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Care Homes Reading time: 3 mins

Investing with care: The key to resilient returns in the UK care sector

14 Dec 2023

Over the coming decades, the UK care sector will become all the more critical. Demographic trends are placing ever-greater demands on an already ageing care system. Investment is needed now to meet the needs of the future.

Institutional investors and managers can work together to help transform care infrastructure in the UK. But it is important that this happens in the right way to deliver good outcomes.

How can investors build care home portfolios with resilient returns?

The answer is a quality-first approach.

The needs of the care system and investors are aligned

The UK needs more quality care homes.

“Over the next century, we’re set to see almost 300% growth in the over 85 cohort of the population,” explains Mike Toft, who is Head of Care Homes at Octopus Real Estate.

It’s not just the number of care homes, but the quality of care that can be provided.

“While there is a balance of care beds now, over the long term, we’re going to see a reduction in quality care beds being provided in the UK. There’s a big obsolescence issue underlying the provision of stock.”

“Around 50% of care homes in the UK were registered more than 20 years ago. These are often Victorian conversions, which lack ensuite wet rooms, suffer from inefficient design, and have poor ESG credentials.”

“Because of the age of the infrastructure, the ability for operators to provide the highest quality of care is becoming increasingly difficult. And we’re seeing some operators deciding to close care homes.”

There is a clear opportunity for private capital to build and operate care homes that are fit for the future. And focusing on quality is aligned with the needs of investors as well as customers.

Targeting resilient income

“It’s ultimately about the quality of care being provided to the elderly cohorts. That’s fundamental to what we’re doing.”

“Because we believe that focusing on quality of care from an investment strategy perspective leads to a more resilient income profile.”

A state-of-the-art home with the highest quality of care should ensure demand is strong and beds are full. That obviously translates into a more robust and predictable return. What’s good for residents – the very best care possible – is also good for investors.

Mike’s view on the link between the quality of care homes and the quality of investment performance was only reinforced during the global pandemic. As a whole, the care sector performed very well during a challenging period. However, it did draw attention to the clear advantages of fit-for-purpose homes.

“COVID-19 highlighted the difficulty some operators had to overcome in providing quality care in ageing homes compared to the homes we are investing in. Having those ensuite wet rooms, wider corridors, and the ease of segregation made an enormous difference.”

Looking ahead to the future, as newly developed care homes become more energy efficient, we’ll see the resilience of returns only strengthen.

“We’ve seen a multiplication in the energy costs operators are bearing. In some cases, there is as much as a 300% increase in utility costs. Modern care homes are more able to mitigate that cost pressure, whether that’s the introduction of PV panels or heat pumps over time.”

Our strategy

“What we’re doing with our current strategy is targetting long-term, countercyclical returns for our investors and meeting the growing demand for quality care homes.”

“Investing in the right locations, with operators capable of providing the highest quality of care, should lead to a resilient investment and allows us to build a more sustainable care sector.”

“We have a clinical assurance team, which is the cornerstone of the underwriting process. With highly experienced nurses in the team, we have eyes and ears on the ground. They’re liaising with the operators, liaising with their clinical leads, underwriting the clinical frameworks which operators have in place, and liaising with the regulator. That sets us up for success.”

“Fundamentally, what we’re doing is investing in care homes that we would be happy for our own loved ones to live in. Having homes that are fit for the future will ensure the right quality of care is provided.”

For more information, please get in touch with our team using the form below.


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