Strong fundamentals combined with an ageing population in the UK has made healthcare, and in particular, care homes, a very attractive asset class for investors.
Good quality care homes with modern facilities are likely to always be close to capacity, due to a combination of factors: high demand for care home places, an imbalance between the number of care homes opened and those closed since 2011, plus pressure on the NHS to relocate elderly patients from hospitals to be cared for within the community. This supports investors’ views that care homes are a secure asset class with a consistent income stream.
That said, there are a number of factors that an investor needs to consider when purchasing a care home, including the location and age of the property, the supply and demand of care beds in the area. Its positive underlying trading performance, the lease terms, tenant covenant strength and rent cover are all important factors, too.
On this last point, according to Savills research, the strongest market-tested tenant covenants are Care UK, Methodist Homes, Orders of St John Care Trust and Anchor. However, there are a variety of other well-established care operators in the sector who have a similar tenant covenant strength but because of their relatively unknown status or limited exposure to the investment market, have not been considered by some investors.
The rent agreed at the start of the lease is an important part of any investment decision and setting the highest rent possible will not necessarily maximise the price achieved. The landlord must ensure the rent is affordable throughout the length of the lease taking into regard the potential fluctuations in profit of the home. A large proportion of recent care home investments have been new builds that are pre-let to an operator on a new 25 to 40 year lease with Retail Price Index rent reviews, or are part of a sale and leaseback which are on similar terms, albeit an older property.
There is also a market for distressed assets and older properties, which are available at softer yields and more affordable prices. Many investors who are looking at this type of product are seeking angles to add value or take a view on the market against the risk associated with that asset and yield applied.
We expect care homes to continue to be popular with investors due to continued demand and a limited amount of new homes coming out of the ground, which will ultimately drive prices higher and sharpen yields. The sector provides a number of opportunities as the market is relatively fragmented, but it is important to ensure the home/portfolio has strong underlying fundamentals to support the investment value in the future and achieve higher returns.