Say hello, wave goodbye

Jordan Rundle, director, healthcare development and investment, and Rob Kinsman, regional director, care, at Christie & Co assess whether the care home market is shrinking or evolving

New research by CSI Market Intelligence, ‘Say hello wave goodbye 2022’, revealed that, in England last year, 123 care homes opened against 247 closures, with a net loss of 230 beds – indicating that the care home market for older people in England shrank for the first time in three years in 2022.

The research also noted that care home openings last year were 23% down on openings in 2021, and were the lowest since 2015. There was a 1.3% market increase through openings, against a 2.6% decrease through closures. This is much in line with the average number of care home openings and closures since 2015 when CSI Market Intelligence began its reporting.

CSI also states that there were only two regions that gained beds across the year: London and the West Midlands, while the largest number of losses were in the Southeast, Southwest and Northwest.

“But many residential care homes that are solely dependent on local authority referrals are no longer receiving the levels of referrals to maintain occupancy levels."

Why are more homes closing?

It’s quite normal for care homes to close and new ones to open, but it’s the scale at which this happens and the number of closures versus openings that’s key. Despite the reported increase in closures, they only made up 13% of our sales in 2022, 80% of which remained as intended care use and are expected to be re-registered. So, yes, homes are closing, but many are being registered with the Care Quality Commission and CIW and are reopening with care use, which is an important thing to note.

Key reasons why homes are closing:

• The fallout from the pandemic has put the sector under pressure, with increased utility bills, increased staff costs, and the squeezing of margins, which have all created the perfect storm for providers, resulting in a number of closures across the UK.

• During the pandemic, the CQC was unable to inspect care settings but, now that we’re moving back into normality, the CQC regulators are toughening again, and many of these homes are being downgraded to Inadequate, which inevitably puts pressure on the financial viability of the business.

• Patient needs have become a lot more complex, with many clients requiring specialist nursing and/or dementia care. The average length of stay was also reduced. Many of the smaller, older properties aren’t equipped to cater to this more challenging client group, which is where the greatest demand is. Many councils prefer to keep people in their own homes and provide domiciliary packages. This trend varies from region to region, but many residential care homes that are solely dependent on local authority referrals are no longer receiving the levels of referrals to maintain occupancy levels.

With an ageing population comes an increased demand for specialist care homes that cater to residents with dementia, Parkinson’s and other complex needs. For owners of both new and existing care homes, investing in futureproof assets to be able to cater to the changing client profile is key.

How is the new build market changing?

UK-wide analysis from the Christie & Co consultancy team reveals that, despite an overall loss of elderly care homes last year, from January 2022 to January 2023, the market gained 1,851 beds, therefore suggesting we’re losing small homes and introducing larger new build assets. In these 12 months, we lost 6,369 beds due to de-registrations, 61% of which were in converted homes with an average size of 28 beds. In the same period, 8,090 beds were introduced to the market, 91% of which were in purpose-built homes with an overall average size of 54 beds.

Due to a significant rise in construction costs over the past 18 months, we are now seeing a trend of both developers and operators increasing the density of new build developments to benefit from economies of scale and improving overall viability for schemes. The average-sized development scheme Christie & Co sold in 2022 was about 68 beds and many new build developments are now in excess of 70 beds.

The emergence of new developments in place of older homes has been happening for a long time and isn’t a new trend, but it has been exacerbated by the pandemic. The underlying business case for new beds to meet increasing bed demand is not going anywhere and it is easier to incorporate the latest infection control measures into new schemes rather than trying to retrofit them into existing converted assets. The majority of investors and capital partners are seeking modern purpose-built real estate assets to achieve the highest Environmental Social and Governance credentials and move towards net zero.

Considering the increasing forecast bed demand due to the ageing demographic, there is expected to be a material undersupply of market-standard beds at a national level over the next decade. If you’re investing in the sector, the fundamental underpinning due to the shortage of market-standard bed supply underlines the long-term requirement for purpose-built operational real estate to meet the growing needs of the population.

Construction cost inflation is a major challenge for the whole sector, and if suitable private fee levels cannot be sustained, the economics and viability for new build development simply don’t work.

Why London and West Midlands are popular with new build investors

At the moment, there are more new care homes being built in affluent areas and less development activity in more marginal regions.

The West Midlands is one of the most densely populated areas in the UK outside London, so provides a strong underpin regarding bed demand and staffing availability. The Midlands has also seen one of the highest percentage increases in annual house price growth over the past few years, thus unlocking the viability of the region for purposebuilt development.

The underlying property values and scarcity of land in London means there has been a lot of competition for development opportunities, from a broad range of residential and commercial uses. As the wider economy has softened and post-pandemic work/life trends have emerged, some of these competing uses have become less attractive which has increased the opportunity for care-related uses to step in. London has the strongest demographics in the UK when it comes to population depth and undersupply of market-standard beds, and we expect increasing development activity inside the M25 over the next decade.

The Southeast has some of the strongest underlying demographics when considering depth of affluence and population density, and has seen the most development activity in recent years as a consequence. In areas such as the Southeast and Southwest, there is generally good demand for residential developments, and so older Victorian care homes that are no longer fit for purpose are closing and being repurposed. The Southwest region, in particular, provides a very compelling opportunity for new build care homes benefiting from an ageing demographic and very limited new build competition. It takes time for the planning and construction process to unfold, but we do expect this trend to continue over the medium-term and first movers into such regions are likely to benefit.

For more information, contact: jordan.rundle@christie.com / 07711 767 180 or rob.kinsman@christie.com / 07717 335 367