FINDING CLARITY:

The care market outlook in 2023

Specialist business property adviser, Christie & Co, has launched its Business Outlook 2023: Finding Clarity report which reflects on the themes, activity and challenges of 2022 and forecasts what 2023 might bring across industries, including the care sector. Rob Kinsman, Regional Director – Healthcare at Christie & Co, shares the key insights relating to the care markets.

In 2022, our deal numbers and volumes hit a 14-year high, as we completed on 78% more deals in 2022 than in 2020. This clearly shows how buyer appetite and confidence has bounced back following a subdued couple of years due to the pandemic.

Market composition

Corporate investors accounted for 33% of our completions last year, which is a significant increase from 22% in 2018. This reflects the increasing use of sale and leaseback finance in the healthcare market and a wide level of activity from a cross section of UK, US, and European Real Estate Investment Trust (REITS) together with institutional capital, and is further illustrated by analysing where buyers are based relative to the businesses which they acquire. In 2022, 48% of our care deals were concluded to buyers located over 100 miles from the target business, a 19% increase since 2015, which reflects an emerging national and international pool of buyers.

We saw a decrease in new market entrants in 2022, which can be largely attributed to regulatory challenges related to the Care Quality Commission (CQC) and funding challenges. Despite banks being largely active in the sector, it became more difficult last year for new entrants with little experience to obtain bank funding and we don’t see these challenges easing in 2023. Successful new market entrants commonly have a financial or medical background (or both) and seek care homes (25-30 beds+) in areas where they can tap into the self-funded market and potentially grow the capacity of bed numbers. So, we’re seeing quite a sophisticated type of first-time buyer, which is a contrast to the ‘hands-on’ new entrant which very much dominated the market when I started as a broker over 20 years ago.

Good quality conversions with potential to expand are highly sought-after from existing providers seeking to expand their portfolios. We’re also seeing competitive bidding for new build opportunities due to a lack of quality opportunities and huge investor appetite for future-proof assets.

Encouragingly, over 40% of providers we polled at the end of 2022 indicated they were seeking to acquire another care home in 2023.

Regional disparities

There is a noticeable difference in demand for care homes in different UK regions as location has become increasingly important. Buyer appetite is being led by the demographic profile and density of the population in any particular area; the level of local authority fee rates; the quality of housing stock and whether the care home is located on public transport routes. Buyers are also keen to understand the size of the self-funded market; the price of housing in the area and the demographic profile of the population within 10 kilometres.

Market challenges

Workforce issues have been a long-standing challenge for the care sector, with many providers reporting notable levels of agency use last year, albeit there are signs that this is now beginning to decrease. Operators are working hard to recruit and retain staff, with many adopting a very entrepreneurial approach, including partnerships with overseas training colleges to bring staff into the UK market.

Positively, occupancy rates are, in most cases, starting to return to pre-pandemic levels; however, local authority fee rates are proving insufficient to offset rising costs in the industry. We’re seeing income generated from private pay clients partially off-set this shortfall.

Rising energy and debt costs are also a significant challenge in the sector. Providers operating smaller, converted care homes are likely to have greater exposure to margin pressure and we are likely to see some greater levels of distress in this part of the market.

2023 Forecasting

We remain cautiously optimistic about the year ahead. Longstanding challenges will remain in the sector, but we don’t believe this will dampen transactional markets and we will continue to see demand exceed the supply of quality opportunities in the market.

To illustrate this further, over 70% of operators recently polled said they are looking to either buy, sell, or both in 2023.

Environmental, Social and Governance (ESG) continues to be a key priority for investors within the care sector who are particularly well-placed to deliver good ESG outcomes. Whilst many care homes in the UK are older and less energy efficient, operators are now embracing the opportunity to make changes to their care homes to improve their green credentials. We’re seeing increasing scrutiny from buyers, and their lenders, in the energy efficiency of care homes on the market and this is a trend that is sure to continue. We also expect to see:

• Continuing demand for good quality, future-proof assets.

• Investor sentiment to remain strong from a wide range of buyer groups.

• Continued growth in operators taking leases to grow their portfolios.

• Further transactional activity in the Operating Company (OpCo) market.

• Sale and leaseback finance will continue to underpin a notable number of transactions, although yields may soften as a consequence of wider macro-economic factors.

• Occupancy should fully return to pre-pandemic levels by year-end.

• Workforce challenges and cost inflation are likely to remain as the two key operational headwinds.

• Possibly more signs of distress emerging, particularly for smaller older style assets which are reliant on local authority funding.

Advice for providers

If you’re considering a sale, our advice is to engage with your agent, accountant and solicitor well in advance to ensure your care home is positioned correctly to achieve the best price. Appointing an experienced team of advisors will ensure your interests are protected and the sale process is as smooth as possible.

If you’re looking to buy, it is key to explore your funding options early on. Our sister company, Christie Finance is one of the leading brokers in the healthcare market. They are able to navigate the challenging funding market and offer a whole-of-market approach to ensure the most competitive funding package is brokered.

For further insight on the care market in the UK, read Christie & Co’s Business Outlook 2023: Finding Clarity report at christie.com/business-outlook-2023

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