Annual UK care sector roundtables and survey report 2016/2017

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Contents  3   Introduction

  4  Significant further findings

  5  Staffing looms largest of providers’ concerns 

  8  Quotes from around the country

  9  A view from Barclays – Paul Birley

10  A view from Pinsent Masons – Joanne Ellis

11  A view from Knight Frank – Care home trading performance

16  Conclusion

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IntroductionCosts and recruitment concerns temper operator confidence in their businesses.

Late in 2016, Barclays, Knight Frank, Pinsent Masons and Caring Times conducted an online survey of sentiment in the residential care sector. This was the sixth consecutive survey, making a valuable contribution to tracking trends over recent years.

Biggest challenges

Rising staff costs and the challenges of recruiting staff continue from last year to be the areas which most concern operators. 85% of operators completing the survey said they were having difficulties in recruitment and, frankly, the major story here was that 15% said they were not. 

Difficulties had already been identified by operators before Brexit but the UK decision to leave the European Union (EU) has intensified problems. There can’t be an operator who hasn’t been asked by existing staff what their future is. The inability to answer with any certainty has already impacted staffing levels (retention) and the numbers of new recruits attracted by work opportunities in the UK (recruitment).

Interestingly, during discussion, there was a minority view that Brexit might be good for recruitment because it would force the Government to be more welcoming to staff from countries like the Philippines, Indonesia, India and parts of Africa, who would more than make up the shortfall from continental Europe. It has to be emphasised that this was not an opinion that was shared by the majority.

Local authority fees continue to be a major concern for just over half the operators surveyed. As a challenge it has therefore declined in perceived importance over recent years although the level of fees does, of course, continue to be a fundamental business driver. Other areas which are now perceived to be less worrisome than in previous years include maintaining a good reputation and the regulatory landscape.

During discussion, it was noted that there continue to be concerns around the subjective nature of Care Quality Commission (CQC) inspections and the perceived lack of a level playing field for care homes but the heat appears 

to have gone out of this conversation. Perhaps with increasing familiarity and maturity now that CQC is over seven years old, there are grounds for optimism for a more mutually supportive relationship.

The increasing dependency of residents when they first arrive at care homes is frequently discussed and would seem to be confirmed by the survey, with 86% of respondents saying that they have noticed increasing frailty among their clients when they first arrive. 

Interestingly, they also say that as many as 42% of their residents stay for two years or more and a further 20% stay for 18-24 months. Only 4% pass away within six months, a much lower figure than one would expect given the increasing frailty of clients on admission. Most respondents (64%) think length of resident stay has stayed the same, with 30% thinking the stays have increased in duration.

Feeling the pulse of the care home sector by measuring confidence levels provides a valuable index, albeit open to subjectivity. One result from the survey particularly stands out: over 80% of respondents said that their occupancy levels stood at over 90%. Given that 90% and over is the ‘Holy Grail’ of occupancy levels, this survey response is very positive and suggests cause for optimism.

In addition, when asked how confident they were about the prospects for their organisation, nearly 70% said they were either ‘extremely confident’ or ‘confident’ and only 5% had ‘no confidence’ at all. As has been seen in recent surveys, care home operators tend to feel much less confident about their sector than their own organisation and again, in 2016, two thirds felt less confident about the sector than the previous year.

When asked whether they would consider selling their business, 84% of respondents said they would not. Make of this response what you will. It could be that owners and senior management are feeling concerned about the sector at the moment and are waiting for a better moment to sell. Or, more optimistically, it could mean they are feeling confident about their businesses and have no desire to sell.

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Significant further findings 

•  88% respondents said they believed there was a North/South divide

•  Operators were split 50:50 between those looking to expand and those not thinking along those lines

•  13% of operators said their fees had decreased, 28% said they had stayed the same and the rest said they had risen

•  Domiciliary care is viewed as the greatest threat to occupancy in care homes by a third of operators. Care villages follow this, followed by extra care, and registered social landlords, with technology in last place

•  Local competition from other operators was regarded as a significant threat by as few as 9% of respondents. How things have changed from the days when operators were very competitive and wary of sharing anything with other operators

Significant further findings•  ‘Falling business valuations’ was another challenge 

that used to concern care home operators but now only 16% see valuations as an issue, indicating that businesses are more stable than they used to be, in spite of decreasing profit margins 

•  When asked about the importance of various factors when considering selling their business, over 70% of respondents considered price to be the most important factor. Proof of funding, the ongoing sustainability of the business, and the quality of the purchaser were noted to be other important factors

•  Interaction with local authorities seems to be slowly increasing. 35% of respondents reported an improvement, while only 16% reported a decrease in interaction. Just under a third of operators have a joint venture with a local authority or other public sector body 

•  And to finish on a positive note, no timetables are mentioned but 62% of operators still think the integration of health and social care will have a positive effect on their business.

