Care Home Investment
CategoriesInvestor Advice

 

Introduction

As well as plenty of the investors we speak to each day, from those starting out to those with extensive global portfolios, powerhouse property companies such as Knight Frank and Savills are demonstrating significant interest in the healthcare asset class. In 2017 there was £1.32bn worth of documented investment transactions in healthcare, see here.

Savills recently commented on healthcare investment becoming mainstream here – “Over recent years, the healthcare market has positioned itself as a more mainstream asset class offering, in many cases, a secure income against a strong operator covenant. The sector has seen renewed interest from overseas investors, particularly from China and the Middle East, while also remaining popular with UK pension funds and insurers.”

Investment Structure

We work with established developers from across the UK, our role is to market and effectively sell the individual properties within developments, if that be traditional residential, care, student or hotel assets. As a result, we have an in-depth understanding of the pros/cons of each market and how the care sector really differentiates itself. Below I’ve detailed some of the key aspects:

High Rental Return – one of the first things most investors look for in examining an investment property is the rental income. It’s important not to analyse this as a cash figure, but more so in relation to the cash outlay/purchase price. We work on a NET return basis, as an example, if you invest £100k and earn £6k per year (after all costs), in income, this is a 6% NET return. In regional cities such as Manchester, Liverpool, Leeds etc you will be able to find residential properties which return 6/7% NET. The Care sector offers 8-10% NET returns, so in terms of cash flow and regular income, it’s more lucrative compared to traditional single let properties.

Assured Income – with care properties, the developer that owns the care home will contractually guarantee your income. So commonly your rental return of 8-10% is fixed for +10 years, this provides certainty and predictability knowing there will be no fluctuations in your income (some developers provide the assurance for the entire lease period up to 250 years, others will renew the contract after the first 10 years). This is typically for a longer period compared to student accommodation which is normally 2-5 years.
Exit Strategy/Buy Backs – one of the most commonly asked questions from those considering investing in the sector is the resale ability. The flexibility is lower than what you will find in the traditional residential property industry. With a residential apartment you can sell to an owner-occupier, mortgage investors, cash investors etc. With the Care sector, it’s more niche so the resale market is more limited. To combat this, developers offer ‘buy back’ terms within their sale agreements. This is the developer contractually guaranteeing they will buy the unit back from you in the future at a pre-determined price/timeframe, typically from year 3 onwards. I could write extensively about buyback options, but I’ll keep it brief for the purpose of this article, just be aware there is a secure medium/long term exit strategy in place, providing inbuilt capital growth.
Fully Managed/Fewer Costs – sometimes investors confuse a property being managed by a letting agent and a fully managed investment structure. If you buy a residential property or if you consider student accommodation after the fixed income period, your property will be subject to charges and upkeep costs such as service charges, ground rent, management fees and maintenance costs. Now although you can predict your return NET of these costs, it will, at some point eat into your returns and your time. If the property needs painting, needs new furniture, the tenant pays late, or there are void periods – your agent will be on the phone to you. The care sector is truly fully managed; therefore, the management company will cover all costs and will maintain the room, not eating into your time or profit margins. Finally, in most cases, there will be no Stamp Duty Land Tax due on purchases.
Listed above are the key advantages in terms of the investment structure, the returns and buyback terms will vary depending on the developer, but the overall investment conditions will be similar.
Market Analysis

Moving onto the market conditions, I’ll focus more on the statistics in this section for those that like to analyse investments based on hard data.

Demand – firstly, we all know we are living longer with advancements in medical research and improved technology, the older population is increasing. According to the Office of National Statistics, in 2016 the UK population was 65.6m, the largest ever. 18% of this population was quoted at over 65 and 2.4% aged 85 and over – see here. The UK has a long history of providing quality care home accommodation, the demand for such accommodation is already substantial and will only increase into the future as the population continues to live longer. The occupancy rates for all care homes across the UK for 2018, is at 89.4%, see here. The lack of government funding for the public sector means publicly funded built and operated care homes are less common, as a result, private providers e.g. developers are stepping in and meeting the demand for quality accommodation within the market. Knight Frank quote there is likely to be a shortfall of 192,000 care suites by 2024.

Profitability – whilst most care homes have a mix of funding methods e.g. local authority, NHS and privately funded residents, the fees are substantial for all residents. The average fee for a care suite across the UK in 2018 was £733 per week, some of our developments go over £1,100 per week. Throughout 2017/18 Knight Frank reported the EBITDARM (% of income) was at 28.3% for all care developments e.g. profits on fee total, see here. It’s clear to see the margins developers make and how they can afford to pay out such returns. Although, as an investor, your income is fixed, of course, it’s important and provides comfort that the development itself is profitable, justifying how the developer can pay such returns.

Are there any disadvantages?

Whilst the lucrative returns and demand for the sector draw the attention of many property investors, there are some ‘cons’ to the asset class which you must be aware of.

Resale Ability – as touched on earlier, care rooms can only be sold to cash investors or back to the developer through the buyback option. If flexibility to exit, e.g. you think in a couple of years you may need to suddenly leave the investment, is one of your concerns, then care is not for you.

Medium/Long Term – if your main objective is capital growth, e.g. seeing the value of the property increase year on year and you’re willing to take a hit on the cash flow/rental income, then I would say stick to residential. Care investments are ideal if you’re looking for a 5-20 year property investment and if you want immediate, secure, stable income rather than speculating on a property value increase, although, of course, increases are likely.
Cash Outlay – as mentioned mortgages can’t be secured against this asset class (the same as student, hotels etc), therefore you must be willing to invest the whole property value. In many cases those who have secured a mortgage recently, based overseas or simply don’t want the liability then this is ideal, but if you have £30-£50k as a deposit, then I would advise leveraging with finance to secure a traditional buy-to-let as you want to make the funds go as far as possible.
Is it an ethical investment?

The ethical factor of investing in care homes is also a common point of discussion. Private investors in this sector are enabling developers to build and manage much-needed accommodation, with demand increasing substantially in the future, many care homes are considered absolutely essential to plenty of local communities where some of the most vulnerable members of our society live and socialise.

Care homes are heavily regulated by the Care Quality Commission, with online reviews and more exposure into the quality of the home and care service provided, the transparency in the industry has improved drastically over the years. The demand for care will reach the headlines more and more over the coming years and private developers are essential to meeting this demand. By investing in care you’re indirectly assisting in providing a home to elderly residents, of which some rely on. As a company which is marketing such investments, you would expect us to form the above opinion. However, I would encourage all investors to conduct their own market research and due diligence on the sector, demand can simply only be met by private developers, who can only grow their portfolio’s through private investor equity.

Summary

I think that’s enough for now but hopefully, you can see the benefits of investing in the care sector. If you have any questions such as Brexit related points (Knight Frank quoted the care sector as the asset class least affected by Brexit as demand is related to domestic factors), management of the property, the developer going bust etc, please contact us using the details below.

To summarise, if you’re happy with a cash investment of +£70k, want high, predictable income and are looking to hold for the medium to long term, then I would argue care is one of the more attractive asset classes.

Contact us today by calling 0203 815 6654 or send us an email to [email protected] asking for further details on the care sector.

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