A number of drivers influence demand for the care of older people. Taken together, they make it an attractive opportunity for well-capitalised asset owners working in partnership with well-managed operators, who are committed to providing high standards of care.
People aged over 85 are the fastest growing part of the UK population and make up the core client group for care homes. According to the Office for National Statistics, the number of people over 85 years old in the UK is forecast almost to double by 2043.
Except in the most extreme forecasts of the potential shorter-term consequence of COVID-19 on the UK population, demand for elderly care is forecast to continue to grow over the longer term. Research by LaingBuisson, a leading consultancy in social care, forecasts that an additional 79,000 beds will be required to satisfy this increased demand over the next 10 years, an increase of 20% on demand today. Though this data was forecast prior to the outbreak of COVID-19, long-term demand is not expected to be significantly affected over the life of our leases.
Over the past 10 years, the supply of available beds has not increased. Underlying this apparent stability have been a number of changes in the structure of the market.
Independent operators, both for profit and not for profit, have continued to take market share from homes owned and operated by the public sector. At the same time, the number of independent sector homes has shrunk by 10% over the past 10 years as older, obsolete buildings are withdrawn from the market to be replaced by more modern, larger homes. The average size of an independent care home has grown from 35 beds to 42 beds in that period. The average size of care homes in Impact’s portfolio is 50 beds.
Over recent years the market has seen deconsolidation at its top end. The market share of the 10 largest independent operators has declined from a peak of 27% in 2006 to 21% in 2019. This reflects diseconomies of scale in the care business. For the larger operators, the potential benefits of access to capital at lower cost and purchasing power for consumables such as utilities and food tend to be more than cancelled out by higher group overheads and the lack of economies of scale in pay rates for care staff, which are operators’ largest expenditure.
Over the same time period from 2006 to 2019, the market share of sole traders with one or two homes shrank from 49% to 32%. Groups with between three and 80 homes in the middle market have been more vibrant, growing their market share from 24% to 47%. Most of Impact’s tenants are active in this part of the middle market.
The Alzheimer’s Society estimates that in 2019 there were 883,100 people in the UK with dementia, of whom 510,600 were suffering from a severe form of the condition. Projections by the Care Policy and Evaluation Centre at the London School of Economics suggest that the number of people with dementia could increase by 80% by 2040.
An estimated 69% of the residents in care homes in 2019 had some form of dementia. As our understanding grows on how to provide good care for people with dementia, there has been more emphasis on building dedicated units to provide this care. That has been a particular focus of our asset management activities during 2019.
In 2019 LaingBuisson estimates that £16.5 billion was spent on long-term care for elderly people in care homes. Approximately equal numbers of residents are now paid for either purely privately or by a combination of local authorities and the NHS. A growing minority are funded through a combination of funding from local authorities and top-up payments from their families.
There has been much debate about how the government will fund adult social care in the longer term. The Institute for Fiscal Studies estimates that total government spending on adult social care increased from £17.1 billion in 2015/16, to £23.5 billion in 2018/19, a 37% increase. About half of this money is spent on providing care for adults over 65.
After the election held in December 2019, the new government announced it would allocate an additional £1 billion for elderly care in 2020/21 and plans to start cross-party talks to develop a long-term and equitable solution for funding elderly care. The Secretary of State for Health and Social Care wrote to all MPs and Members of the House of Lords in March 2020 to initiate those talks.
As a result of increasing demand, limited new capacity and a shift from government provision to independent providers, the independent sector has seen sustained and above-inflation growth. Over the past two decades average weekly fees charged by operators have grown on average by 3.7% per annum. Over the same time period, RPI has averaged 2.8% per annum. This gives us confidence that the RPI linkage in our leases is sustainable.