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Staffing looms largest of providers’ concernsThe 2016 survey was used as the basis for a number of regional roundtable discussions where care providers, big and small, discussed the results in the context of the issues of the day. Here we report on the roundtable discussions held in Birmingham, Bristol, Cardiff, York, Lewes and London.

Laying it on the table at Lewes

It was clear from discussion even before the meeting formally convened that recruitment- especially given the lack of nurses- was perceived as the main challenge facing care providers. “Finding good nurses is the problem,” said David Holmes from Ashcroft Care. Downing’s Graham Elliott added that staff poaching has become common. 

Once the meeting was formally introduced by Barclays’ Paul Birley, delegates could not help sliding back to that perennial topic of conversation in care home circles – CQC. Liakat Hasham from CHD Living summed it up for everyone: “Inconsistency is the big issue,” he said. 

Generally, those around the table felt there would be a small ongoing decline in the number of care homes over the foreseeable future although alternative models, such as supported living, were not making the progress in the UK that they have done in Europe and the USA. Smaller homes are the most likely to be sold, mainly because they can be put to alternative use, explained Sam Wright of Knight Frank.

Daniel Braithwaite of Pinsent Masons agreed. He noted that he was seeing plenty of M&A activity and companies with the strongest balance sheets doing well. Overall, confidence levels were high – on average 4, (where 5 is very confident and 0 is not confident at all). As always, delegates were more confident about their businesses than the wider sector.

Providers need to respond quickly

Evolve Care Group CEO Preyen Dewani told colleagues at the Bristol discussion that confidence was increasing among mid-market providers because they are more flexible, more nimble, more adaptable organisations 

that can respond quickly to external pressures. Richard Deverson, Operations Director at Windmill Care, agreed: “I think it depends a lot on your size,” he said. “I think some of the big providers will be feeling a bit nervous.” 

Pinsent Masons’ Sean Elson reported that heavier penalties for health and safety breaches had emerged as a major threat in the care sector. “The main headline is the new sentencing regime for health and safety breaches of care and treatment,” said Sean. “Some of the fines are at existential threat level for some organisations. We’ve seen fines in excess of £1.5m in the last few months.”

Knight Frank’s Paddy Evans said that building new capacity was being made problematic in some areas because of escalating development costs: “These have pretty much doubled in the last six or seven years,” he said. “Build costs, excluding land, are somewhere between £80-100k per bed.”

Those around the table were cautiously confident, with an average score of 4, but staffing, the National Living Wage and recruitment issues were a significant worry for all.

Concern and caution in Cardiff

In past years, the annual visit to Cardiff Castle for the roundtable meeting was a positive experience where Welsh social care providers demonstrated that their business was considerably less pressured than those of operators in other parts of the UK. In 2015, that comfort zone was a little less solid and this pattern was repeated at the end of 2016, when Welsh owners showed significant unease in a number of business areas.

Staffing was the most discussed topic. Mike Davies of 

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Mavalon Care and Mike Slotor of Osborne Care Homes both highlighted nurse recruitment as a huge issue in Wales. Barclays’ Paul Birley suggested that innovation in recruitment was now the key and referenced initiatives such as providing staff accommodation. 

Hand in hand with recruitment issues goes the rising cost of staff. The cost of employing nurses has risen to such a point that, as in the rest of the UK, questions were raised about what exactly the role of the nurse is and whether some of their tasks, like dispensing medication, could be delegated. Nursing assistants and apprentices were offered as alternative options to help the recruitment crisis.

A new issue raised was the increasing divergence between the public and private sectors. The harmonious scenario whereby private clients subsidised publicly funded clients within a single home is beginning to break up. This is primarily due to the inability – or refusal – of local authorities to pay the fee increases which providers feel they need to charge their private clients in order to maintain standards. There is also a mounting perception among private clients that they should not be obliged to subsidise the public sector.

