Returns from an age-old problem

This article is part of
Alternative Investing - November 2014

The global financial crisis created a paradigm shift in the perception of risk.

The unprecedented collapse of most traditional asset classes prompted investors to look further afield for truly alternative forms of investment, immune from the short-term impact of market movements.

Furthermore, the subsequent low-interest rate environment of today has resulted in a major quest for income, driving the prices of many yielding assets well above fair value.

As investors seek to address these issues, nets have been cast far and wide. The care home sector, a relatively unknown but growing space, remains the preserve of a small band of investors, but its profile is rising. It is now being recognised for its low correlation to other assets, low volatility characteristics, as well as high and sustainable levels of income.

The care home sector’s emergence as an alternative form of investment is underpinned by undisputable demographic trends, such as an ageing population. The provision of residential care is not subject to market forces and the payers for such services are not directly affected by short-term sentiment.

The macro demographics are irrefutable. The number of people in the UK aged 85 and over was 1.6 million in 2013, and this is set to double over the next 20 years. From 2012 to 2032, the populations of 65 to 84 year olds and the over 85s are set to increase by 39 per cent and 106 per cent, respectively.

Rising need

Based on government actuary projections, the number of people living in residential care in the UK will increase to 1.25 million in 2056, compared to 419,000 in 2009. It is difficult to find a more invariable and global tailwind than the ageing population.

At the very time when the need for residential care is being driven upwards by demographic change, the total capacity in residential care homes has actually declined in the past decade. For example, mental health capacity has shrunk 24.8 per cent over the past 10 years. The supply-demand imbalance offers unrealised investment opportunities and significantly underpins the asset class, helping it to exhibit low correlations to both traditional and alternative assets.

The sweet spot for investing in care is with the operating companies, which are both the providers of care and owners of the real estate. The leading operators are creating profit levels in the region of 25-28 per cent for care provision, with gross fees being linked to retail price inflation. The sector is characterised by high barriers to entry because of the upfront capital operators possess and their specialist regulatory knowledge.

Such a solid level of return helps to provide a high and inflation-proofed income stream for investors, which is currently producing a running yield in the region of 8 per cent. In the current low-interest rate environment, a high and predictable income level is a rare commodity. It is especially favourable when compared to other alternative assets, the majority of which produce no income at all.