2018

CARE HOMES TRADING PERFORMANCE REVIEW

HIGHLIGHTSOccupancy rates at a record high with sixth consecutive annual increase

Average weekly fees increase for the seventh consecutive year

Staff costs continue to bite as recruiting and retaining staff remains challenging

RESEARCH

32

CARE HOMES TRADING PERFORMANCE REVIEW RESEARCH

INTRODUCTIONWe are pleased to introduce the seventh annual review of trading performance in the UK care home sector.

Knight Frank are kindly provided with data by leading care home operators. We are proud to announce a 46% increase in the number of operators in our care homes trading performance index (CHTPI) for the financial year 2017/18.

The CHTPI review provides industry-leading benchmarks on occupancy rates, mix of funding type, average weekly fees (AWF), costs such as staff and agency outlays, and profitability.

The headlines show that both occupancy and AWF increased, as did staff costs as a percentage of income but profit margins fell against last year’s performance.

Mandip Bhogal Associate, Healthcare

OCCUPANCY AND FEESOccupancy rates have hit a record high since records began in 2006, increasing for the sixth consecutive year to 89.4%, finally surpassing the 2006 figure of 89.3%.

As illustrated in Figure 4, a marginal uplift of 0.2% in occupancy percentage has been seen. With a strong demand for elderly care facilities, this upward trend is no surprise.

In 2018, the gap between personal and nursing care occupancy closed further, following a similar trend to last year’s review. Occupancy in nursing homes increased from 88.7% to 89.1% while occupancy rates fell for personal care homes from 90.2% to 89.9%. The following reasons are contributing to this trend:

• Residents are moving into care homes when their needs and acuity levels are higher and admission is necessary

• Nursing care providers are shifting their offering to personal care due to the nursing staff shortages

• Only 39% of the existing provision is registered as a nursing home compared with 61% of personal care homes.

Similar to last year’s review, the South West region is operating at the lowest

RETIREMENT HOUSING – LIMITED ON-SITE CAREAND REDUCED AMENITIES

85AVERAGE AGE OF A RESIDENT

IN A CARE HOME

85 AVERAGE AGEOF CARE HOME RESIDENT

70%OF THETOTAL

MARKET

HOUSING WITH CARE /ASSISTED LIVING – INCREASED PROVISION OFHEALTHCARE AND MOREEXTENSIVE AMENITIES

30%OF THETOTAL

MARKET

OPENED BEFORE2000

OPENED BETWEEN2000-2009

OPENEDAFTER 2010

89.9%90.2%

88.0%

STAFF COST% OF INCOME

SOUTH

55.4%

MIDLANDS

56.2%

NORTH

59.2%

OCCUPANCY%

EBITDARM% OF INCOME

AVERAGE WEEKLY FEES (£)

STAFF COST% OF INCOME

SOUTH

55.4%

SOUTHMIDLANDS

56.2%

MIDLANDS

NORTH

59.2%

NORTH

88.9

%

88.6

%

87.7

%

£668

£733

£933

SOUT

H

MID

LAND

S

NORT

H

SOUTH

MIDLANDS

NORTH

OCCUPANCY%

88.9

%

88.6

%

87.7

%SO

UTH

MID

LAND

S

NORT

H

EBITDARM% OF INCOME

SOUTH

MIDLANDS

NORTH

29.6%

31.2%

25.4%

29.6% 31.2%25.4%

AVERAGEWEEKLY FEES £

£668 £7

33

£933

SOUT

H

MID

LAND

S

NORT

H

20%

20%

NORTH / SOUTH DIVIDE

OCCUPANCY AVERAGE WEEKLYFEES

STAFF COSTS(% OF INCOME)

EBITDARM(% OF INCOME)

ALL CARE PERSONAL NURSING

89.4% 89.9% 89.1% £773 £671 £838 57.6% 55.8% 58.4% 28.3% 28.5% 28.2%

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

Source for all charts: Knight Frank Research

FIGURE 2

Share of the sample by size % of total care beds (FY 2017/18)NUMBER OF BEDS

1-39 40-59 60-79 80-99 100+NUMBER OF BEDS

1-39 40-59 60-79 80-99 100+

NUMBER OF BEDS1-39 40-59 60-79 80-99 100+

13%12%

6%

34%35%

12% 35% 34% 13% 6%

12% 35% 34% 13% 6%

12% 35% 34% 13%

FIGURE 3

2017/18 RESULTS AT A GLANCE

WALES 3%NORTHERN IRELAND 4%LONDON 6%EAST MIDLANDS 7%NORTH EAST 7%WEST MIDLANDS 8%SOUTH WEST 8%SCOTLAND 10%EAST OF ENGLAND 11%YORKSHIRE AND THE HUMBER 11%NORTH WEST 12%SOUTH EAST 13%