Perhaps as evidence of the diverging markets, one or two providers felt that the Care and Social Services Inspectorate Wales (CCISW) is inspecting private providers more attentively than predominantly public sector providers.

Solid confidence in London

The significant feature of the meeting in London was its optimistic outlook despite all of the challenges that the year had seen, both within the sector, nationally and internationally.

This positive tone was set immediately by Joanne Ellis of Pinsent Masons who described their year as “very busy and active”. One of the few negatives she had experienced was the increasing use of fines against senior company personnel for breaches of health and safety legislation. This is a worrying personal development for company staff.

Paddy Evans from Knight Frank said that institutional appetite for the sector remained strong post–Brexit, to the surprise of some. In particular, big pension funds had retained their investing enthusiasm – a positive for social care because it is precisely their kind of long-term 

investment that the sector needs.

When asked to score their confidence levels out of 5 (where 5 is very high and 1 is very low), attendees recorded a very solid average of 4, with no-one below 3.5. Demographics, confidence in their own abilities, and special opportunities, such as the need for high dependency care and step-down care, were their drivers.

Inevitably, there was some discussion about negatives. The difficulties in staff recruitment and retention, staff burnout, stagnant fees and the impact of the National Living Wage and Brexit were all areas of concern. For some, the elephant in the room was the future role of technology in health and social care – is it going to help or hinder?

Technology improves transparency

Roundtable participants in Birmingham also scored highly on the confidence index, with an average of 4.5, but staffing issues remain worrisome. “We operate a lot of nursing homes,” said Al-Karim Kachra of Country Court Care. “As a hands-on family business, we have been able to keep agency costs low but now they are spiralling. Perhaps that will worsen in post-Brexit UK.”

Knight Frank’s Head of Healthcare, Julian Evans, said there were about 6000 operational care homes which had 30 beds or less and that these were most at risk of going below the viability threshold. “Our modelling shows that these homes will be exceptionally vulnerable to the National Living Wage over the next five years,” said Julian. “So I see the supply and demand for beds as a massive issue and good operators are likely to benefit from increasing occupancy.”

Technology, it was agreed, has an ever increasing role to play in care home operation and Marches Care’s Mandy Thorn said falls mapping software had been very useful in identifying areas and circumstances which were predisposed to falls occurring. “We have seen this reducing falls, especially in our specialist dementia unit,” said Mandy. “We have reduced falls by about 15% because we have identified what the triggers are.”

Other areas of care where technology is now widely used include electronic medication records, care planning, and rostering. Electronic care planning was identified by several providers as improving transparency and communication between care staff and residents’ families. The routine use of surveillance cameras to 

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monitor staff, however, was not supported by providers.

Failure to tackle the stigma of social care

Providers in York were critical of public bodies and their interaction with the social care sector. Tony Cole of Grafton Land and Property identified a lack of joined-up thinking between the NHS and social care: “The huge assets that the NHS is sitting on could be used for intermediate care but they’re not being used,” he said.

Xavier Adam of investment firm AMC Network said the sector still had a big image issue after various big groups had gone bust. “The uncertainty about the public funding of social care is making investors cautious about the future viability of some facilities,” he said.

Daniel Braithwaite of Pinsent Masons said he was concerned by the punitive approach being taken by the regulator and referred to the care provider Embrace which had been fined £1.5m. “For a firm worth about £70m, this is a huge fine,” said Daniel. “On top of that, the fine for the manager was £20,000 with a nine month suspended sentence. At a time when the sector is trying to recruit good people and retain good managers, that has to be a significant disincentive.”

Chris Mitchell, Chairman of Park Lane Healthcare, which operates seven homes in the north of England, said his concern was the prevailing ‘blame culture’: “There’s a big stigma attached to social care but no-one wants to tackle it,” he said. “Successive governments have just kicked the can down the road.”

8

Quotes from around the country“Being a hands-on family business, we have been able to keep agency costs low but now they are spiralling. Perhaps that will worsen in post-Brexit UK.”

– Al-Karim Kachra, Country Court Care

“Our modelling shows that these homes will be exceptionally vulnerable to the National Living Wage over the next five years, so I see the supply and demand for beds as a massive issue and good operators are likely to benefit from increasing occupancy.”

