The UK Care Home Sector Has Been Through Hell, But Investors Still Want More Of It

It was when the army came to see Anne Copeland that the scale of the situation really hit home. In the beginning, the conversation was about turning empty buildings into care homes for people going in and out of hospital, to avoid the transmission of the coronavirus. By the end it had covered turning ice rinks into morgues and the shortage of refrigerated lorries to move bodies.

“You were having conversations that would have been unthinkable at Christmas,” Copeland, the head of specialist funds at Kames Capital, said of discussions she held with army officers and a local authority she prefers not to name, which happened around the end of March and beginning of April.

“Nothing was off the table in terms of how to deal with the situation. It was blind panic.”

Other real estate sectors have had their operations affected by the coronavirus pandemic, but nothing like care homes and senior living. The sector deals every day with things society would prefer not to think about: ageing, death, dementia, disease, incontinence. But during the coronavirus crisis, it has been challenged like never before. 

Those in the sector are angry about the way the spread of COVID-19 in care homes was managed by the authorities. Sources told Bisnow the chaos about how to handle the pandemic led to situations where operators and their landlord partners felt like they were being forced to choose who lived and died. They felt unprotected from a virus that disproportionately affected the vulnerable people we as a society have asked them to protect. In that sense, the virus has shone an even brighter light on the problems in caring for an ageing population that have been building for years, but which the public and private sectors have been unable to solve.

But in spite of all this, those that know the world of care homes and senior living best argue that the sector has met an impossible challenge with skill and dignity, and prevented the death toll rising even higher than it did. As a result, as unimportant as it may seem at such a time of turmoil, the signs are that its reputation as a real estate asset class has been enhanced. The business model has not become any easier, but investor appetite remains strong. 

Bisnow is holding a webinar on the healthcare real estate sector on 1 September, looking at the strong demand drivers. Sign up here.

Copeland has invested in the healthcare sector for two decades, including through Kames’ Target Healthcare Property Fund. She has seen the sector expand from a niche within the niche of the alternative property universe to one in which £2.5B was invested last year in the UK. Myriad types of investor are drawn to the typically long leases, and the strong demographic support: We are all living longer, but not necessarily healthier, so the need for specialised senior living becomes greater and greater.

Her description of the upheaval caused by the pandemic is eye-opening, and the numbers startling. There were 29,000 more deaths in care homes in England and Wales in the first half of 2020 compared to the first half of last year, the Office for National Statistics reported. Overall the death rate rose year-over-year from 37,000 to 66,000, with 20,000 of those deaths directly a result of COVID-19 and many more indirectly attributable, the ONS said. 

More people died in care homes from COVID-19 in the UK than in any other European country except Spain, with the mortality rate double that of France and 13 times higher than Germany, according to a study by the London School of Economics.   

Several policy decisions have angered those in the care home sector. Around 25,000 people were discharged from hospitals into care homes without being tested, a decision that Copeland said caused excess deaths. General practitioners and hospitals were specifically told not to test people going into homes, so that hospital beds could be freed up, for fear that the NHS would be overwhelmed. This fear was especially acute in the weeks before the emergency Nightingale hospitals around the country were established. 

“People talk about underlying health issues, and yes, these people would die anyway,” Copeland said. “But not that week, or that day. Yes, you can say they’ve lived a good life, but that doesn’t wash in a developed country; we can’t decide who lives and dies.” 

In some areas, GPs contacted care homes asking to speak to residents to suggest they include “do not attempt resuscitation” notices in their care plans, meaning that if they were to have a stroke, heart attack or fall, emergency services would not be called. The intention was to keep hospitals from becoming overwhelmed. Copeland cites stories about GPs handing out clipboards for residents to sign at homes with little consultation.

“The No. 1 priority, financially and health-wise, was to protect the NHS; they didn’t want anyone coming from care homes into hospitals. You are asking people to take a decision about who gets a ventilator, who lives and dies. There was uproar.” 

On a day-to-day level, care home staff could not get coronavirus tests, and personal protective equipment was directed toward the NHS, increasing the risk to care home staff and patients. When care workers inevitably did contract the virus, homes were often left dangerously understaffed. Copeland spoke of staff camping in the garden of homes, not seeing their own families, in order to make sure residents were cared for. 

Caring for residents with dementia at a time like this is particularly difficult, she said. Facial recognition is vital for people with dementia, so staff wearing face masks is very upsetting. These residents are often unable to follow instructions about staying in their rooms, making it difficult to help them self-isolate.

Kames was in the middle of signing a lease on a property in Essex when it was contacted by the NHS and army to see if it could provide assistance in expanding the care network quickly. It put the negotiations on hold and the army used its expertise in field logistics to, in just 14 days, create a 64-bed facility for patients who had been in intensive care after contracting COVID-19 — and so couldn't go back into homes — that needed further medical care after being discharged. 

The business model for care homes has undoubtedly been hit for the short and medium term by the coronavirus.

Target Healthcare REIT chief executive Kenneth MacKenzie said occupancy in the company’s portfolio is down around 8% to 10% as a result of the pandemic. As residents have died, homes have been unwilling to take in new tenants without a robust testing regimen in place, an effort to avoid the virus entering their facility. 

