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Is it worth investing in care homes

Are care homes worth the investment?

Reasons why it is worth investing in the UK care home market

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.

Britain's ageing population and underfunding

Britain’s population is ageing and the government does not have the resources available to provide care for them. In 2018 central government gave local authorities £21.3bn for social care, less than the £22bn it gave in 2011. The ageing population has only exacerbated the funding issues. According to the Office for National Statistics, in 2016 18% of the population was aged 65 and over and in some regions as many as one in three people were over the age of 65. With regards to future demand, according to The Lancet more than one million more people aged 65 and over will need round-the-clock care by 2035, which is a rise of over a third.

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A budget shortfall has meant that the government is more reliant than ever on private companies, who are willing to bridge the gap as there is a sustained demand for beds. Whilst Boris Johnson has pledged to invest more money in the social care sector, going off records of previous government’s investment suggests this isn’t likely to materialise. Under the Conservative government, spending on adult social care in England has fallen by 3% since 2009/10 according to the Institute for Government.

Even if the cash injection is delivered as promised, many are in double whether it will go far to remedy the situation. Think Tank the King’s Fund described the social care funding boost as “the bare minimum needed to patch up services for another year”, suggesting it is just papering over the cracks of a much deeper problem.

The number of people with dementia

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

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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 £1billion 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 65’s 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’ says 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.

The luxury care sector

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”.

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With a typical unit costing under £150,000, this type of commercial property investment bypasses stamp duty fees, and investors can make a healthy 10% contracted return per annum – much higher than returns achieved from putting the money in a savings account (typically around 1%). Retirees who sell their homes can trial living in a retirement home and avoid paying stamp duty if they make a subsequent purchase within three years. This affords them enough time to see if they like the retirement living environment or whether they wish to purchase accommodation elsewhere. Investors can also choose to rent out the unit for a set period and then decide whether they want to live in the unit or use the rental income to live in another development. If they choose to sell their house and downsize to a retirement property, they can gift money to their children and grandchildren, limiting the amount of inheritance tax they’d have to pay otherwise.

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Many luxury retirement home investments restrict the sale to over 65s only on a lifetime lease basis. The benefits of the luxury care investment opportunities One Touch offer are that they can be sold to owner-occupiers or investors alike. This opens a wider pool for resales, and allows for better capital uplift. Also, lifetime leases cannot be passed on to a beneficiary so if the occupant dies within 5 years the investment is returned to the company with no benefit to the remaining family’s inheritance and at a far greater cost. Conversely, the fixed-term nature of the leasehold that accompanies investments offered by One Touch can be passed onto other family members should the owner pass away before the leasehold is up.

In short, retirement property investments give individuals a lot of flexibility to choose what they want to do with their wealth, and at the very least they let them choose whether they are suited to living in a retirement home environment.

The opportunity to invest in luxury care homes and purchase a studio in a luxury retirement village is proving to be a lucrative one, as Berkley have reported that they make £30,000 profit per bed, and £2million 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. Start a conversation to explore how investing in care home rooms could work out for you

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