By Dale Cowdell, Debt Finance Director, OakNorth

There’s a structural problem at the heart of the UK care sector that’s becoming harder and harder to ignore. The population is ageing, demand for high-quality beds is rising, yet the number of beds actually reaching the market has stayed broadly flat. New homes are being built – but not nearly fast enough, and not always in the right places. Purpose-built, modern care homes represent a small fraction of what’s available today, while an increasingly affluent elderly population is discovering that the stock simply isn’t there to meet their expectations.

That mismatch between expectations of our growing elderly population and limited quality supply is, in my view, one of the most compelling long-term investment cases in UK property. The question for ambitious operators is how to position themselves to capture it.

Why the timing is better than it’s been in years

The last few years were genuinely difficult. Construction costs climbed, land got expensive, and rising interest rates made the economics of new development much harder to justify. A lot of deals that should have happened simply didn’t.

The direction of travel is now improving. Construction inflation is levelling off and conditions for both development and acquisition are becoming more supportive. While near-term volatility remains – particularly if inflation proves more persistent – the medium to long-term outlook is more positive. Operators who have been waiting for a clearer window are beginning to find it.

Capital structure for the ambitious operator

Every operator I speak to wants to grow. The question is always how, and how to finance it. In practice, growth comes via three routes: buying an existing home, building new, or leasing. Most successful operators end up doing all three at different stages, each with a different capital structure.

Buying an existing care home is the quickest route to cashflow, since you’re acquiring a running operation with residents and occupancy already in place. The challenge, however, is finding the right asset at a price that works, and what value you can add, particularly as consolidation at the top end of the market accelerates.

Building aground up scheme is where real value can be created. The economics of developing a well-located, purpose-built home, which involves carrying the build cost, then stabilising occupancy over 12 to 18 months, can deliver a very significant return, if the additional risk is appropriate to take

Leasing, particularly through sale-and-leaseback structures, is increasingly popular for operators focused on scaling quickly. The attraction is immediate cashflow from day one, without needing to carry freehold capital through a long build or fill-up period. The trade-off is paying rent rather than building equity, a calculation each operator has to make for their own growth strategy.

The most resilient operators I work with tend to run a mixed portfolio: freehold assets they’ve built and own outright, generating long-term equity, alongside leasehold properties that produce immediate income and fund the business while the next development comes through.

How the sector is evolving

At the bottom end of the market, sub-30 bed homes are becoming increasingly difficult to run profitably. Staffing costs have risen, and economies of scale matter more than they once did, which is squeezing that part of the market out. At the same time, branded groups are emerging at the quality end – operators delivering consistent standards across multiple locations, in a way that’s starting to resemble the hospitality sector. Families choosing a care home increasingly want to know what they’re getting before they arrive, and that kind of brand consistency is becoming a genuine competitive advantage.

The sector is also attracting international capital. US funds have become increasingly active in the UK, drawn by the demographic tailwinds and the high proportion of private-pay residents at the quality end of the market. That’s a validation of the investment case, but it also means more competition for the best assets.

What we look for – and what we offer

The operators who succeed at scale all balance operational quality with financial discipline but the desire to deliver exceptional care is key.

At OakNorth, we can fund the full lifecycle of a care home project from development finance through the build, into the stabilisation period, and through to mature trading. Most lenders will cover one or two of those stages. We can take a project from the ground being broken to the last bed being filled, without the operator needing to refinance in the middle. Each refinancing costs time, money, and management focus that most growing businesses would rather not spend.

The demographics are compelling, the undersupply is real, and conditions are better now than they’ve been in several years.