13%

12.0

%

11%

11%

8%8%

3%SOUT

H EA

ST

NORT

H W

EST

WALES

4%NORTHERN

IRELAND6%LONDON

7%EAST MIDLANDS

7%NORTH EAST

WEST MIDLANDS

SOUTH WEST10%

SCOTLAND

YORK

SHIRE

AND

THE H

UMBE

R

EAST

OF E

NGLA

ND

13%

12.0

%

11%

11%

8%8%

3%SOUT

H EA

ST

NORT

H W

EST

WALES

4%NORTHERN

IRELAND6%LONDON

7%EAST MIDLANDS

7%NORTH EAST

WEST MIDLANDS

SOUTH WEST10%

SCOTLAND

YORK

SHIRE

AND

THE H

UMBE

R

EAST

OF E

NGLA

ND

FY 2017/18 SHARE OF BEDS

FY 2017/18 SHARE OF BEDS

FIGURE 1

Regional share of the sample % of total care beds (FY 2017/18)

54

CARE HOMES TRADING PERFORMANCE REVIEW RESEARCH

5

FIGURE 8

AWF £ per week

ActualReal terms (2006 prices)

£400

£450

£500

£550

£600

£650

£700

£750

£800

2017

/18

2016

/17

2015

/16

2014

/15

2013

/14

2012

/13

2011

/12

2010

/11

2009

/10

2008

/09

2007

/08

2006

/07

FIGURE 9 AWF by region (FY 2017/18) £ per week

£400

£500

£600

£700

£800

£900

£1,000

£1,100

NORT

H EA

ST

NORT

HERN

IREL

AND

YORK

S &

HUMB

ER

NORT

H W

EST

WAL

ES

EAST

MID

LAND

S

SCOT

LAND

EAST

OF E

NGLA

ND

WES

T MID

LAND

S

SOUT

H W

EST

LOND

ON

SOUT

H EA

ST

Personal CareNursing

Personal all UKNursing all UK

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

NORT

HERN

IREL

AND

NORT

H EA

ST

LOND

ON

WAL

ES

SCOT

LAND

NORT

H W

EST

YORK

S &

HUM

BER

WES

T M

IDLA

NDS

EAST

OF

ENGL

AND

EAST

MID

LAND

S

SOUT

H W

EST

SOUT

H EA

ST

SF % of incomeLA % of income

FIGURE 10 SF as a % of income vs. LA as a % of income (FY 2017/18) %

occupancy rate of 83.1% triggered by a low occupancy rate (81.6%) in its nursing homes as shown in Figure 5. This region also has the second largest self-funder (SF) percentage of income (56%), indicating longer fill periods for operators targeting the private pay market. The most noticeable movement was in Wales, where occupancy rose from 87.9% to 90.8%.

Figure 7 illustrates that the highest occupancy rate (90.2%) is in properties built from 2000-2009. Occupancy is significantly lower for properties built after 2010 mainly due to slower fill rates for new developments strategically positioned to predominantly target the SF market.

Please note, Knight Frank Research use effective beds as opposed to registered beds to determine an accurate measure

supported by its strong affluence profile which is reflected in the SF percentage of income increasing in this region by 2% to 60% of income. The East Midlands also had a high percentage of SF income at 54% (increasing 2% from the prior period) which is encouraging for developers who continue to head north of the Watford Gap to maximise returns. Figure 9 and Figure 10 also identify a North South divide.

In comparison to the prior period, the North East is relegated to bottom place, switching with Northern Ireland, driven by the region’s SF percentage of income falling from 35% to 25%.

Figure 10 examines the relationship between SF and LA income by region. The outcome is predictable with the exception of London where a large proportion of the stock was built in the last century and is funded by the LA and NHS PCT.

of occupancy. Effective beds are also known as operational beds, which are available during the financial year.

FeesAWF increased for the seventh

consecutive year rising by 3.7% to £773

in the financial year 2017/18. This is

above the RPI inflation of 3.3% for the

corresponding period, and represents the

highest rate since records began in 2006

(Figure 8). In real terms, the AWF increase

represents a less impressive movement

of only 5% since 2006 (Figure 8).

The increase in fees has been driven by:

• Increased Local Authority (LA) fee

rates (rising on average at 3.6% as per

LaingBuisson’s Care Markets Annual

Survey report, July 2017)

FIGURE 4 UK care home occupancy rate %

2014 2016 2017 2018

ALL CARE

201520132012201120102009200820072006

89.4%89.2%

88.4%88.3%

87.6%87.2%87.2%

87.8%

87.2%

87.7%

88.9%88.8%

89.3%

2014 2016 2017 2018

ALL CARE

201520132012201120102009200820072006

89.4%89.2%

88.4%88.3%

87.6%87.2%87.2%

87.8%

87.2%

87.7%

88.9%88.8%

89.3%

NURSING CARE89.1%

PERSONAL CARE89.9%

PERSONAL CARE89.9%

NURSING CARE89.1%

• Continued SF fee inflation, above RPI

and the continued shift towards the private pay care market.

