Investors eye attractive yields in UK care sector

This article is part of
Hunt for Income - November 2015

As life expectancy in the UK rises, funding older age is becoming an increasingly pressing problem.

There are currently four people of working age for every one person above the age of 65, but it is predicted that this will reduce to two in the next 35 years. This population dynamic, coupled with attractive yields, is driving significant interest in the healthcare sector from institutional and retail investors.

The UK’s elderly care sector is particularly seeing an increased level of investment activity as it benefits from this demographic trend. Not only is the number of 85-year-olds set to double in the next 20 years, the average life expectancy beyond retirement age is also growing rapidly. Just 40 years ago the average retiree lived for 10 years post-retirement, compared with 20 years today.

Rising life expectancy creates additional challenges in the form of frailty and chronic illnesses such as dementia. Pressure for funding continues to weigh on the NHS, with more than half of expenditure being directed towards the over-65s category. Hospitals are moving towards the delivery of high-acuity treatments, with the requirement for longer-term care moved to other sources, either via domiciliary care or into secondary care facilities such as residential care and rehabilitation units.

The investment opportunity lies with the fact that roughly 15 per cent of the over-85s are expected to make use of residential care of one form or another. To meet this demand, the UK’s ageing care-home stock needs a substantial upgrade – only 20 per cent of homes have been built since the turn of the century and so there is a necessity for investment in modern, purpose-built healthcare facilities run by quality care operators.

Leases to these operators can be very long – in some cases 35 years – and with the right agreements can achieve inflation-linked uplifts on insuring contracts for the duration.

The specialist investor in the sector should be able to obtain very attractive income streams secured against real assets, which compare favourably with other real estate assets such as primary healthcare (GP surgeries) and supermarkets.

But investing in the elderly care sector is not without its challenges and there have been a number of high-profile cases in recent years to illustrate this.

As in any service-led sector, there is the potential for reputational issues as a result of poor provision of care, which investors must seek to insulate themselves from.

The lessons first expressed by Florence Nightingale in the nineteenth century about ensuring high standards of care, both clinical and social, still hold true today – if the underlying care fundamentals are strong then the financial performance typically follows.

Care funding remains firmly on the agenda with an expanding gap in terms of the cost of elderly care between those residents paid for through government funds and those who are self-funded. The latter is in effect subsidising the government shortfall, with little in the way of care service differentiation.