– Julian Evans, Head of Healthcare, Knight Frank

“Most providers will be aware of the heavy penalties that have been handed down to Maria Mallaband and Embrace for health and safety issues, and we see that trend continuing. So this is an extra level of concern overlaying issues around funding and recruitment. The scrutiny is greater and the penalties, when enforced, are far more severe.”

– Sean Elson, Pinsent Masons

“Our major challenge is how to grow in a controlled way without compromising the quality of the services we deliver. The growth potential is enormous and the question for us is how to participate as a charitable provider.”

– Mark Terry, Financial Director, MHA

“We have taken a decision to continue taking local authority funded clients but it is becoming more difficult.”

– Mandy Thorn, Managing Director, Marches Care

“Nurses are choosing to do agency work rather than be tied to a single employer and that’s a real challenge.”

– Julian Ball, Chief Executive, Lighthouse Healthcare

“People don’t want to see CQC visiting a service every two years; I think they want them in there every other month. The only way they can do that is to stop going in mob-handed, seven at a time, to a 30-bed home, to do a three-day inspection.”

– Tony Stein, Healthcare Management Solutions

“Development costs have pretty much doubled in the last six or seven years. Build costs, excluding land, are somewhere between £80-100k per bed.”

– Paddy Evans, Knight Frank

“Confidence is increasing among mid-market providers because they are more flexible, more nimble, more adaptable organisations that can respond quicker to the pressures that are out there.”

– Preyen Dewani, Chief Executive, Evolve Care Group

“We are seeing quite a reasonable banking appetite for lending to the sector. The concerns the banks have are reputational and also concern the increasing politicisation of the regulator.”

– Matthew Clayton-Stead, Pinsent Masons

“Technology is the great disrupter in healthcare.”

– Tim Chaudhry, Exceptional Group

“My greatest concern is the increasingly high dependency of residents.”

– Ravi Gidar, Goldcare

9

Staffing, both in terms of recruitment and retention, especially of nurses, remained a challenge over the year, as reflected by the fact that it moved to be the most significant concern of operators in this year’s survey. The Care Quality Commission (CQC) was never far away from the thoughts of operators and we also saw some large operators hit with hefty fines. The NHS was also often in the headlines as it struggled with funding and demand challenges.

The challenges make one wonder: why would anyone want to be involved in the sector? However, in spite of these concerns, most of the people I meet are trying hard to deliver quality care and make a difference to the people they support. 

Last year’s survey showed that confidence levels had improved and were approaching the average for the last five years, supporting a growing belief that perhaps more positive times lie ahead. Healthcare is certainly a sector in the midst of huge change and, as the old adage, goes ‘where there is change, there is opportunity’. Therefore, whilst we’ve seen a number of operators exit the sector, it has meant that we’ve seen a shift in the balance of power in those areas towards the operator and, in some cases, the achievement of good fee increases. 

2017 will see a further increase in the council precept which will certainly help, although some operators argue that this precept hasn’t gone far enough. The shift towards providers delivering more care to those that can self-fund continues at pace, as fees tend to be a little more elastic.

A view from Barclays – Paul Birley2016 was quite a year for the care sector. I have heard it described as a “VUCA” time – volatile, uncertain, complex and ambiguous. It started with concerns about funding and these concerns re-appeared at the end of the year.

Paul Birley Head of Public Sector and Healthcare, Barclays

We will need to ensure that operators continue to strive to deliver quality care and to do this they will need to continue to invest in their leadership, staff and premises. A clear focus and strategy will also be required; we know from past experience that when operators get distracted, there can be painful results. 

Operators need to keep their ears close to the ground and be able to react quickly to changing circumstances and demands. Quality homes with quality teams will continue to thrive, supporting the message which appears to be coming from this year’s survey results. 

10

We have talked about the use of technology in social care for years now but have seen no real uptake to date and, save for assisting care givers and operators in keeping records, it has largely remained an underutilised resource.

To date, technology has often been ineffective as products were too complex for older users; however, as artificial intelligence becomes more widely integrated and smartphone and tablet interfaces even more intuitive, we are finally seeing the adoption of tech in social care settings by many service users and their families. 