Income per resident increased 4.5% to £40,922. However, this is less than the 4.7% increase in staff costs per resident.

The gap between nursing and personal care fee rates has widened even further. This has been driven by the appetite for nursing homes to inflate fee rates for the acute nature of care provided and due to increasing nursing staffing costs. In addition, the NHS-funded nursing care (FNC) rate increased 2% to £158 per week from April 2018. This is to assist with the nursing wage pressure, due to the shortfall of qualified nurses within the UK. In real terms, this reflects a fall.

Figure 10 illustrates the South East region’s continuing dominance,

FIGURE 6

Occupancy rates % (LHS) vs. SF % of income (RHS) (FY 2017/18) %

75%

80%

85%

90%

95%

100%

SOUT

H W

EST

EAST

MID

LAND

S

YORK

S &

HUMB

ER

SOUT

H EA

ST

NORT

H EA

ST

WES

T MI

DLAN

DS

NORT

H W

EST

WAL

ES

EAST

OF E

NGLA

ND

LOND

ON

NORT

HERN

IREL

AND

SCOT

LAND

RegionSF pay as a % of total income

All UK

0%

10%

20%

30%

40%

50%

60%

70%

FIGURE 5 Occupancy rates by region & care type (FY 2017/18) %

Personal CareNursing

Personal all UKNursing all UK

75%

80%

85%

90%

95%

100%

SOUT

H W

EST

EAST

MID

LAND

S

YORK

S &

HUMB

ER

SOUT

H EA

ST

NORT

H W

EST

NORT

H EA

ST

EAST

OF E

NGLA

ND

LOND

ON

SCOT

LAND

WES

T MI

DLAN

DS

NORT

HERN

IREL

AND

WAL

ES

FIGURE 7 Occupancy rates by property age (FY 2017/18) %

OPENED BEFORE2000

OPENED BETWEEN2000-2009

OPENEDAFTER 2010

89.9%90.2%

88.0%

Personal care £671 3.1%

Nursing care £838 5.0%

ANNUALCHANGE (LFL)

AVERAGEWEEKLY FEE

AVERAGE WEEKLY FEES

Personal Care £651 8.4%

Care with Nursing £798 9.9%

All Care Homes £746 7.4%

3.1%RPI inflation (FY 2016/17)

ANNUALCHANGE (LFL)

AVERAGEWEEKLY FEE

Source for all charts: Knight Frank Research Source for all charts: Knight Frank Research

ALL UK FUNDING MIX (%)

Self-funder 44%NHS 11%

LA 44%Other 1%

AVERAGE WEEKLY FEES

FIGURE 11 AWF by property age £ per week (FY 2017/18)

OPENED BEFORE2000

OPENED BETWEEN2000-2009

OPENEDAFTER 2010

£790£878

£755

The Hamptons, New Care

76

PRIVATE PAY MARKET This section focuses on the key performance indicators where more than 70% of income is derived from self-funded care (17% of the overall index). Year-on-year, the analysis points to a stellar performance!

