Ben Barbanel, Head of Debt Finance at OakNorth Bank
The UK’s social care industry is one of the biggest and most important in the UK. There are more than 1.5 million people working for organisations that provide social care and support services to people all over the country, contributing an estimated £43billion to the economy[1]. In England alone, the sector has created over 17,000 organisations and seen the development of just under 40,000 physical sites across the country[2].
Elderly care and retirement living are important sub-sectors of social care – according to the ONS, one in four people in the UK will be 65 or over by 2050[3]. This, coupled with higher living and healthcare standards is resulting in a greater life expectancy, which in turn, is amplifying the need for more elderly care in the future.
The importance of specialist care
With more people in the UK being diagnosed with dementia, the need for specialist care is essential. The disease is an ever-growing challenge for the both the NHS and specialist care home operators, with the illness now being universally seen as one of the most critical health and care issues faced not only in the UK, but the world. Dementia is one of the main causes of later life disability, ahead of cancer, cardiovascular disease and stroke, with the UK currently seeing 850,000 people being diagnosed, a figure that is projected to increase to 1.6 million by 2040[4]. As a result, there is a considerable economic cost associated with the disease – £23 billion a year – which is predicted to triple by 2040[5], and equate to more than the cost of treating cancer, heart disease and stroke patients.
The need for specialist care homes in the UK is increasing and additional investment in growth is required to meet current and future demand. We’ve done quite a bit in this space – for example, last November, we completed a £26.3million loan to Frogmore, the UK-focussed, fully integrated real estate investment manager, to develop a 35-bedroom specialist dementia care home situated in the City of Westminster. Then only a few months back, we supported the Care Concern Group, one of the UK’s most highly-regarded care home operators, with an £18.5million facility to develop a new 81-bedroom care home in Aberdeen, specialising in dementia care and providing facilities such as hair salons, cinema rooms and a library, emphasising the Group’s focus on delivering a high calibre of care.
The impact of the global pandemic
Pre-pandemic, we were seeing a healthy amount of growth in the sector. As a lender, we had, and continue to have, strong confidence in the sector, but it’s clear COVID-19’s impact on care homes has been dramatic and long-lasting. The UK has experienced a devastating number of deaths among care home residents, which unfortunately brought long-standing problems with care home provision to the forefront of the general public’s minds. HC-One, the UK’s largest care home provider recently revealed that the pandemic claimed more than 2,000 of its frail and elderly residents, with the industry being far from in the clear still to this day. According to The Financial Times, 43 of HC-One’s 326 homes are still in a state of lock down and closed to new residents, with occupancy rates remaining at least 10% below pre-pandemic levels[6].
Furthermore, according to a report in July from Christie & Co, 39% of care home operators said occupancy levels were below 80%[7], which is not sustainable in the long-term. Compounding these challenges is the fact that the furlough scheme ended on 30 September – a scheme which was used by almost a quarter of operators at the peak of the crisis. With government stimulus like this coming to and, we will see a cliff edge, dividing operators into two streams: those which are going to surge ahead and do well in the recovery, and those which unfortunately are not going to make it through.
The aftershock of the pandemic will likely be felt by care home and retirement village operators for years to come, but every crisis presents new opportunities, and for those that are well-capitalised and keen to grow, it is an opportune time. We are likely to see an increase in M&A activity over the next 6-12 months. In June this year for example, we completed a £50 million loan to Brigid Investments, a special purpose vehicle formed by John Laing, and Macquarie Capital, for the acquisition of approximately 250 UK wide, newly built and fully occupied rental retirement properties, operated by McCarthy Stone. The facility also provided Brigid Investments with the opportunity to develop a scalable platform moving forward, in partnership with McCarthy Stone, resulting in a commitment to finance a further 400 rental retirement units over the next 12 months.
Social care moving up the political agenda
The pandemic presented a harsh reminder of the importance of the social care sector, particularly elderly care. With families unable to visit loved ones in care homes and retirement villages, they relied on the commitment of key workers to ensure their relatives were taken care of not just physically, but also mentally.
The recent flagship announcement[8] from the government will see £12 billion per year invested in health and social care over the next three years which will come as a welcome respite for the sector. This policy, which demonstrates the importance of the sector to policy makers, is set to directly help about 150,000 more people at any one time, according to government documents[9]. Last month, Westport Care Home in Stepney Green was visited by Prime Minister Boris Johnson, Health Secretary Sajid Javid, and Chancellor of the Exchequer Rishi Sunak to discuss the need to support care homes with the cost of delivering care[10].
Changing demand
Care homes and retirement villages have historically been misunderstood, being seen by many as morbid places to wait out the rest of your life until you die. However, the pandemic has fortunately changed these perceptions, as well as what residents are looking for. One of the key themes that has emerged is how elderly people think about their quality of life, their surroundings, and the increased importance of having a sound support bubble. Many have spent much of the past 20 months in near-isolation, not being able to see friends and family, and if their home doesn’t have any outdoor space, spending a significant time indoors.
There is therefore now an increased focus on senior living providing a hospitality and service environment that goes beyond food and beverage, and fundamentals such as a nice kitchen, to offering a range of lifestyle facilities such as restaurants, lounge areas, hair salons, and cinemas. Residents aren’t simply looking for a new home, but rather a community where they can age and have their increasing care needs addressed over time. For example, in January this year, we completed a £42 million transaction to a vertically integrated retirement living investor, developer and operator to develop 84 retirement homes in a purpose-built village in South-East England. The new scheme will consist of extensive health and recreational amenities, including a spa and treatment rooms, pool, gym, lounge bar, library and restaurant.
A survey from The Associated Retirement Community Operators last year found that 65% of operators believe the most common drivers of the increase in demand for retirement communities is the desire for additional company and social interactions and a realisation that their home is no longer fit for purpose[11].
Another trend that has emerged from the pandemic is the increased focus on sustainability and heightened environmental awareness. According to a survey from Boston Consulting Group of more than 3,000 people across eight countries, 70% of people are more aware now of how human activity impacts climate and the environment, than they were pre-COVID-19[12]. With COP26 swiftly approaching, climate change is solidly at the top of the agenda.
Operators are therefore having to think about how they can cater to this and younger generations who are more environmentally-conscious and keen to place their elderly relatives in more sustainable homes. For example, a few months ago, we completed a transaction to support the first acquisition of a new joint venture between FORE Partnership and Amicala, that intends to develop up to £300m worth of ultra-sustainable net-zero extra care later living schemes.
The road to recovery
Since our launch in September 2015, we’ve lent approx. £200 million to the elderly care sector, supporting many of the UK’s leading operators. A good chunk of the funding we’ve done recently has been focused on growth – i.e. how can we help an operator grow the number of homes they operate, increase their regional presence with an appropriate structure in place that balances both debt and equity, etc. In addition to this, we’ve done a number of transactions where we’ve provided roll-out facilities for growth and capital expenditure – an area we expect to do more of over the next 12 months. Understanding the dynamics of a business – whether the model is predicated on freeholds or on leaseholds, what the management team looks like, how aggressive the growth aspirations are, etc. are all really important.
Our outlook for the sector remains bullish, so if you’re an operator looking for capital to grow – whether organically or through acquisition – do get in touch. We provide loans of £500k up to £50m and aim to complete transactions in days or weeks vs the months it takes traditional banks.
[1] Prospects – Overview of the social care sector
[2] Skills for care – The size and structure of the adult social care sector and workforce in England
[3] ONS – Overview of the UK population: January 2021
[4] Alzheimer’s Society – Facts for the media
[6] The Financial Times – Care homes struggle as pandemic prompts changes to business model
[7] Christie & Co – Care Mid-Year Review 2021
[8] Gov.UK – Our Plan for Health and Social Care
[9] The Guardian – Social care plan will help just a tenth of UK’s older people in need
[10] The Carer – Boris Johnson Visited Westport Care Home Ahead Of Social Care Announcement
[11] ARCO – Retirement communities
[12] BCG – The Pandemic Is Heightening Environmental Awareness