We believe the timing is now right for better use of tech to interact, entertain, monitor, communicate and deliver healthcare, but with that comes a responsibility to ensure such devices are secure as cyber-attacks and hacks become more frequent.

Adding to a continuing sense that providers may feel under siege from regulatory inquiries and investigations, there was a new offence created in relation to abuse of adults with capacity. This was highlighted in November 2016 in one of the first cases for a new offence of ill treatment or wilful neglect by care workers. At Manchester Crown Court, two care workers pleaded guilty, with one being sentenced to 12 months in a young offender’s institution and the other to 13 months imprisonment. 

A view from Pinsent Masons – Joanne EllisAs legal advisers to the sector, there are a number of specific themes we can touch upon in a year of political and global surprises.

Joanne Ellis PartnerPinsent Masons

The immediate custodial sentences imposed by the court in the case show the severity with which these matters are being treated; at a time when margins are already stretched, providers have to factor in the cost of increased supervision and staff training to make sure they are on top of the risks – both financial and reputational. We will continue to see homes closing as they are unable to manage these risks but perhaps these “failing” homes will be privatised if Jeremy Corbyn has his way…

Finally to Brexit; with Sterling falling and a hard Brexit looming, how will the care sector respond to the possibility that there may be an influx of pensioners from the EU? We are seeing more successful and innovative models of large-scale senior living from many providers of retirement village developments (both the private and third sectors) and we expect this trend of the older but healthy generation taking control of their senior years to increase as we enter unchartered waters outside of the EU.

11

Headline results show that, for the 2015/16 financial year, occupancy rates edged marginally higher and average fee levels outstripped RPI inflation for the third consecutive year. Issues with rising staff costs which we highlighted in last year’s report have continued, with labour costs increasing again, both in absolute terms 

and as a percentage of income. 

Staffing seemed to be the biggest and most uncertain issue facing the industry, with the introduction of the National Living Wage and uncertainty on freedom of movement of labour within the EU following the Referendum.

A view from Knight Frank – Care home trading performanceThis is Knight Frank’s fifth annual review of the latest trends in the trading performance of the UK’s care home sector. The Care Homes Trading Performance Index provides industry-leading benchmarks on occupancy rates, levels of private and publicly-funded income, average weekly fees, costs, such as staff and agency outlays, and profitability.

Occupancy

Occupancy rates continued to increase in the financial year 2015/16. Whilst there was only a marginal uplift from 88.3%, the latest figure of 88.4% marks the fifth consecutive year of growing occupancy and the highest rate since 2008. 

Throughout the history of the dataset, occupancy levels sit within the 87% to 90% range, suggesting a degree of equilibrium, taking into account the natural level of vacancy from turnover of residents. Regional disaggregation of occupancy rates shows a range between 86.2% and 92.1%, very similar to the range over time for the wider UK market, reinforcing current equilibrium levels (Figure 2).

OCCUPANCY AVERAGE WEEKLYFEES

STAFF COSTS(% OF INCOME)

EBITDARM(% INCOME)

ALL CARE PERSONAL NURSING

88.4% 90.7% 87.7% £694 £600 £726 58.2% 52.3% 59.5% 27.5% 32.3% 26.4%

ALL CARE PERSONAL NURSING ALL CARE PERSONAL NURSING ALL CARE PERSONAL NURSING

Source: Knight Frank Research

Figure 1: 2015/16 results at a glance

Northern Ireland has the highest occupancy level of 92.1%, some way above Scotland at 90.4%.

The North West is the only other region to stand out above the national average, with occupancy at 89.5%. Occupancy in Greater London has fallen since last year’s reporting where it topped the regional league, falling from 90.2% to 88.8%. 

At the other end of the table, the two regions with the lowest occupancy match last year, with the South West and North East delivering occupancy rates of 86.3% and 86.2% respectively. Positive news for these regions is that both had sizeable increases over their 2014/15 rates of 85.0% and 83.8% as the spread between regions has fallen. 

12

Occupancy rates in personal care homes are consistently higher than those in nursing care homes across all regions, driven by demand for modern facilities provided by privately funded personal care homes. Nationally, personal care home occupancy stands at 90.7%, compared to 87.7% for nursing homes. Regionally, occupancy in nursing homes ranges from 84.8% in the North East to 92.0% in Northern Ireland; personal care occupancy ranges from 86.6% in the South West to 95.4% in Northern Ireland.