6

13%

12.0

%

11%

11%

8%8%

3%SOUT

H EA

ST

NORT

H W

EST

WALES

4%NORTHERN

IRELAND6%LONDON

7%EAST MIDLANDS

7%NORTH EAST

WEST MIDLANDS

SOUTH WEST10%

SCOTLAND

YORK

SHIRE

AND

THE H

UMBE

R

EAST

OF E

NGLA

ND

13%

12.0

%

11%

11%

8%8%

3%SOUT

H EA

ST

NORT

H W

EST

WALES

4%NORTHERN

IRELAND6%LONDON

7%EAST MIDLANDS

7%NORTH EAST

WEST MIDLANDS

SOUTH WEST10%

SCOTLAND

YORK

SHIRE

AND

THE H

UMBE

R

EAST

OF E

NGLA

NDSO

UTH

EAST

25%

WES

T M

IDLA

NDS

13%

EAST

OF

ENGL

AND

13%

SOUT

H W

EST

12%

EAST

MID

LAND

S 10

%

NORT

H W

EST

8%

YORK

SHIR

E AN

D TH

E HU

MBE

R 8%

SCOT

LAND

4%

LOND

ON 3

%

NORT

H EA

ST 2

%

WAL

ES 2

%

FY 2017/18 SHARE OF BEDS

FY 2017/18 SHARE OF BEDS

75%77%79%81%83%85%87%89%91%93%95%

WAL

ES

SOUT

H W

EST

SOUT

H EA

ST

WES

T M

IDLA

NDS

EAST

MID

LAND

S

LOND

ON

NORT

H W

EST

EAST

OF

ENGL

AND

YORK

S &

HUM

BER

NORT

H EA

ST

SCOT

LAND

Occupancy All UK

FIGURE 17

Occupancy rates by region (FY 2017/18) %

010%20%30%40%50%60%70%80%90%

NORT

H W

EST

SOUT

H W

EST

WES

T M

IDLA

NDS

EAST

OF

ENGL

AND

EAST

MID

LAND

S

WAL

ES

YORK

S &

HUM

BER

SCO

TLAN

D

SOUT

H EA

ST

NORT

H EA

ST

LOND

ON

Staff costs % of income All UK

FIGURE 19

Staff costs as a % of income by region (FY 2017/18) %

2017/18 2016/17

NURSINGPERSONALALL CARE

88.8

%

90.6

%

86.9

%

86.6

%

89.6

%

88.2

%

FIGURE 13

Occupancy rates % YoY

NURSINGPERSONALALL CARE

2017/18 2016/17

£947

£803

£1,1

47

£1,0

81

£719£8

59FIGURE 14

AWF £ per week YoY

FIGURE 15

Staff costs as a % of income YoY %

NURSINGPERSONALALL CARE

47.6

% 48.9

%

46.6

% 47.6

%

51.5

%

49.4

%

2017/18 2016/17

FIGURE 16

EBITDARM as a % of income YoY %

NURSINGPERSONALALL CARE

39.4

%

36.4

% 41.7

%

40.1

%

33.0

%36.9

%

2017/18 2016/17

FIGURE 18

AWF by region (FY 2017/18) £ per week

£0

£200

£400

£600

£800

£1,000

£1,200

£1,400

NORT

H EA

ST

YORK

S &

HUM

BER

WES

T M

IDLA

NDS

NORT

H W

EST

EAST

MID

LAND

S

WAL

ES

EAST

OF

ENGL

AND

SOUT

H W

EST

SOUT

H EA

ST

SCOT

LAND

LOND

ON

AWF All UK

FIGURE 20

EBITDARM as a % of income by region (FY 2017/18) %

0%10%20%30%40%50%60%70%80%90%

SOUT

H W

EST

NORT

H W

EST

WES

T M

IDLA

NDS

YORK

S &

HUM

BER

EAST

OF

ENGL

AND

EAST

MID

LAND

S

WAL

ES

SOUT

H EA

ST

NORT

H EA

ST

SCOT

LAND

LOND

ON

EBITDARM % of income All UK

COSTSAlthough care home operators are coming to terms with the impact of the National Living Wage (NLW), retaining good quality staff, particularly qualified nurses, remains challenging.

Staffing costsStaff costs in 2017/18 increased 4.7% to £23,575 per resident. This has reduced from a 7% increase witnessed in last year’s review, when care assistant pay rates were inflated to meet the NLW standards. The national average wage rate per hour for a care assistant stands at £8.00 which is 50 pence per hour higher than the NLW in 2017/18. The current rate is also above the 2018/19 NLW of £7.83 per hour. However, the NLW is projected to rise to at least £9.00 per hour by 2020, therefore the rising staff costs per resident, since 2011/12, as illustrated in Figure 21, will continue this upwards trend.

Even though staff costs per resident increased materially, staff costs as a percentage of income only marginally increased by 0.1% to 57.6% due to:

• AWF inflation

• Increasing SF ratios

• An average 3.6% LA fee rate increase.

However, when predominantly focusing on the LA pay market (90% of income and above) staff costs as a percentage

of income stand at 69.9%, up from 65.5% in last year’s review which indicates that the LA fee rate increases are insufficient.

Recruiting and retaining good quality staff remains the biggest challenge for operators as agency costs increase from 7.4% to 8.2% when compared with last year’s analysis. The UK unemployment rate fell to 4% in the three months to June 2018, its lowest rate since 1975.

TABLE 1 Staff costs (FY 2017/18)

LOCATION

Per resident P.A.

As a % of revenue

Agency staff cost as % of total staff costs

London £28,266 58.3% 6.9%

South East £27,822 52.9% 9.9%

South West £26,150 57.9% 8.4%

Scotland £25,230 60.9% 7.2%

Northern Ireland £24,642 71.0% 14.3%

Wales £23,415 58.7% 8.1%

West Midlands £22,689 57.4% 8.2%

North West £22,198 60.0% 9.9%

East of England £22,149 54.7% 8.2%

East Midlands £20,977 54.7% 5.3%

Yorkshire and The Humber £20,551 60.0% 7.3%

North East £18,984 56.7% 3.7%

All UK £23,575 57.6% 8.2%

Personal careNursing Personal careNursing Personal careNursing

FIGURE 21

Staff costs As a % of income (RHS) vs. £ per resident (LHS)

