Newsroom

15.09.2014
The Outlook for Care Home Development

Melville Knight, Chief Executive of development and construction partner Castleoak, considers the current care home development market and what we can expect going forward.

Melville Knight, Castleoak

"Figures from Laing and Buisson* show the last five years have seen a fairly static number of new care beds coming through at approximately 7,000 per annum. In the short-term, we expect the rate of new care home development to continue to remain static, if not to decline a little, before picking up over the medium- to long-term," explains Mel.

"We believe the outlook for care home development is characterised by several significant opportunities and challenges, summarised as follows:"

Opportunities

House price inflation supporting higher fees

House price inflation and better liquidity in the housing market should support continued above inflation increases in private/self-pay fees. This will increase the attractiveness of developing new, high quality care accommodation. We expect the greatest care home development growth will remain in locations which attract a high percentage of self-funder residents and top-up fees.

Increased capital at a lower rate making deals more attractive for operators

Cost of care home capital

Attracted by a solid investment opportunity, there is a huge amount of UK and overseas capital available to invest in the UK care home property market. Combined with the fact that well located purpose built care homes are a relatively scarce investment opportunity, the cost of capital is being driven down as investors accept lower returns to attract and secure projects. Operators and developers are benefitting from this weight of capital.

Strong demographics support long-term growth

10,000 new care beds needed per annum

The UK’s ageing population is playing a fundamentally important role in supporting continued investment in the care home market, as well as growing interest from investors.

Crucially, over the next two decades the segment of the population aged 85 and over will see the greatest and fastest growth. This growth, coupled with the increasing incidence of dementia must lead to an increasing demand for residential and specialist dementia care.

Conservative estimates suggest at least 10,000 new beds will be needed each year.

Challenges

Reduced land availability 

As the property market regains its strength, the availability of land for new care home developments is becoming increasingly squeezed. Competition from residential developers, which typically pay more per acre and buy unconditionally, is particularly strong. Increased competition, coupled with reducing supply, is therefore making the task of finding the right sites at the right price more difficult than ever. 

New care home developments will be largely led by the availability of land. Maintaining strong relationships with land owners, agents and developers is therefore vital for supporting development plans, as is the ability to quickly assess the suitability of sites and respond to opportunities.

Planning challenges

There is generally a better appreciation amongst planners about care homes and the needs of an ageing population. Yet, land is still not being routinely allocated in local plans. Moreover, there is evidence that some local authorities are increasingly resistant to new care home developments due to fears they will end up bearing the cost of fees.
It remains important for planning applications to be well researched and documented with a good consultation process. Castleoak’s experienced in-house planning team continues to be highly successful in securing applications, but only as a result of meticulous preparation, effective relationship building and extensive public and stakeholder consultation.  

Increasing construction costs

Estimated construction price inflation

Increasing house building combined with skills shortages are driving up material and labour costs. As a result, construction costs are increasing. Significantly, we’ve recently heard several customer anecdotes of contractors returning tenders with prices 5-10% above budget. 

This is a trend we expect to continue, with construction price inflation predicted to be approximately 5% per annum for the next two years**.  To help offset increasing construction costs, value engineering can be undertaken through a collaborative process with your developer or contractor. This should be done at the pre-planning stage to save time and abortive costs.

Conclusion

As the economic recovery gains momentum, this presents both opportunities and challenges for organisations developing and operating new care homes. We remain optimistic that the challenges can be overcome and, in time, the growing demand for new care beds coupled with increasing customer expectations will drive the rate of new care home development.

*Laing and Buisson, 2013. New registrations and closures - Care homes for older and physically disabled people, UK, 1991-2013
**AECOM April 2014. Market Forecast: rebound on track

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