Colliers Review: care home market hindered by falling fees despite improved occupancy levels in 2014
Caring Times Latest
The UK healthcare market has experienced another consecutive increase in the number of residents in care homes (nursing, personal care and specialist homes) for the third time in 18 months according to the 20th biannual Care Homes Review from specialist healthcare advisors Colliers International. However despite augmented demand, profit margins are on a downward trajectory due to limited public funding as care home operators increasingly struggle to absorb costs.
The report, which focuses on the five key performance indicators of the care home industry, including occupancy rates, average weekly fees, payroll costs, non-payroll costs and profit margins (EBITDAR), found that occupancy levels are continuing to rise in all sectors and now exceed 90% in nursing homes, personal and specialist care homes.
Despite stronger occupancy, profit margins are becoming tighter; falling fee levels coupled with rising costs have meant profitability has fallen in both nursing and specialist care sectors (to 31.1% and 31.5% respectively) and have remained unchanged in the nursing home sector at 28.7%. Colliers International head of healthcare Adam Lenton said that, despite the rise in domiciliary care across the UK, there was clearly still a great need for registered residential care homes, which was only set to increase with the UK’s ageing population.
“However, limited public funding has led to stiff competition for the private purse, putting enormous pressure on fees and making for some particularly challenging trading conditions,” said Mr Lenton.
“There are concerns that the Dilnot review will open up private fee rates to greater scrutiny leading to a possible fall in private fees and increased competition as a result.”
Average weekly fees have been edging lower over the last 18 months, with real fees (with inflation taken into account) tracking down in 2014, especially in the nursing sector. Nursing fees declined 3% in real terms to £637 per week and by 12.6% since 2009. Specialist care homes saw weekly fees fall even further, by -6.7% in real terms, demonstrating even greater pressure on profits, as a result of increasing costs and falling fees. Personal care has generally fared better, maintaining its average fee in the last six months but has seen a 1.3% decrease in real terms.
Colliers’ analysis showed a small decline in nursing payroll costs in the first quarter of 2014 but the challenge of staff recruitment continues to face care home operators; the recent National Minimum Wage increase to £6.50 per hour was also an inevitable cost to be absorbed.
“Use of agency staff is prevalent and there is renewed focus on sourcing overseas support to resolve staffing issues in the longer term,” said Mr Lenton.
“However in the short term, this is likely to put continued pressure of payroll costs for care home operators, particularly by those operators who are unable to pass the cost on by increasing fees.”
Non-payroll costs across all sectors went up slightly in the first quarter of 2014, reaching 17.5% in personal care, 15.1% and 15.0% in specialist care. Rising costs in food and energy are yet further contributions to increasing pressures on business performance and resulting profits.
In the healthcare investment market, high quality primary healthcare facilities have been trading in a range from 4.75 to 6%. High quality care homes have also been trading between 5% and 6% in the South East, but regional assets and portfolios that were trading between 7.5% and 8% last year are seeing transactional yields at 7%or better. Dr Walter Boettcher, director of research and forecasting, Colliers International said: “The international ‘search for yield’ has lead overseas investors to compete ever more directly with ‘cash rich’ UK institutions to push down yields across asset classes and across the UK.”