£14,000

£16,000

£18,000

£20,000

£22,000

£24,000

£26,000

2017

/18

2016

/17

2015

/16

2014

/15

2013

/14

2012

/13

2011

/12

2010

/11

2009

/10

2008

/09

2007

/08

2006

/07 52%

54%

56%

58%

60%

62%

64%

As % of income

£ per resident

FIGURE 22

Staff costs per resident (LHS) £ per resident vs. staff agency cost % (RHS) by region (FY 2017/18)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

NORT

H E

AST

YORK

SHIR

E AN

D T

HE H

UMBE

R

EAST

MID

LAND

S

WAL

ES

NORT

HW

EST

NORT

HERN

IREL

AND

EAST

OF

ENG

LAND

SCOT

LAND

WES

TM

IDLA

NDS

SOUT

HW

EST

SOUT

HEA

ST

LOND

ON

Personal careNursing Nursing (ALL UK) Personal care (ALL UK)

0%

2%

4%

6%

8%

10%

12%

14%

16%

Nursing care agency %Personal care agency %

8.2%ACROSS THE UK, AGENCY STAFF COSTS

INCREASE FROM 7.4% TO 8.2% WITHNORTHERN IRELAND AT 14.3%

FIGURE 12

Regional share of the sample % of total care beds (FY 2017/18)

Source for all charts: Knight Frank Research

CARE HOMES TRADING PERFORMANCE REVIEW RESEARCH

INCREASING AGENCY STAFFCOSTS

Source for all charts: Knight Frank Research

98

STAFF COSTS BY PROPERTY AGE

PER RESIDENT58.9% OF INCOME

PRE 2000

£23,788 PER RESIDENT52.4% OF INCOME

POST 2010

£24,329

CARE HOMES TRADING PERFORMANCE REVIEW RESEARCH

PROFITABILITYEBITDARM as a percentage of income fell to 28.3%.

The industry standard definition of earnings before interest, tax, depreciation and amortisation, rent and management (EBITDARM) allows for consistent comparison across all care homes. The 2017/18 financial year witnessed a fall in profitability from 29.0% in 2016/17 to 28.3%, measured as a percentage of income.

The trend line in Figure 25 shows a gradual downwards slope in EBITDARM as a percentage of income since dataset records began in 2006, and profit margins achieved before the recession in 2007/08 have not been regained.

One of the main reasons for this fall is contributed by the decline in profit margins for personal care homes from 29.9% to 28.5%. The year-on-year increase in staff costs per resident (7%) exceeded the increase in income per resident (5%). Within our dataset, over 50% of the personal care home stock was built in the last century and circa 30% was built in the early 2000’s. This limits their ability to inflate fee rates to

a sufficient level when compared with future-proof assets built over the last 10 years.

Interestingly, in the homes that are mainly LA funded (90% of income and above) profit margins stand at 15.9%, down from 20.7%.

More choice and opportunities are available for staff, allowing them to switch jobs for preferential pay rates and to work in less challenging environments. This is quite evident in the South East region where staff agency costs are above national average, at 10%.

The shortfall of skilled nursing staff in the UK continues to hamper the sector and mount further pressure on existing staff. This is affecting trading performance as agency costs in nursing homes reflect 9.3% (8.5% in 2016/17) when compared with 5.4% (4.1% in 2016/17) for personal care homes. As per Knight Frank’s Healthcare Development Opportunities Review 2018, the sector witnessed 226 home closures in 2017/18 in the UK (6,740 beds), 90% of which were rated Inadequate or Requires Improvement by the Care Quality Commission before deregistration. A large proportion closed due to the impact of the NLW and challenges of recruiting nursing staff.

In light of the nursing staff crisis, a shift towards personal care home developments has continued as 54% of new openings in 2017/18 were for personal care homes only.

In regards to staff costs per resident, London takes top spot from the South East region as shown in Table 1 when compared with 2016/17, driven by the upwards pressure to recruit and retain staff within the M25. The lowest staff cost as a percentage of income was established in the South East at 52.9% driven by the higher fees, comfortably compensating for higher labour costs.

Staff costs as a percentage of income has reached 71% for Northern Ireland, driven by low fee rates paid by the Trusts and a low percentage of SF (7%) coupled with the challenges of recruiting staff from only six counties within the region and required nursing ratios.

Property costsProperty costs comprising utilities, council tax, insurance, repairs and maintenance, are small in comparison to staffing costs, but must be managed efficiently to maximise profits.

Property costs were similar to the previous year’s review at £2,006 per bed, which equates to 5% of income. Figure 23

FIGURE 23

Property cost per bed £ per bed

£1,000

£1,200

£1,400

£1,600

£1,800

£2,000

£2,200

£2,400

2017

/18

2016

/17

2015

/16

2014

/15

2013

/14

2012

/13

2011

/12

2010

/11

2009

/10

2008

/09

2007

/08

2006

/07

Real terms (2006 prices)Nominal

illustrates a surge in property costs to 2013/14 before they started to stabilise. This is mainly due to a substantial change in dataset sample to reflect a higher proportion of newer properties. Properties built in the last century cost £2,167 per bed in comparison with £1,910 per bed for properties built after 2010.

