Care home yields in line with other property sectors

In 2018, Knight Frank reports that there were £1.7 billion of healthcare transactions in 2017 and that 2018 will be a record year[1]. So much so, it states that the overall performance of the healthcare sector, that includes care homes, specialist care homes, acute hospitals etc. delivered the highest total returns for 5 years[2]. They record yields for care homes alone at 4%. Although this may not seem particularly high, they are very much in line with other property sectors and benefit from long dated income and strong covenants.

This is in stark contrast to Knight Frank’s 2014 report which put the yields offered by care homes at almost 10 per cent, at the top of the list of returns from property in the health sector.

So, what happened? Critically, care home fees have risen to a level that makes them very difficult to afford and fees have outstripped earnings by a large margin. Rising fees attracted private investors and companies sprang up offering creative ways to invest, such as ‘buy-to-let’ where you could buy the room or suite outright and take a return. Institutional investors funded developments and then placed those finished developments inside their pension or hedge funds and managed them for a steady return. The net result of all this is that yields have gone down as capacity has become constrained and capital values have risen.

From a sector perspective, over the last few years it has become apparent that in order to support the UK’s intention to ensure that all those who have care needs have them met, the industry needs to be sustainable and positioned to invest to meet growing future needs.

The Competition Markets Authority (CMA) states that the care homes sector is worth around £15.9 billion a year in the UK, with around 410,000 residents[3]. There is some uncertainty about future funding and policy direction but there is little doubt that the sector needs more capacity and as with other government led infrastructure programmes, private sector investment will inevitably be needed.

With an ageing population and under provision of care home beds, it is likely that there will be opportunities for investment in the UK care home sector over the coming years.

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[1] Knight Frank Healthcare Capital Markets 2018.

[2] The Investment Property Databank (IPD) UK index is the standard benchmark for investors to analyse the performance of property in the UK market. Source: MSCI

[3] CMA 2017 estimate.