With demographic projections showing a steady rise in life expectancy and the population aged over 80, long term demand trends suggest upward pressure on occupancy at current supply and development rates. United Nations projections predict UK life expectancy will rise from 80.4 years in 2013 to 81.2 years in 2018, before hitting 82.0 years in 2023 and 82.8 years by 2028. This drives forecast population growth for those over 80 from 3.0 million in 2015 to 3.3 million in 2020, and 5.0 million by 2035.

Average weekly fees

Average weekly fees for care homes rose in the last financial year from £675 to £694, a growth rate of 2.7%, picking up pace from 2.3% in the year prior, and marking the fifth consecutive year of growth and another all-time high (Figure 3). 

In real terms, average weekly fees have been rising since 2012/13 and have now surpassed their 2006/7 levels - the start date for the historical dataset. This is the first time this level has been breached since 2009/10, as fees have outstripped the low levels of inflation of the last couple of years. 

Current fee levels are significantly higher for nursing care, where staff costs are augmented by the higher qualification levels required by staff. Growth rates in average weekly fees were higher for nursing care than for personal care, a reversal of the recent trend. This may be explained by higher wage growth for the more highly qualified nursing staff as labour markets became tighter in an environment where national unemployment has dropped below 5%. 

Analysis by type and region shows the most lucrative average fees of £897 are made in nursing homes situated in the South East, a product of higher property and labour costs in the region, coupled with high levels of demand and a more affluent population. London also has high nursing home fees in relation to other parts of the UK, at £856. 

Figure 2: Occupancy rates by region

(FY 2015/16)

80%

82%

84%

86%

88%

90%

92%

94%

Nor

ther

n Ire

land

Scot

land

Nor

th W

est

Gre

ater

Lon

don

Wal

es

Wes

t M

idla

nds

East

East

Mid

land

s

Sout

h Ea

st

York

s &

Hum

ber

Sout

h W

est

Nor

th E

ast

Source: Knight Frank Research

£400

£450

£500

£550

£600

£650

£700

ACTUAL

REAL TERMS (2006 PRICES)

2015

/16

2014

/15

2013

/14

2012

/13

2011

/12

2010

/11

2009

/10

2008

/09

2007

/08

2006

/07

Figure 3: Average weekly fees£ per week

Source: Knight Frank Research

All UK

13

The demand driver for higher fees is evident in the levels of income coming from self-funding clients. In the South East, for example, where there is the largest pool of affluent people, 51.2% of income is derived from private revenue. The North East, by contrast, sees only 19.5% of income from self-funding clients. 

The range of average weekly fees is much greater than that of occupancy rates, with those in nursing care running from the £897 in the South East to £566 in the North East. For personal care, the range is tighter but still spread from £727 in the South East to £530 in Northern Ireland. The premium paid for nursing over personal care ranges between 11% and 21% across all regions other than the North East, where nursing only offers 4% higher fees for operators. 

The reasons behind this are likely to be very low levels of private funding for residents. Nursing care relies on NHS and local authority funding for 64% of income which contrasts to personal care, where private funding is just over 50%. By region and type, this reliance on Government funding is least evident for personal care in the South West, with 78.5% of income coming from private individuals, driven by demand from wealthier individuals to be resident in some of the most desirable locations in the UK. 

The evidence available in the six months since the end of the financial year suggests that income has increased from the data we are able to analyse to end-March 2016. Initial analysis suggests local authority income has increased by around 4-5% in the latest financial year. Additionally, the increase in NHS income from funded nursing care will also feed through to higher income. 

Whilst only an interim measure, the independent review of the rate paid by the NHS to nursing homes has led to a rise from £112.00 per week to £156.25, a 40% increase. The Government accepted the recommendations and backdated the rise to April 1st which will add a step change to income from the previous to the current financial year. 

As the demand driver of average weekly fees is a combination of residents’ affluence and Government income, the future is reliant on the outcome of Government health policy and the capital pots of potential residents. The former is likely to be impacted by the political and economic uncertainty surrounding the UK’s negotiations to leave the EU, though changes to health spending may benefit. The latter may be impacted by the 

future of the residential property market as many people sell their homes to use the capital for residential care.

