How to invest in the care home sector
How can you access the care home sector for investment?
At any point in time there are a number of nursing homes for sale. Investors may be wondering how profitable UK care home businesses are on average and how would one go about buying a care home business or nursing home? Our informative article answers these questions and sets out different care property you may choose to invest in. How other senior living investors are participating in the sector; the structures, risks and returns. Read our checklist for buying retirement property.
When evaluating the full spectrum of care property for sale the types include; investing in a nursing home, a residential care home for sale or buying a retirement property before you retire. Here are some of the questions and ideas to consider:
- Finding care homes for sale
- Care Quality Commission
- Types of Care Property
3.1 Residential Care
3.2 Nursing Care
3.3 Later Living Retirement Property
4.What is the profit margin for UK Care Homes?
- How to invest in the care sector:
5.1 Buying a care home business
5.2 Forward funding a care home development
5.3 Investing in a purpose-built care home REIT
5.4 Buying a care home room
- Conclusion: Understanding risks and rewards
Finding care homes for sale
Look around at the care homes for sale you will find a number of care home agents or business transfer agents that are marketing care homes. A large percentage of the businesses for sale are in need of improvement and the properties in need of updating. Care homes that have a poor CQC rating will often have a reduced income and the regulator has the ability to shut down them down. Ultimately who would want their loved one to stay at a home that has a poor record are delivering care?
Care Quality Commission
The Care Quality Commission (CQC) is the regulator of the care home sector; they inspect and provide ratings on residential care homes and nursing homes in the UK. They uphold safeguarding of care home residents and evaluate whether care home staff are receiving sufficient training to effectively meet the individual personal needs of residents when they carry out their duties.
Types of Care Property
Residential Care Homes
The majority of care homes provide residential care which includes services such as preparing meals, assisting with personal hygiene, creating stimulating activities and providing connectedness though a sense of community.
Some of the care home operators have a specialist team of qualified nurses who will be able to provide the additional services of 24 nursing care for patients with dementia, post-operation recovery (respite care) and those with providing end of live support to patients with terminal illnesses such as cancer.
Later Living Retirement Property
Later living villages are communities which are built for people over 55 who a looking to downsize. Purpose built retirement property has all the features of usual homes but will be designed for future accessibility as the needs of the owner or resident may change over time. The owner still has a great deal of independence.
The increasing appeal of assisted living is that the services on offer including; personal shopping, preparing meals and providing community entertainment and with excellent onsite facilities such as medical treatment centres covering physiotherapy, doctor’s surgeries and water aerobics.
Some of the senior living investors heavily investing in this sector are large pension funds are like Legal and General in their Guild Later Living Villages and Royal London’s £80 million Joint venture with Audley Group. The idea is to create communities that appeal more to residents that the homes that they were leaving.
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What is the profit margin for UK Care Homes?
Care Homes provide annuity style income which is both a steady and increasing income stream is ideally suits the long-term commitment that insurance companies and pension funds have to their investors. This could be the reason that they are growing their investment in the sector and why you should be seriously thinking about it too.
Knight Frank Care Home Trading Performance reviews
We have kept a close eye on the care home market reports since 2013. By studying the tables, you will also notice the that average weekly rental rates increased from £622 to £746 between 2013 to 2017.
That is an increase of 19.9% over 4 years.
The 2019 average U.K rents had increased to £837 per week by 2019. Thereby showing a further 12% increase.
Investors should take comfort in the fact that typical occupancy just shy of ninety per cent (89.5% in 2019) and that annual revenue increases more than inflation.
One should bear in mind that returns can vary on a care home and regional basis.
How to invest in the care sector:
Buying a care home business
When considering how to invest in the care home sector. Remember, that in most instances, you will be purchasing a care home business. It is not the bricks and mortar – although purpose-built and modern buildings can command a higher rental income – it is the revenue stream that you are purchasing. Those care homes which are consistently delivering the best service and managed-well will most likely be most profitable over the medium-term.
Forward funding a care home development
Established care home operators do search for and develop their own care homes. However, a landowner could also joint venture with property developer to build new care homes. The lease agreements with care home operators is often secured before the development takes place.
Investing in a purpose-built care home REIT
Care Home Real Estate Investment trusts like Target REIT and Impact REIT purchase the care homes with long term leases in place with well-established operators. They have a countrywide portfolio and target 6% annual returns. The total asset management costs of these type of REITS can be higher than other property funds. According to AJ Bell website, Target REIT’s 2019 annual costs were:
The annual ongoing costs of 3.76% reduce the net returns that investors could receive. The peace of mind that investor gains is that there are a team of asset managers and surveyors would conduct appraisals on the portfolio and meet with the care home operators to review the businesses annually. This obviously comes at a cost.
Buying a care home room
One Touch Investment has been marketing care home rooms for investment since 2015. The way it works is that some care home operators choose to release equity from their businesses by selling the underlying care home and leasing it back on fifteen to twenty-five-year lease (15-25). That way the operator is still able to conduct their business from the premises and have spare capital to fund their business growth and further care home purchases.
We tend to source care homes opportunities that are trading assets with a proven cash flow and income stream that cover the net income of the lease agreement. Operators are typically willing to contractually agree to a 10% net income on the lease which is either paid as a portioned monthly or quarterly income payment.
By now, you are probably starting to see some of the benefits and gain a comfortable understanding of how it may work for you. To discuss the best way forward arrange a call back with your investment consultant.
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Conclusion: Understanding risks and rewards
There are several ways to access the care home market. Whether you choose to purchase an entire care home, forward fund a care home development through a joint venture opportunity, purchase shares in a REIT or buy a care home room. Each option has its risks and rewards.
It is important to choose an option which makes the most sense to you. By that, we mean gaining an understanding and conducting some of your own research.
Here at One Touch we place useful information at your fingertips. Be it property sector information reports, comparable properties for sale and fully operational care home investment opportunities.
We are not financial advisors; we are a property agency with a focus on investment property. We aim to visit each property and meet with the care home manager; we look at the recent profit & loss of that specific care home as well as comparative weekly rents in the local area.
In a care home investing; your tenant, on a long-term commercial lease, is the operator. We do not offer ongoing asset management services…so it would be important to keep an eye on the company performance and future CQC reports throughout the investment term. When you feel it is the right time to sell, get back in contact and we can assist you with property resales as we have helped several other investors.
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