We expect to see property costs rise due to increasing energy costs, despite the Government’s strategy to price cap by the end of 2018. Repairs and maintenance will continue to dent the Profit and Loss account, specifically for properties built in the last century.

On a regional level, property costs as a percentage of income were lowest in the London region (4.5%), compensated by its strong AWF and highest in the North East driven by low AWF.

Capital expenditure (Capex)New to the Index is an assessment of capex across the sector. 85% of UK care home stock is over 40 years old and the

TABLE 2

Capex/bed by region

REGIONS CAPEX/BED

East of England £1,804

West Midlands £1,614

Scotland £1,581

East Midlands £1,574

London £1,454

North West £1,425

North East £1,421

South West £1,372

Wales £1,364

South East £1,258

Yorkshire and The Humber £1,228

Northern Ireland £1,126

UK AVERAGE £1,430

lack of capex remains a concern. We have carried out a review to show capex spend per bed by property type and age. On a national level capex per bed stands at £1,430 for the financial year 2017/18.

Food costsFood costs increased 3% from last year’s study to £1,462 per resident (£4.00 per day) which consumes 3.6% of income. Food costs as a percentage of income remain static when compared with 2016/17. This means that operators have been able to increase fees in line with their food costs, which is encouraging.

The increase is driven by operators’ continuous efforts to invest in good quality produce tailored to individual residents, offering a wide variety of fresh fruit, dairy, vegetables, grains and protein, as nutrition for the elderly. This is specifically important for dementia residents, in order to improve their wellbeing. Interestingly, food costs per resident in homes that are predominantly SF (70% and above) are at £1,676 (£4.59 per day).

CAPEX PER BED BY PROPERTY

TYPE

CAPEX PER BED BY PROPERTY

AGE

CONVERTED PROPERTY

£1,933PER BED

PURPOSE BUILT PROPERTY

£1,346PER BED

£1,423PRE-2000

£1,2472000-2009

£935POST-2010

CAPEX PER BED BY PROPERTY

TYPE

CAPEX PER BED BY PROPERTY

AGE

CONVERTED PROPERTY

£1,933PER BED

PURPOSE BUILT PROPERTY

£1,346PER BED

£1,423PRE-2000

£1,2472000-2009

£935POST-2010

FIGURE 24

Food cost index (FY 2017/18) % difference from all UK

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

NORT

HERN

IREL

AND

NORT

H EA

ST

SCOT

LAND

YORK

S &

HUM

BER

EAST

MID

LAND

S

NORT

H W

EST

LOND

ON

EAST

OF

ENGL

AND

WES

T M

IDLA

NDS

SOUT

H W

EST

WAL

ES

SOUT

H EA

ST

Source for all charts: Knight Frank Research

Source: Knight Frank Research

FIGURE 25

EBITDARM as a % of income

24%

26%

28%

30%

32%

34%

2017

/18

2016

/17

2015

/16

2014

/15

2013

/14

2012

/13

2011

/12

2010

/11

2009

/10

2008

/09

2007

/08

2006

/07

Avonmere, Avery

1110

CARE HOMES TRADING PERFORMANCE REVIEW RESEARCH

Source for all charts: Knight Frank Research

FIGURE 28

Distribution of profit margins across the CHTPI (FY 2017/18)

0% 5% 10% 15% 20% 25% 30%

41+%

31-40%

21-30%

11-20%

<10%

Prof

it m

argi

n

% of CHTPI Sample

There was only a marginal fall in profitability for nursing homes from 28.6% in 2016/17 to 28.2%, which is supported by the increase in occupancy in nursing homes, as discussed earlier in the report.

The South East remains in top position as the most profitable region. Its robust trading performance is driven by the affluence of the region.

The region’s AWF increased by 5% while staff cost per resident increased 4%. Staff costs as a percentage of income are also controlled well and the region presents the highest percentage of SF income.

Combining the regional picture with the care home type, the East Midlands have the most profitable personal care homes with a margin of 33.0%. Staff agency costs are at 3.0% which is well below national average. It also has the lowest staff costs

FIGURE 27

EBITDARM per resident (FY 2017/18) £ per bed

£2,000

£4,000

£6,000

£8,000

£10,000

£12,000

£14,000

£16,000

£18,000

£20,000

£22,000

NORT

HERN

IREL

AND

YORK

S &

HUM

BER

NORT

H EA

ST

NORT

H W

EST

SCOT

LAND

WAL

ES

EAST

MID

LAND

S

SOUT

H W

EST

WES

T M

IDLA

NDS

EAST

OF

ENGL

AND

LOND

ON

SOUT

H EA

ST

Personal CareNursing

Personal all UKNursing all UK

as a percentage of income at 51.9%. The most profitable nursing homes are in the South East region. It is also no surprise that Northern Ireland remains rock bottom, driven by its low AWF and high staff costs.