Costs

As with the majority of service sector industries, the largest contribution to overall costs for care home operators is labour costs. Staff costs in 2015/16 continued the recent trend, rising 3.2% to £21,040 per resident. Whilst this growth rate is lower than the previous two years, it is in line with the average growth since 2007 (Figure 4). 

As a percentage of income, staff costs have increased to 58.2%, the highest as a proportion of income and the most significant annual rise over the period of analysis. The geographical divergence in staff costs is intuitive, with the largest per resident costs in the South East, at £24,938. London and the South West are the only other regions with similar costs at £24,390 and £24,358 respectively. 

Staff costs in all other regions are below £22,000 per resident. The lowest cost region is the North East, with costs at £17,355, 30% below the South East. The higher fees in the South East more than compensate for higher labour costs though, with staff costs consuming 54.4% of income, the lowest percentage of any region.

£14,000

£15,000

£16,000

£17,000

£18,000

£19,000

£20,000

£21,000

£22,000

£23,00020

15/1

6

2014

/15

2013

/14

2012

/13

2011

/12

2010

/11

2009

/10

2008

/09

2007

/08

2006

/07

£ PER RESIDENT

AS % OF INCOME

52%

53%

54%

55%

56%

57%

58%

59%

60%

61%

62%

63%

Figure 4: Staff costs

As £ per resident (LHS) vs % of income (RHS)

Source: Knight Frank Research

14

This compares to the North East proportion of 61.1%, which is the third highest regional percentage. 

The region with the highest proportion of income eclipsed by staff costs is Northern Ireland where £21,646 per resident accounts for 69.5% of income. Interestingly, this is also the region with the highest percentage of staff costs from agency staff at 12.2%, much higher than the national average of 7.5%. Wales has the next highest agency costs at 8.6% and four regions use agency staff for 8.3% of their labour bill. The East Midlands and North East use agency staff for 5.4% of staffing costs, suggesting the high level of costs as a percentage of income in the North East is not driven by high agency staff costs but by the lower levels of income in the region. 

The rising level of agency staff costs may prompt some operators to re-evaluate their approach to staff. As agency costs rise, it becomes increasingly efficient to invest in permanent staffing. Whilst there are additional costs associated with employing permanent staff, such as higher wage bills from attracting and retaining good staff and non-wage costs, the benefits should outweigh these. The increase in service level from low staff turnover should allow for fee rises over time, particularly in affluent areas, and the reputational risk to an operator should reduce as staff engagement and loyalty produce better results. 

It is important to note that the analysis period ends on 31 March 2016 and thus does not include the impact from the implementation of the National Living Wage on 1 April 2016, which increased minimum hourly wages from £6.70 to £7.20 for workers aged 25 or above. This 7.5% increase for lower paid staff will impact staff cost increases next year and years to come if the Government sticks to its existing future rises.

Profitability 

The 2015/16 financial year witnessed a much welcomed pick up in profitability, from 27.1% in 2014/15 to 27.5%, as measured by earnings before tax, depreciation and amortisation, rent and management (EBITDARM). This is only the second year that profitability has increased as a percentage of income in the nine year history of the dataset, as a slow downward trend has gripped the sector. 

2011/12 was the only other year to see an uptick, as profitability has been gradually moving downwards 

Figure 5: EBITDARM as a % of income

23%

25%

27%

29%

31%

33%

35%

2013

/14

2015

/16

2014

/15

2012

/13

2011

/12

2010

/11

2009

/10

2008

/09

2007

/08

2006

/07

Source: Knight Frank Research

Figure 6: EBITDARM per bed (FY 2016/16)

£ per bed

£2,000

£4,000

£6,000

£8,000

£10,000

£12,000

£14,000

£16,000

Gre

ater

Lon

don

Sout

h Ea

st

Wes

t Mid

land

s

Sout

h W

est

East

East

Mid

land

s

Scot

land

York

s &

Hum

ber

Nor

th W

est

Wal

es

Nor

th E

ast

Nor

the r

n Ire

land

PERSONAL CARE

NURSING

Source: Knight Frank Research

15

from the 32.8% in 2007. Profitability between the two types of care home has reduced since the last reporting period, with the national rate of EBITDARM for nursing homes of £9,987 per resident only 1.4% higher than the £9,851 seen in personal care homes. 

For the financial year 2014/15 there was a 7% profitability premium for nursing care. When EBITDARM is expressed as a percentage of income however, the reverse is true, as the income levels per resident are lower, as are staffing costs. Personal care homes have profitability levels of 32.3% of revenue, compared to only 26.4% for nursing homes. 

As we see an increase in the proportion of income from self-funding in personal care, there is likely to be a point in the near future when the average absolute EBITDARM level moves higher for personal care than it is for nursing care. This is particularly true for more affluent areas of the UK where the higher levels of profitability and lower levels of risk associated with personal care make it very appealing. 

Geographically, the most profitable homes are in London and the South East, where EBITDARM as a percentage of income is 32.6% and 32.3% respectively. 

No other region has a rate above 30%. Profit margins in Northern Ireland are much harder to achieve, with EBITDARM as a proportion of revenue down at 15.5%. Profitability in Wales is also more difficult to achieve at 21.5%, as is the North East, where weekly fees are lowest and EBITDARM as a percentage of income is 22.7%. All other regions are within the range of 25-30%. 

Combining the regional picture with care home type, it is not a surprise that the lowest profit margins are for nursing homes in Northern Ireland and some of the highest are for personal care homes in the South East, at 34.5%. It is interesting that the most profitable region type is for personal care in the North West, which is driven by the low levels of staff costs. 

It appears that economies of scale work only to a point, in terms of EBITDARM as a percentage of income. As care homes grow in size, they become more profitable, up to the 60-79 bed size band. This seems to be the optimal size, with profitability levels at 29.4%, with 80-99 bed homes not far behind at 29.1%. At either end of the spectrum though, small and large homes are much less profitable, at around 25% of income. Looking across the two care home types shows a contrast though, as personal care homes with 100 or more beds are the most profitable segment at 35.9%.

16

ConclusionThe future for care home operators looks set to be buffeted by a multitude of issues over the coming years. However, compared to many industries, the underlying fundamentals seem to insulate the care home sector from many of the macroeconomic challenges on the horizon for the UK. 

The most concerning impacts for the sector from EU negotiations relate to labour markets and may be felt in the medium term. Staff costs seem destined to continue their rise. Sourcing and retaining staff will continue to be difficult, perhaps necessitating increased use of expensive employment agencies. The need to allow industry workers into the UK, whether from the EU or elsewhere, will not be easily solved although final deals may produce positive outturns. 

Another concern for the industry comes from the recent change to NHS-funded nursing care rates, which were raised following an independent review completed in July 2016. The 40% increase in nursing care rates may seem welcome when taken at face value, but concerns on the sustainability of this rate suggest this may be revised down and varied by region. Arriving at a level which is both adequate for residents and sustainable for the NHS is important. 

In response to this uncertainty, it is unsurprising that operators have repositioned their nursing facilities to focus on personal care and, in particular, the self-funding market where fee uplifts have been as much as 8%. 

In the short to medium term we expect to see increasing staff costs and increasing weekly fees. Occupancy levels are also likely to rise, driven by the insatiable demand from an ageing population. To further compound bed supply, the National Living Wage may be forcing closure of unviable care homes that, generally, have fewer than 25 beds. Care homes in affluent areas of the country will benefit most, particularly for personal care, and we may see EBITDARM per resident for personal care outstrip that of nursing care for the UK as a whole. 

The defensive characteristics of the care home sector are highly likely to attract increasing investor appetite over the next 12 months.

For further information, please contact:

Paul Birley Head of Public Sector  and Healthcare, BarclaysM: 07775 546 435*paul.birley@barclays.com

Julian Evans FRICS Head of HealthcareKnight Frank LLPM: 07795 283 268*julian.evans@knightfrank.com

Joanne Ellis PartnerPinsent MasonsM: 07769 740 336*joanne.ellis@pinsentmasons.com

*Please note: these are mobile phone numbers and calls will be charged in accordance with your mobile tariff.

17

18

Barclays is a trading name of Barclays Bank PLC and its subsidiaries. Barclays Bank PLC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority (Financial Services Register No. 122702). Registered in England. Registered number is 1026167 with registered office at 1 Churchill Place, London E14 5HP. Item Ref: AP411717. February 2017.

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