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The following article appeared in the March edition of Agenda, the newsletter of ECCA (English Community Care Association), of which Castleoak is a member.
Developing care accommodation post credit crunch: opportunity or folly?
Care sector development, design and build specialist, Castleoak, has seen its own development activities accelerate over the past year as care providers look for flexible solutions to advancing their development programmes. Melville Knight, Castleoak’s Executive Chairman, reviews the opportunities and the pitfalls of developing now.
Opportunities
Demand
Strong demand for care accommodation continues. Laing & Buisson’s latest annual survey predicts a net increase in demand of 40,000 beds over the next 10 years.
Supply
A substantial proportion of existing stock is outdated and unfit for purpose. The complexity of needs and the economic pressures also make the viability for small care homes an issue.
Land
The housing market slowdown means we now have better land available at more realistic prices. However, as the house builders return to the market this will change and so, I believe, we have a one- to two-year opportunity.
Construction costs
Construction prices have fallen by more than 15% since their peak. Recovery in the construction sector will be slower than in the land market and it may not be back to full strength until 2014. So, the next three to four years should continue to offer really good value.
Funding
Banks and equity investors have been looking for safe havens and the care sector has definitely been identified as just that. We have found that both equity and debt funding have become easier to access for sound propositions, involving experienced developers and care providers.
Interest rates are at an historic low. The current 5 year swap rates at a little over 3% suggest that relatively low rates are here for the medium term and, despite higher margins, represent good value.
NHS finance
NHS funds will come under more pressure this year, regardless of the outcome of the General Election. With results and efficiency high on all political agendas, pressure to blur the boundaries between health and social care funding, and the care sector able to provide better outcomes at reduced cost, there could be increased opportunities for the sector in the health arena.
Private Fees
Despite the tough economic climate, reports suggest that funds remain available for self funders to pay all or part of their care home fees, with above inflation increases being sustained. This reflects, I believe, the needs driven nature of the demand and a move towards higher quality care provision, where available.
Risks
Planning
This is not a major problem but the process can be unpredictable, causing delays and adding cost.
Move to domiciliary care
Delivering increased care to people in their own homes for longer remains politically attractive because of the perceived cost advantages. However, there are limitations, particularly for the acute care needed by the older age groups and those with dementia, and local authorities are already concerned that cost savings have been overestimated.
Local authority finances
These will undoubtedly be squeezed, affecting fee rates and the number of placements in residential care.
Conclusions
It’s pretty clear that the opportunities outweigh the risks.
Of course, we have a vested interest in maintaining activity levels but I genuinely believe that there is a unique combination of factors which present the sector with an important opportunity to replace unsuitable stock and expand capacity over the next few years. This is evidenced by the number of healthcare entrepreneurs returning to the sector and the number of equity funds looking to enter.