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Source: Laing & Buisson

Demand for care beds

Laing and Buisson estimate that the overall impact of demographic pressures and government policy will be an increase in effective demand of 24,000 care beds in the UK by 2016 i.e. 2,400 extra care beds per annum.

Supply of beds

A combination of factors has resulted in the supply of care beds falling by over 100,000 beds (18.1%) since a peak in 1996, but the situation now appears to have stabilised. See table 2.

In the year to April 2006, independent sector capacity actually increased for the first time in nine years, albeit marginally, to 408,900 places, the balance of 59,100 places (468,000-408,900) being in the public sector.

Table 3: Occupancy rates in privately owned care homes for elderly people in England 1997-2006

Source: Laing & Buisson

Occupancy levels

The decrease in the supply of beds since the mid 1990s has, given steady demand, not surprisingly led to increases in occupancy rates as can be seen from table 3.

Occupancy levels have plateaued since March 2005.

There are small regional variations, with occupancy rates in London, being above the national average.

Sources of funding

In the elderly care market, local authorities are the major purchasers of care beds, and are likely to remain so in the foreseeable future, in all but the most prosperous areas of the country. On average, local authorities account for 60% and the NHS 8%, the balance (32%) being private pay. There is practically no difference nationally in the percentage of private pay residents in nursing and residential (personal) care homes.

As the elderly become more asset rich (largely by owning their own home), the number of private pay clients is likely to grow.

Fee rates

The average weekly fee for a single room in a nursing home in March 2006 was £581 according to Laing and Buisson, an increase of £47 (8.8%) over 2005. The average weekly fee for a single room in a care home offering personal care only in March 2006 was £403, an increase of £26 (6.9%) over 2005. The price of a single nursing home bed has risen on average by 9.1% per year since March 2001, whilst the price of a single residential (personal care) bed has risen on average by 8.5% per year over the same period. A key driver has been above inflationary fee increases by local authorities, the increased use of third party top-ups and an increasingly buoyant private pay market.

Wage costs

Whilst rates of pay have increased ahead of inflation, underpinned by increases in the national minimum wage, the sector has been helped enormously by the influx of staff from overseas. This influx has restricted agency costs and kept wage rate increases in check.

Profit margins

Due to good fee rises over the last five years and generally buoyant occupancy levels, the EBITD (earnings before interest, taxation and depreciation), levels per bed achieved by the sector have increased significantly, from around £4-£5,000 per bed in 2000 to 2002 to over £7,000 per bed in 2006.

Care standards

The impact of the Care Standards Act 2000 has been less than originally anticipated. The government is understood to be undertaking a review of the national minimum standards and associated care home regulations, but so far there is no indication of any intention to make mandatory changes to the current standards. Instead, the emphasis seems to be to encourage improvements with the Commission for Social Care Inspection (CSCI) proposing a new star rating system to reflect the quality of a service. The CSCI propose to award a star rating based on outcomes in seven areas: quality of life; choice of control; making a positive contribution; personal dignity and respect; freedom from discrimination and harassment; health and emotional well-being; economic well-being; and leadership and management.

Care home sales

Care home sales have been very buoyant over the last two-three year period, with good numbers of potential buyers.

Table 4: Corporate sales

At the corporate end of the market, there continues to be a strong appetite for the sector with private equity investors being the major buyers. In 2001, the total value of investment by private equity houses in the healthcare sector was approximately £0.4bn, which grew to £3bn by the end of 2005 and is likely to exceed £6.4bn in 2006. Some of the major corporate transactions that have taken place so far in 2006 are detailed in table 4 above.

Care homes are typically sold at prices which reflect a multiple of their earnings (EBITDA – earnings before interest, taxation, depreciation and amortisation). The multiples generally have regard to historic performance, current run-rate and projected levels of profitability. In the last few years the multiples have risen sharply and in the corporate sales above, were typically above 10 times current EBITDA. Multiples have risen in response to several factors notably:

• the perception that healthcare is a relatively stable industry and the profit stream therefore reasonably secure relative to some other sectors;

• healthcare has good prospects for further growth;

• there is scope for further consolidation of the sector; and

• healthcare assets can be leveraged to relatively high levels and borrowing costs are at historically low levels. The emergence of Op-Co-Prop-Co funding has assisted this process, particularly with property yields at their current low.

A key difference of the market today, compared to previous years is the willingness of investors to buy on projected levels of profitability rather than just on proven past and current levels of performance. Recent corporate sales have incorporated significant profit growth assumptions and it remains to be seen if these will be fully realised. If not, there may be a price correction in the coming year or so. Rising interest rates may also put a brake on rising values.

Prospects for the future

Average occupancy levels are set to remain high if, as expected, demand for beds remains firm. This does not mean that every nursing and residential care home will experience high occupancy. As in any market, local reputation will be paramount in determining success.

Fees are likely to continue to increase, albeit at perhaps a lower rate than we have seen in the past five years, due to increasing constraints on local authority funding levels. The proportion of private payers should continue to increase.

Earnings per bed should, therefore, continue to improve. However, we are likely to see lower increases than those seen recently.

The pace of development of new homes and extensions to existing ones is likely to increase given current profit levels and values, although the scale of new development is likely to be tempered by a shortage of building land and planning difficulties.

Irrespective of any changes to government policy, the market will continue to drive forward quality. In 1996 barely 60% of beds were in single rooms, whilst 10 years later this figure had risen to 85%. Similar improvements have been seen in the number of en-suite WCs. Consumer choice and higher expectations will drive the sector over the next decade. For those operators able to rise to the challenge there will be few other sectors able to match its rewards.

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