We have identified five key drivers which make the UK market for elderly care attractive to well-managed care home operators. This in turn creates opportunities for well-capitalised asset owners, such as us, to grow in partnership with these operators and build portfolios of assets offering secure and rising income, with the potential for further value creation through careful asset management.
The UK population is ageing rapidly. The number of people more than 85 years old in the UK is forecast to increase from 1.5 million in 2014 to 3.6 million by 2039. A substantial minority of this age group will need some form of residential care, which can only be provided in a care home or in hospital.
The number of beds available has fallen 17% from its peak in 1996. Recent research by the Consumer Association shows that in England alone, there could be a shortfall of 42,000 beds by 2022. Of the 150 local authorities (LAs) the Consumer Association surveyed, only 20 are adding beds at a sufficient rate to keep up with likely demand over this period.
At the same time, annual spending on residential care for older people has risen from £9.3 billion in 1995 to £15.9 billion in 2017. This represents a sizeable increase in real spending per bed, with fees continuing to rise ahead of inflation in 2017, as shown in the chart below.
The UK has numerous small operators of care homes. In total, there are around 5,500 different providers, operating 11,300 care homes between them (source: Competition & Markets Authority (CMA)). Operators with fewer than 26 homes have 69% of the market. This fragmentation offers scope for stronger asset owners and stronger operators to grow through consolidation, and for asset owners to broaden the range of tenants in their portfolios. At the period end, the Group owned 0.6% of the private care beds in the market.
In the 12 months to June 2017, the NHS in England lost cumulatively 2,274,300 bed days through delayed transfers, an increase of 66% on 2010. The majority of these beds are occupied by elderly people who cannot safely be sent home but could be more effectively and efficiently looked after in a care home environment. This is highly wasteful for the NHS at a time when its budget is under unprecedented pressure, as the average hospital bed costs four times more than the average care home bed. In order to manage these pressures better, in January 2018 the Secretary of State for Health, Jeremy Hunt, was also put in charge of adult social care.
According to the recent study by the Competitions and Markets Authority:
This means that the public sector is responsible for funding at least some of the cost of care for the majority of care home residents. The combination of rising demand, insufficient supply and the need to reduce pressure on the NHS has led the government to announce a series of initiatives over the past two years, to increase LA funding for elderly care. These initiatives reflect the fact that care is an essential service, which LAs are legally obliged to provide.
The initiatives are set out below. Together, they represent a substantial increase in public sector spending, in a market worth around £16 billion a year: