By Ben Barbanel, Head of Debt Finance at OakNorth Bank
The COVID-19 pandemic has and will continue to have a lasting impact on all our lives. Throughout the past 12 months, British businesses and communities have shown immense resilience and creativity, even in the most challenging of times.
While the road ahead will be challenging for communities and economies globally, it is vital that all of us play a key role in the rebuilding of communities and the UK economy.
One such industry that has shown resilience and grit during the pandemic is the care home and retirement living sector.
At the start of 2020, care homes and retirement villages were seen as going from strength to strength as an asset class. As the pandemic came to the UK, care home and retirement living operators and owners switched from focusing on growth to implementing new safety measures to ensure their residents and staff were safe, while halting any potential outbreaks.
From what we’ve seen so far, care homes and retirement villages will end up being one of the winners from the pandemic and there are a few reasons for this:
Pent-up demand for care homes and retirement villages
The pandemic has made many elderly people think about their quality of life, their surroundings, and the increased importance of having a sound support bubble. Many may have spent much of the last year 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. Moving to a rural retirement village means residents become part of a community while also benefitting from outdoor space as well as shared spaces. People have also realised that the upkeep of their own homes is hard, costly, and ongoing, hence why moving into a care home or retirement village has savings and aggravation benefits too.
A survey from The Associated Retirement Community Operators (ARCO) late last year found that 65 percent of operators believe that the most common drivers of the increase in demand for retirement communities are the desire for additional company and social interactions and a realisation that their home is no longer fit for purpose.
Not only are we seeing retirement villages and communities becoming a more popular alternative to care homes, the quality is also improving as more care home operators and owners are seeing the importance of added amenities like a cinema, restaurant, bigger community gardens and more.
According to Knight Frank’s Healthcare Development Opportunities Research 2020, the UK’s over 85 population will grow from 1.6 million in 2020 to 2.1 million by 2030, and 3.7 million by 2050 as the post-war baby boom generation reach their twilight years. While the UK is building new care homes and beds, the pace of development is not in keeping with elderly population growth. The number of care home beds per 100 people over the age of 85 has fallen from 33.7 to 28.7 since 2010 and is forecast to fall even further. This creates an opportunity for experienced management teams in the sector.
What lenders look for when lending to a care home operator or owner
In OakNorth Bank’s case, we’re relatively unique in that we can pull together both development and owner-operated funding into one solution, as we’re not sat in separate teams (i.e. real estate or corporate) within the bank. This gives us and the borrower greater visibility and transparency throughout the entire process.
Since our launch in 2015, OakNorth Bank has supported the later living sector by providing fast, flexible and accessible debt finance. Since the start of 2020, we’ve completed numerous deals to support the sector:
- A £9.4m loan in January 2020 to Care Concern Group, a leading dementia care home that operates over 80 sites, to acquire a care home in Birmingham.
- A £20m transaction in January 2020 to LV Care Group, a leading care home provider in Jersey, to support the acquisition of two new sites in Jersey and the Isle of Man.
- A £4.4m CBILS loan in February 2021 to complete the development of Beulah Vista Caring Home, a 60-bed purpose-built care home in Upper Norwood, London.
- A £42m loan in January 2021 for a client advised by CBRE for the development of a new retirement village in the South East that will include extensive health and recreational amenities, including a spa and treatment rooms, pool, gym, library and restaurant.
- A loan in January 2021 to Macc Care, the Birmingham-based care home group, to support the development of a new c. 55,000 sq.ft. care home development comprised of 80 bedrooms, a lounge and dining space, a cinema, hair salon and more in Solihull.
- A £26.3m loan in November 2020 to leading real estate fund manager, Frogmore, for the development of a new 35-bedroom specialised dementia care home in Westminster
Given that our loan size ranges from £500k to £45m, we primarily focus on owner-managed businesses with a handful of sites or private equity-backed operators who have a high-quality care provision reputation and management.
There are a number of factors we look at when considering whether to lend to a care home operator:
- We look at existing stock in local competing areas – how much supply vs demand is there?
- The quality of stock – how modern is the property, what are the specifications (i.e. is it purpose built, en-suite, wet rooms, amenities, etc.)?
- The experience and track record of the management team
- Do they have other care homes in their portfolio? If so, what are the occupancy rates? What are the CQC ratings?
- The location of the care home as this will impact demand and the quality of life for residents
- Has the management team put their own money into the business? Do they have skin in the game?
- Have they thought about potential road blockers like development delays or additional waves of the pandemic?
The future of care homes and retirement villages in a post-COVID world
Just as in any crisis, opportunities are created and for operators and owners in this space, it could represent the chance to acquire a new site at a discounted price, build or repurpose and existing property, or make renovations and upgrades that they’d been putting off.
As evidenced from the above, we’ve been supporting the retirement living and care home sector before and during the pandemic and will continue doing so throughout 2021 and beyond.
If you’re a care home operator or owner and are looking to scale over the next few months, please get in touch ([email protected]) and I’ll see if we can help you achieve your growth ambitions!
