at 57.2 per cent of running costs. Annual staff costs average about £18,840 per resident, but are higher in the southeast.
Mr Evans says a number of operators that have undergone financial restructuring simply do not have the cash flow to maintain the facilities. But the wave of restructuring across the sector in the past two years should see the UK healthcare landscape stabilise and provide opportunities for innovation and investment.
This is much needed given it has lagged behind the US and Australia, where five-star residential villages are more commonplace, often integrated with housing for students.
With this in mind, it could just be that British care homes acquire some of the glitz of Hollywood for investors in the next few years.