Why the UK care home market is worth investing in

Globally, the median age of populations is rising. It can present a problem because if there are less people of a working age, than retirees, who will generate the income tax to cover the welfare and cost of caring for the elderly?

The percentage of people who retire financially independent is around 5% of the population. The majority of retirees will need to work in retirement (74% of Americans believe so Thomson Reuters).  In the UK, 14% of retirees live in poverty according to AgeUK. In later years, the likelihood of needing additional medical care increases.

In the UK, 17% of the population is over 65. The proportion of the United Kingdom’s population aged 90 or over has been increasing ever since the 1980s and by 2040 nearly one in seven is projected to be aged 75.

As part of this growth, the number of over-85s is estimated to more than double from 1.5 million in 2014 to 3.6 million by 2039 according to the NHS Confederation. What this means is that the there is an extensive demand for care homes in the UK.

How does the UK government help provide for the cost of care in the UK?

At the moment, if a person living in the UK has the need for nursing care and they have less than £23,250 worth of personal assets, the government will cover the full cost of care. This applies to care for the elderly infirm and specialist dementia care.

There is a means test whereby some level of contribution will be made towards care for those who have less than £118,000. In a way, as an investment class, the UK care home sector provides a level of certainty of income because the rich can afford to pay – will pay – and the government subsidises those who cannot.

I have read that there has been an increase in the number of people with dementia

Number of UK patients with recorded diagnosis of dementia increases by 62% over seven years between 2007-14 (according to the Health and Social Care Information Centre). They need specialist 24-hour care with qualified nurses.

Is the government looking after people with dementia?

The National Health Service in the UK has been reducing capital and seeking out private partners to develop and manage care homes. Virgin Care entered the market in 2010, and over the past six years has been awarded contracts worth more than £1bn and runs over 200 NHS services. So private companies are developing and managing the care homes. The government will pay the bills – where the people can’t afford to.

How investors can make direct investments in this sector?

One can purchase a UK care home suite in a luxury retirement home for over 65s or a nursing home catering for dementia patients. In both instances the care home operator will lease the property back from the investor at net yields of up to 10% per annum. The care home operator essentially runs their business from the premises and rents property from the investor on a long lease of 10 years.

“High yielding, hands off investments like care homes and student accommodation investments have been very popular with overseas investors because they are fully-managed and pay regular income,” said investment director Arran Kerkvliet at One Touch Property; a specialist property broker in London that sources well-researched property developments for global investors seeking to diversify their income.

What are the risks?

Nursing care, qualified nurse shortage. Inflation and minimum wages driving costs up. This is why those leases are only 8% net.

How does the luxury care sector differ from nursing care?

Luxury care homes typically attract more self-paying residents, due to the higher weekly rentals. Luxury care homes are aimed at 65+ year olds who wish to downsize and move into a community environment.

They provide an assisted living environment where residents still maintain a degree of independence, but are given help with personal care and have opportunities to attend social events such as wine tastings, social games and nature walks.

There is a strong demand for suites in luxury care homes in the affluent parts of the South West of England, such as Somerset, where twenty-six per cent (26%) of the population are over 65 years of age.

Tom Morgan, a senior director for CBRE comments that staying in a care home has “become more of a lifestyle choice. People choose them for the mental stimulation and sociable environment”.

The opportunity to invest in luxury care homes is proving to be a lucrative one, as Berkley have reported that they make £30,000 profit per bed, and £2mi in profit per care home.

Weekly fees have increased in some instances by over 50%, driven by the lack of beds in luxury care homes. Investors have recognised the high returns that can be made, and appetite for high-end care homes with self-paying residents is surging.

Knight Frank cites £10bn of overseas equity that is set for investment in the sector, attracted by the stable income stream and the “hands-off” nature of the investment.

You can read more about care home investments, and the viability of investing in a luxury care home in the Free care home investment guide.