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In December´s edition of care sector publication, Caring Times, Castleoak Group Executive Chairman, Melville Knight, gives his view on the opportunities and challenges presented by the current economic downturn.
If a week is a long time in politics, then six months is a lifetime in the economy. The credit crunch, which seemed almost a distant snowball in March, had not only rolled down the mountain by September, but had transformed itself into the proverbial avalanche.
In the wake of international government and IMF intervention, the question about short-term prospects, never mind medium and long-term ones, remains top of the agenda.
“How are you finding things?” seems to be the first question encountered in just about every meeting – which is hardly surprising given the fact that we are all facing circumstances unseen for eighty years. In reality, everyone is looking at everyone else in the hope of finding some reassurance.
Whilst the care sector has not been entirely unaffected we probably have more reasons than most to be cheerful. In our experience, the demand for new-build care homes is undiminished, as is the appetite for extra care accommodation for rent. It’s only in the area of extra care for sale that we are detecting a slowing down – hardly a surprise taking into account the state of the general housing market.
The fundamentals of the sector – in terms of demographics and need – have not changed and were spelled out very forcefully by William Laing’s comments in “Caring Times” following the publication of Laing & Buisson’s Care of Elderly Market Survey for 2008. In his view, not only is the care sector “robustly underpinned by demography with the prospect of substantial growth in underlying demand in the decades to come”, but he even went as far as saying that there “is a clear signal that the sector is moving from a contraction to an expansion phase, albeit slowly, to meet these inexorable demographic pressures”.
His views, based on hard data, coincide with the anecdotal evidence we pick up in conversation with our customers and others, including consultants and funders, who have a close association with the sector.
Occupancy levels remain good and private fee payers are still coming in to the market. Private demand seems set to increase and, even though the current stagnation in the housing market and the fall in prices have produced some obvious timing pressures, what remains clear is that, the vast majority of those who planned to use their property equity in order to fund their long term-care, will continue to be able to do so. Even at reduced values, most unencumbered properties will release more than enough money to fund care for the average two years required.
If equity release is one issue, quality is another, and it is clear that the quality of accommodation is becoming more important than ever and that meeting expectations is critical. This upward momentum has been intensified by the introduction of the star rating system, which will inevitably increase the pressures on, and ultimately speed up the removal of, sub-standard stock. The emerging National Dementia Strategy will produce another focus on the need for high quality, purpose-built accommodation to facilitate delivery of the best possible care.
Funding, too, is not the universal problem that it appears to be elsewhere in the economy. Banks still seem to be very positive about the sector – which, after all, is needs-driven – and, in general, appear willing to support new developments. The impact of recent interest cuts, making borrowing more affordable, could have a further positive effect.
Of course, we are all aware that some highly leveraged groups with high debt are experiencing funding pressures. This, however, is most certainly not a reflection of funders losing their appetite for the sector - it is simply the impact of new commercial lending criteria coming into play.
Fortune, they say, favours the brave, and so it is no surprise to find that a number of UK and overseas private equity funds with cash to invest are looking carefully at the opportunity to develop new-build portfolios. Their interest in the sector right now not only reflects the underlying strength of the long-term demographic position, but also highlights that we should have confidence about a recovery in property values in the medium-term.
The pressures facing residential housebuilders provide the care sector with a golden opportunity to have the pick of sites. For the first time in many years we are seeing land, in excellent locations, available at economic prices. The spare capacity in the construction sector must also mean that, for those undertaking developments at the moment, they can be assured of very good value for money. Developers like Castleoak Care Developments are therefore now well-placed to deliver a pipeline of viable development opportunities to care providers.
In conclusion, caution is undoubtedly the mood music of the moment, but we should not lose sight of the fact that some of the best opportunities can arise in the toughest markets.