Like Copeland, MacKenzie said operators in the sector have dealt well with an impossible situation.

“If you believed what you read in the media, you’d never invest in the care home sector,” he said, citing articles warning of an imminent collapse in the sector that would lead to mass closure of homes.

Over the last few months, 375 of the residents in Target Healthcare REIT's portfolio had died, he said, compared to about 300 during any normal period. The 25% excess deaths are far below what might have been expected given the issues the sector has faced, he said, and well below the almost 100% rise the ONS found across the sector.

He added that while occupancy is down, enquiries are back to pre-coronavirus levels; the issue is the ability of homes to admit new residents. 

This creates a problem for the care home sector until a coronavirus vaccine is found. 

“As an operator, you have to build a business model that is sustainable and profitable through all cycles,” Patron Capital Managing Director Keith Breslauer said.

He said that in the part of the sector where governments and local authorities pay for care, a shortage of staff meant operators were increasingly forced to rely on agency workers, which pushed up costs and squeezed margins.

Those margins are compressed even more when you factor in the increased ongoing costs of PPE and testing that homes will incur until a vaccine for the coronavirus is found. Homes operating at 10% reduced occupancy is not sustainable for extended periods of time.

“If you’re not already invested and you are looking at it from outside, it’s a challenge to underwrite at the moment,” Breslauer said.

Landlords and operators have had to work together to address the challenges facing care homes in this environment.

As well as paying for PPE for their operators where possible, landlords have considered real estate-led solutions ranging from the creation of new externally accessed visitors’ rooms with internal screens to the purchase and installation of thermal imaging cameras.

“While the landlords have done this because it is ‘the right thing to do’, the added reassurance for new referrals will also support their tenants to rebuild their occupancy levels,” CBRE Senior Director Sam Wright said. “This in turn will support the business and help the tenants to pay their rent.”

And in spite of all of the challenges outlined, the rent has been paid. CBRE sampled a group of investors that owned portfolios totalling 24,000 care home beds, and found a rental collection rate of 97% in June, an incredibly high figure given the operational challenges homes have faced, Copeland said. That compares to an overall rental collection rate in commercial property of less than 80%, according to Re-Leased.

“This shows that even in a black swan event where the industry is on the front line and care operators face an array of financial and operational challenges, rent collection levels have remained robust,” Wright said.

“It is still too early to predict what the next 12 months hold for the care sector and if or when there will be a second or third wave. Nevertheless, most operators are now well prepared for the second wave and, while occupancy levels fell 8%-10% overall, they did not reach the apocalyptic levels that some were predicting, and are now beginning to rise. So, while challenges remain, the general outlook for the sector is positive.”   

Copeland said the transactional market is also operational, with assets trading at yields equivalent to those seen before the pandemic.

“Along with rent collection rates, I think that’s a sign of how well the sector has done, and the fact that there will be continued investor interest,” she said.

And that investment will be needed, not just for real estate, but for society, because the UK has a problem with caring for its ageing population. 

About 6,500 care homes totalling 140,000 beds are at risk of closure over the next five years, Knight Frank predicts, which will create a shortage of much-needed beds. 

The coronavirus has exposed that not only does the UK not have enough care home beds, it also has the wrong sort.

Target Healthcare’s MacKenzie said of the roughly 450,000 care home beds in Britain, more than 80,000 are in properties more than 40 years old, essentially converted houses, and so do not have en suite toilet and shower facilities. Perhaps another 100,000 might have a toilet but no shower.

“A lot of our residents are doubly incontinent,” he said. “If that were you, would you want to be changed in the privacy of your own room, or in a communal bathroom?”

In normal times, this is a matter of ageing with dignity. Today, it is a matter of disease control: It is far easier for residents to self-isolate, and operators to manage a viral outbreak, in homes with en-suite facilities.

Knight Frank estimates it will cost about £15B to upgrade the UK’s stock of care home beds to the required standard. 

“That is why we only invest in new, purpose-built facilities, and that is what investors want,” MacKenzie said. “There will be a flight to quality.”

He added that design features like wider corridors and screening rooms of the sort mentioned by CBRE’s Wright were becoming increasingly prevalent even before the pandemic, a trend that will only accelerate. 

Knight Frank Head of Healthcare Julian Evans said more and more investors are being attracted to the sector, especially pension funds that need long-term income to match their liabilities. While the average commercial lease has fallen to six-and-a-half years, according to Knight Frank, leases in the healthcare and care home sector are typically for 15 years or more. It is apt that homes for pensioners are a good way of paying pensions. 

Evans said he is seeing an increasing interest in the sector in the UK from infrastructure funds that consider assets like care homes as a crucial piece of social infrastructure. Australian firm AMP, which entered the UK market in 2017, is an example. 

But more broadly, we as a society need to think about how we pay to take care of our ageing population. The budget for social care has not kept up with the demand, Evans said, and as Breslauer highlighted, it certainly hasn’t kept up with rising costs. 

“People don’t like thinking about death, but this is a ticking time bomb,” Evans said. “There is increasing amount of private capital looking at the market, but unless we are willing to pay more tax, like they do in other countries, then this issue won’t be solved.”