Tanworth Court Care Home, Solihull, constructed 2019 (© Cushman & Wakefield)
Care homes form a fundamental part of the UK's adult social care sector. Valued at a total of around £17.3bn, there are close to 500,000 bedrooms in the market, with the private sector accounting for 94% of these according to the 2021 report from consultancy LaingBuisson.
The provision of residential care in the UK has effectively been privatised since the 1980s, partly because the independent sector can operate with a lower cost base, but also because of its ability to innovate. Last year, the British Medical Journal suggested the UK's adult social care system was one of the most privatised in the western world.
LaingBuisson furthermore indicates that around 30 providers account for 30% of the entire market, with 12% attributed to the top four. It is projected that the market will become even more fragmented as the top 30% of providers continue to expand by acquiring smaller groups and building new care homes, while the bar for entry for others remains high.
It has been accepted for some time that the UK population has an ageing profile, and as such the demands on the elderly care sector could be substantial. Figure 1 demonstrates that some challenges lie ahead, particularly when considering how the population of those aged more than 85 will quadruple within the next century.
Figure 1: Forecast trends in age of UK population.
Source: LaingBuisson and Cushman & Wakefield (from Office for National Statistics)
Many commentators project that both capacity and demand in the care home sector will grow for several decades to come. In the medium term, increased demand will not only mean greater levels of occupancy but also rising demand for alternative products such as retirement living. This latter sector is rapidly expanding across the UK, allowing empty nesters to downsize into more suitable homes with on-site assistance where required.
The design of care homes has changed significantly over the past four decades. The residential conversion market of the 1980s and early 1990s saw homes of all shapes and sizes being created, but a later and ultimately abandoned attempt to introduce minimum standards for bedrooms, communal spaces, doorway widths etc under the auspices of the Care Standards Act 2000, left many of these behind, unable to adapt as the market shifted toward a purpose-built model. Nevertheless, LaingBuisson has estimated that converted assets still account for around 50% of the market.
From around 2010, care home construction has been very different to that of previous decades. For comparison, converted homes of the 1980s offered bedrooms of 10–12 sq m with no en-suite facilities, but there has since been a gradual transition to today's 16–20 sq m rooms with full en-suite wet rooms. Open spaces, uninterrupted level access, and larger communal and circulation areas come as standard in modern designs, which means that they are safer and better equipped to accommodate the changing needs of residents.
The modern care home design can also be more profitable. Scale and effective layout enable optimised staff-to-resident ratios, and there is also evidence of improved staff productivity and retention in a better-equipped modern environment.
Typical 1980s adapted bedroom in a care home © Cushman & Wakefield
Hallway in an older, adapted care home © Cushman & Wakefield
A purpose-built care home bedroom in 2019 © Cushman & Wakefield
Hallways in a purposed built care home in 2019 © Cushman & Wakefield
As people live longer into older age, they do so with multiple comorbidities and in a much frailer state. Research by the British Medical Association in 2018 highlights that 50% of people aged more than 65 are now living with some degree of frailty, which is one of the key factors for care home admission.
As the average age of the care home resident increases, their needs and demands change. Older and more frail residents become less mobile and depend more on others' help to perform basic tasks, and require a suitable environment for this.
Not only is there an evident need to increase the number of care homes to meet the expected demand, but older, unfit stock must be replaced. It is estimated that around 70% of the market was constructed before 2000.
Although some older assets will have been retrofitted to bring them closer to modern standards, it would not be unrealistic to suggest that most have not, as data indicates that around a third of the current market still doesn't offer en-suite facilities.
Consequently, the many converted care homes that remain on the market may be approaching functional obsolescence. This highlights the need to build more care homes to keep pace with both increasing demand and the changing requirements of the ageing population.
The effects of COVID-19 have certainly been felt by all care homes. Although it is too early to quantify the impacts, it is estimated that the pandemic may speed the exit of many older assets from the market. Older assets are smaller and as such are more financially volatile, and the loss of more residents than usual over a short period of time could more easily bring them to breaking point.
Equally, as care homes have attempted to contain infection the gap between old and new has become apparent: the lack of en-suite facilities in older properties for instance prevents isolation in bedrooms as there is a need to move around the building to use communal bathrooms.
Many modern care homes are in contrast designed with smaller unit sizes; for example, an 80-bedroom home operating as four 20-bedroom self-contained units can more easily contain the spread of infectious disease, as each unit can lock down to prevent the spread of infection into the other three units. Smaller assets that cannot operate in this way do not contain infection so easily, as evidence begins to emerge of care homes having to close as a result of the virus.
The care home market consists largely of assets that are owned-by the operators rather than investors, although as a need-driven sector it continues to appeal to investors including private equity firms, specialist real-estate investment trusts and mainstream asset managers. For owner-occupiers, developers and investors, the increasing need for care is irrefutable; although the revenue limitations in lower-income areas that rely on widely criticised social funding diverts attention towards more affluent locations where more older people can afford private care and, so offering the highest revenue prospects to providers.
The care home market has been polarised for some time, with assets of mid- to upper-end quality benefitting from strong demand, while lower-quality homes have suffered from stagnant appeal, dwindling funding options and opportunistic pricing, given their uncertain future.
As the market focuses on modern, purpose-built assets in the best locations, competition mounts in what is a relatively small sector. This is expected to continue as investors look for longer-term opportunities, turning to new development: as more new homes enter the market to meet demand, the oldest and smallest assets will continue to fall away.
Terry Unitt MRICS 20 March 2023
Alison MacDougall 10 March 2023
Sue Pritchard 10 March 2023