Care Home Market Snapshot Summer/Autumn 2010

The care market is still relatively strong when compared to other sectors of the UK economy and is perceived by many to be one of the safer opportunities available in today’s economic climate due to the strong demographics and underlying profitability from well run facilities.

The sector is not however completely immune to the impact of the credit crunch and Savills has experienced a softening in values in all care home market tiers and this is partly driven by a reduction in loan to value levels which will have a bearing on who is able to bid and at what level.

There remains demand from private sector and not for profit and group operators with access to funding who are looking to expand their portfolios and diversify but this remains focused on well located units with a proven track record or with potential to enhance profitability or develop additional bed spaces.  This particularly applies to those units that already meet modern standards or can be upgraded with minimal capital expenditure.

There is a shortage of going concerns for sale in the 30 – 70 bed bracket (particularly in London and the South East) and we have a number of group purchasers who are looking to expand their portfolios through acquisition rather than development.

The key drivers for potential purchasers at this time tend to be:

• Size of home, quality of the accommodation and sustainable capacity
• Potential (to improve, reposition and add value)
• Locations (do the locations fill a gap or geographically fit well with purchaser’s existing homes)
• Fee profile and profitability (will it be possible to improve profitability by reducing agency costs etc)
• Regulatory matters (outstanding CQC requirements, action plans, lack of manager, POVA issues etc)
• Tenant Services Authority Policy/Regulatory Matters

Market Tiers

The Savills healthcare team has experienced reduced levels of sales activity in the lower market tiers however demand for quality care homes in the mid and upper tiers of the market remains strong with a shortage of stock.

A lower tier home is typically:

• Conversion below 30 beds with compliance issues
• Few en suite facilities and located in low fee paying areas
• Low profitability
• High agency costs
• Little or no room for expansion or reconfiguration

A property in this tier might typically sell at between a 5 and 6 multiple of earnings (EBITDA) or £30,000 – £40,000 per bed and it could have a higher alternate use value. 

EBITDA being an acronym for "earnings before interest, taxes, depreciation and amortisation’’ and represents the abridged net operating profit to which a multiple is applied and that is used along with other factors to value a business.

By comparison a top tier property is basically the opposite of the above and typically it meets the wish list of most buyers being:

• Largely purpose built with single en suite facilities
• Exceeds care standards
• Has high average fees
• Strong record of profitability with EBITDA equivalent to £10,000 – £13,000 per bed per annum
• Low agency and likely the dominant local provider
• It may be located in an area with high barriers to entry perhaps due to land prices or planning policies
• Potential remaining either to expand, improve fees or enhance profitability.

A property in this tier might sell at an 8 – 10 multiple of EBITDA or £80,000 – £100,000 plus per bed plus any value for planning or potential.  Typically this could be from £10,000 - £20,000 plus per bed.  This is either paid on completion of sale or if the site has potential but no planning by way of a 5 or 10 year overage agreement.

The middle tier will aspire to these criteria but with some blurring at the edges and overlap being:

• Largely purpose built or be a high quality conversion with majority single rooms
• Be compliant or readily adaptable
• Have a strong trading record with scope to improve and have profitability around £7,000 – £10,000 per bed per annum.

A unit in this tier might sell at a 7 – 8 plus multiple of EBITDA or £55,000 – £80,000 per bed plus a value for planning.

Conclusion

The Savills healthcare team has experienced reduced levels of sales activity in the lower market tiers however demand for quality care homes in the mid and upper tiers of the market remains strong with a shortage of stock.

Opportunities to purchase good quality care homes as going concerns remains rare as potential vendors are unable to see comparable returns from the release of their equity as interest rates remain low. Additionally if a care operator was looking at creating a group of care homes via organic growth it would not be unreasonable to say that it would take them 5 – 8 years to acquire the land, construct the properties, commission and trade The opportunity cost of doing this would be substantial and typically land and build costs are circa £80,000 per bed before you start trading the home and thus acquisition of quality going concerns will remain an attractive option for aspirational purchasers.

There is no doubt that the next year will be a challenging one but as demand still far outweighs supply prospective vendors may very well see this as an opportunity to maximise the capital receipt of their business.