Whilst averages are an interesting and intuitive way to analyse markets, distributions give an added dimension of insight (Figure 28). Considering 10 percentage point brackets for EBITDARM as a percentage of income, the largest proportion of homes (28.9%) make a profit between 20% and 30%. A quarter of homes make between 30% and 40% profit. Interestingly 12.4% of homes make a profit margin above 40% (increasing from 9.2%) which indicates demand for the premium end of the market driven by affluent locations, luxury products, good quality food and activities.

FIGURE 26

EBITDARM as a % of income (FY 2017/18)

10%

15%

20%

25%

30%

35%

NORT

HERN

IREL

AND

YORK

S &

HUM

BER

NORT

H W

EST

SCOT

LAND

SOUT

H W

EST

WAL

ES

NORT

H EA

ST

WES

T M

IDLA

NDS

LOND

ON

EAST

MID

LAND

S

EAST

OF

ENGL

AND

SOUT

H EA

ST

All UK

INCREASING CARE NEEDS Increasing care needs of residents creating upwards pressure on existing nursing provision as operators continue to shift towards personal care only

RECRUITMENT ISSUES Recruitment and retention of skilled staff, exacerbated by BREXIT

INCREASED PENSION CONTRIBUTIONS Staff pension contributions increased from April 2018 to a minimum employer contribution of 2%, increasing to 3% from April 2019

INSUFFICIENT LA FEE RATE Failure of LA fee rate increases to track rising costs leading to further closures, particularly for smaller and older stock

INCREASING REGULATORY REQUIREMENTS Increasing regulatory requirements from the CQC and health and safety legislation

SLOWER FILL RATES Slower fill rates for new developments, strategically placed to target the SF market

FUTURE-PROOF CARE HOME STOCK State-of-the-art stock entering the market, providing a lifestyle choice for residents with amenities such as a cinema room, cafeteria, gym and spa and hair salon

CARE-TECH With regulatory requirements becoming more stringent, technology will play a substantial part to improve processes and efficiencies, such as electronic care plans, medication systems and more long term, Artificial Intelligence

IMPROVED STAFF EFFICIENCIES Technology such as acoustic monitoring to improve staff efficiencies

BONUSES The sector is already seeing welcome bonuses and rewards being paid to nursing staff to enhance the recruitment and retention process

CH

ALL

ENG

ES

OP

PO

RTU

NIT

IES

JULIAN EVANS FRICS Head of Healthcare

Where we are today? The lack of social care funding and the shortfall of skilled labour continued to present a stern test for the UK care home market over the past twelve months. Nonetheless, it has remained resilient and robust in comparison to some of the other property types and wider investment classes.

Although 2018 Q1 traded with low occupancy due to higher death rates in the bitter cold winter months, occupancy in the financial year remained strong. We are however seeing slower fill rates, specifically in the South East, where commissioning periods on average are now taking up to four years before reaching maturity.

There is an increasing reliance on agency staff, and not just for nursing. Recruiting at management level is also proving to be a challenge. Operators are continuing to think creatively, recruiting Medical Technicians and upskilling them to nursing levels.

Operators are repositioning from nursing to personal care homes due to nursing staff shortages and higher clinical standards. There has been a decline of 16,580 nursing degree applications since March 2016, the last year in which students received an NHS bursary. If this trend continues, this will no doubt exacerbate the national crisis in nursing bed provision.

Furthermore, the social care funding crisis shows no signs of abating

and, indeed, the statistics speak for themselves. Almost 7,000 beds deregistered in 2017/18 as homes became unviable. Our study shows how staff costs as a percentage of income is significantly higher for homes that are mainly local authority funded (70%). Profit margins have fallen to 16% for these homes.

There is also inconsistency from the CQC inspections where operators are increasingly challenging report findings. This is coupled with the Competition and Markets Authority continuing to challenge the sector.

Although activity from the traditional lenders into the sector has been subdued over the last year or so, they have been replaced by a broader church of domestic and international capital.

What does the future hold? The next 12 months are likely to bring more of the same. Uncertainty remains over the long term plans from the Government for social care and the green paper on care and support for older people has been delayed until autumn 2018.

As Brexit negotiations make slow headway, significant uncertainty exists over the future free movement of labour and the legal rights of EU nationals already residing in the UK. An analysis of the Office for National Statistics suggest that ending freedom of movement could result in 115,000 fewer adult social care workers by 2026. This crisis will need a bit more than enhanced pay packages to recruit and retain staff in the coming years.

Our study reveals a capex differentiation between older and converted stock against new purpose-built facilities. Older homes are having to increase spend on refurbishment and maintenance as new purpose-built homes open and threaten their trading performance. We will continue to see this trend as the quality of care home schemes in the development pipeline reach new heights.

There are a lot of exciting new builds coming into the market with improved design, providing a lifestyle experience. Amenities comprise restaurants, cinemas, gym and spa facilities and children’s play areas.

The Dutch model There is also an emerging interest for the “Dutch model” driven by their innovative design, improving well-being of the residents.

It is truly overwhelming to see a strong investor appetite for future proof assets coming into the market.

The role of technology Technology will also play a substantial part in improving care to meet regulatory requirements. Operators have already started to invest in Artificial Intelligence, electronic care plans, medication monitoring devices and acoustic monitors, which alleviate pressure from staff. Examples include a smart wristband which comprises sensors to track and alert caregivers to falls, alterations in eating habits and behaviour.

Working alongside hospitals We will also see care homes working more closely with hospitals in regards to step down provisions, particularly in winter months when hospitals are under pressure to release blocked beds. In early 2018 we saw a Foundation Trust sign a five year sublease on a care home adjacent to the hospital campus.

An attractive target Despite operational challenges, particularly within social care, it is our view that the healthcare sector is one that is least affected by Brexit volatility, as demand is typically driven by domestic factors. Both domestic and international investors are seeking defensive sectors to invest in. Care homes remain an attractive target.

Important notice: This report is provided strictly on the basis that you cannot rely on its contents and Knight Frank LLP (and our affiliates, members and employees) will have no responsibility or liability whatsoever in relation to the accuracy, reliability, currency, completeness or otherwise of its contents or as to any assumption made or as to any errors or for any loss or damage resulting from any use of or reference to the contents. You must take specific independent advice in each case. It is for general outline interest only and will contain selective information. It does not purport to be definitive or complete. Its contents will not necessarily be within the knowledge or represent the opinion of Knight Frank LLP. Knight Frank LLP is a property consultant regulated by the Royal Institution of Chartered Surveyors and only provides services relating to real estate, not financial services. This report was researched and written in September 2018 based on evidence and data available to Knight Frank LLP at the time. It uses certain data available then, and reflects views of market sentiment at that time. Details or anticipated details may be provisional or have been estimated or otherwise provided by others without verification and may not be up to date when you read them. Computer-generated and other sample images or plans may only be broadly indicative and their subject matter may change. Images and photographs may show only certain parts of any property as they appeared at the time they were taken or as they were projected. Any forecasts or projections of future performance are inherently uncertain and liable to different outcomes or changes caused by circumstances whether of a political, economic, social or property market nature. Prices indicated in any currencies are usually based on a local figure provided to us and/or on a rate of exchange quoted on a selected date and may be rounded up or down. Any price indicated cannot be relied upon because the source or any relevant rate of exchange may not be accurate or up to date. VAT and other taxes may be payable in addition to any price in respect of any property according to the law applicable. © Knight Frank LLP 2018. All rights reserved. No part of this publication may be copied, disclosed or transmitted in any form or by any means, electronic or otherwise, without prior written permission from Knight Frank LLP for the specific form and content within which it appears. Each of the provisions set out in this notice shall only apply to the extent that any applicable laws permit. Knight Frank LLP is a limited liability partnership registered in England with registered number OC305934 and trades as Knight Frank. Our registered office is 55 Baker Street, London W1U 8AN, where you may look at a list of members’ names. Any person described as a partner is a member, consultant or employee of Knight Frank LLP, not a partner in a partnership.

COMMERCIAL RESEARCH

William Matthews Head of Commercial Research +44 20 3909 6842 william.matthews@knightfrank.com

Mandip Bhogal Associate +44 20 3869 4702 mandip.bhogal@knightfrank.com

HEALTHCARE Julian Evans FRICS Head of Healthcare +44 20 7861 1147 julian.evans@knightfrank.com

Patrick Evans MRICS Head of Corporate Valuations +44 20 7861 1757 patrick.evans@knightfrank.com

Kieren Cole MRICS Head of Commercial Valuations +44 20 7861 1563 kieren.cole@knightfrank.com

RECENT MARKET-LEADING RESEARCH PUBLICATIONS

Healthcare Development – 2018

Knight Frank Research provides strategic advice, consultancy services and forecasting to a wide range of clients worldwide including developers, investors, funding organisations, corporate institutions and the public sector. All our clients recognise the need for expert independent advice customised to their specific needs.

Front cover image: Mayflower Court, Anchor

Specialist Property Report 2018 – The Human Factor

Active Capital: The Report 2018

Healthcare Capital Markets – 2018

Knight Frank Research Reports are available at KnightFrank.com/Research