Care Home Market in the UK 2015 - Alchemy Research and ... · Given the market’s fundamentals...

Care Home Market in the UK

2015

Alchemy Research and Analytics 2

Contents

• Executive Summary

• Demographic Trends

o Demographic Structure and Forecasts

o Regional Distribution of Aged Population

o Global Trends

• Overview of UK’s Care Home Market

o Market Structure

o Market Size and Growth Prospects

o Supply-Demand Dynamics

o Hotspots in London and South East

Demand-Supply Analysis

• Competitive Landscape

• Investments

• Outlook


Executive Summary

Demographic Shift

• Higher life expectancy, better healthcare facilities as well as long-term decline in fertility levels have contributed towards rapidly ageing demographic structure in the UK

• Within the 65+ years population, the fastest growing segment is expected to be of the 85+ population. As per projections, by the end of 2032 the number of 85+ years people would double from 2012 levels

• UK’s ageing demographic structure is part of an overall global trend, particularly discernible in developed economies

Regional Variations

• UK’s Southern region is expected to add the maximum number of 65+ people. The South East in particular is a key region, accounting for the maximum concentration of the elderly population

• The care home market in the South East is dominated by private providers, given the higher proportion of self payers, which enables better pricing. In contrast, the care home market in Northern regions is primarily Local Authority led

Market Structure

• UK’s care home market, while structured in a public-private partnership, is increasingly driven by private suppliers and self-payers. Given the market’s fundamentals (ageing population, rise in self payers, etc.), market size is projected to reach ₤46 billion by 2040 - a threefold rise compared to the level in 2011

• Organised private sector care home market remains highly fragmented. Top ten private service providers account for just about 20% of the overall capacity

Investment

• Lately, private equity interest has been high towards UK’s care home market. Most of the PE deals have been in the sub-£ 500 million range. US REITs have shown a particular interest due to their saturated domestic markets

• These investments appear to compensating for the gap arising from a scaling back of government expenditure in care home provision – public outlay on elderly care has ben progressively reduced due to budgetary constraints

Outlook

• Increasing likelihood of consolidation in the market as the larger players seek economies of scale to drive their growth plans. The OpCo-PropCo model is preferred as institutional investors look to partner high quality operators

• Sovereign Wealth Funds might enter the market given the attractive returns potential, high quality long term cash flows and favourable market dynamics

London and South East

• The elderly population in Greater London area is concentrated in the peripheries, especially in the West and North West areas of London. There are a large number of players but facilities are typically smaller given the high property prices in the region

• Elderly population in the South East is concentrated in the coastal belt due to favourable weather conditions. There are fewer players in these locations, but facilities are larger ensuring there is no shortage of supply of care home beds


Demographic Trends


The UK’s population is ageing rapidly...

UK Demographic Break-up (2012 and 2032) 1 Elderly Population Break up (in millions)1

71.7

3.1

13.4

43.0

12.2

63.7

1.4

9.4

41.7

11.2

Overall Population

85+

65-84

15-64

0-14

2012 2032

Po

pu

lati

on

by

age

gro

up

(in

mill

ion

s) Up

9%

Up 3%

Up 43%

Up 113%

Up 13%

5.82

6.66

7.97

3.58

4.61

5.44

1.44 1.99

3.06

2012 2022 2032

65-74 75-84 85+

Source: ONS

• UK’s population is ageing rapidly, with the median age of the population projected to increase to 41.7 years (2032) from 39.9 years currently2(2014)

• The elderly population in the UK (aged 65 years and above) is forecast to grow 1.52x in the next 20 years, adding almost 6 million people between 2012 and 2032 to reach a total of 16.47 million in 2032. This represents more than 70% of the projected increase in the overall population in the UK during the same period

• The 85+ years age group is expected to grow the fastest, owing to better healthcare facilities and improving life expectancy, and will more than double to 3.06 million by 2032, from 1.44 million currently. The 75-84 years and 65-74 years age groups are expected to grow by 52% and 37% respectively during the same period


…with the Southern regions projected to account for the maximum change in the population of 65+ year olds...

Scotland

UK elderly population - Regional breakup1

926 49

586

Total number of 65+ year olds in 2012 (in ‘000s)

% change in population of 65+ year olds (2012-32)

#

#

N. Ireland

North West

North East

Yorks & Humber

East Midlands

West Midlands

East

South East

Greater London

South West

Wales

273 63

1,222 45

469 48

913 47

811 56

984 46

1,078 56

1,558 58

1,085 53

938 58

42

Source: ONS

Southern Regions

• The Southern Regions comprising East England, South East, Greater London and South West cumulatively accounted for c.43% of the 65+ year old population in the UK in 2012

• In the next two decades, these regions are expected to add 2.6 million 65+ year olds, or almost 47% of the overall addition to the 65+ years population in the UK

South East Region

• The South East accounts for the largest concentration of 65+ years old in the UK, having almost 1.6 million elderly people

• The region is expected to add 0.9 million people in the next 20 years, almost twice that of the next biggest concentration, North West, which is expected to add 0.5 million people during the same time period


…this trend being part of a broader demographic trend within developed economies globally

74.7 million

9.86 million

39.17 million

16.47 million 16.72 million

22.48 million

16.56 million

15%

20%

25%

30%

35%

0 5 10 15 20 25 30 35 40

% o

f 6

5+

yrs.

of

ove

rall

po

pu

lati

on

20

32

Increased in the number of 65+ yrs. Population 2032 Millions

Global comparison of elderly population 2012-20321

• The elderly population (above 65 yrs.) in G7 countries was 17.5% of overall population and is projected to increase to 24.40% in 2032 While Japan possesses the highest of 32.76%, followed by Germany (29.02%, Canada (25.34%, France (23.95%), UK (22.96%) UK possesses the fourth position in the G7 countries with 16.47 million of elder population in 2032, from 65.83% change from 2012

• Population projection for the period till 2050, as per the Pew Research Centre, suggest that the number of 65+ people could triple as compared to the level in 2010. These estimates particularly point to a possible decline in population of countries such as Japan, Russia and Germany

Source: US Census Bureau (Global Comparison of elderly population 2012-2032; Pew Research Centre report


Overview of UK care home market


Care Home Market

Supply - Providers

Demand - Funders

Non-Public

Public

Private (for profit)

Voluntary (not for profit)

Local Authority (LA)

National Health Service (NHS)

Self Payers

Public Purchasers

Local Authority (LA)

National Health Service (NHS)

Non-Public,

90%

Public , 10%

Self Payers,

40%

Public Purchasers

, 60%

Source: HM revenue and customs, NHS

The Care Homes Market in the UK is structured along Public and Private participation; with the share of private suppliers and payers progressively increasing over time


0.96 1.96 3.02 4.43

12.82 18.72

28.76

42.08

2011 2020 2030 2040

Public Private

• The residential care or care home market is expected to expand threefold between 2011 and 2040 to reach £46.5 billion in 2040,, with the private sector accounting for 90% of overall industry revenues

• Growth can be attributed to the following drivers: Increase in house prices which will directly impact the fees being charged by the care home provider. House prices are expected to

increase 2.3x between 2014 and 2040

A rapidly ageing population will drive demand for care home beds, which, in turn will catalyse expansion in bed capacity at a CAGR of 2.4% till 2040. By then, the total care home population is expected to reach 824,000 mostly to be catered to by the private sector service providers

The rise in self payers amongst older people will influence demand for care home beds, particularly in the private sector. The latter is typically expensive than the available public sector options

Source: Analysis of UK Long Term Care Market

Market Size in terms of revenue (£ billion) Market Size in terms of care home population (‘000s)

CAGR: 4.3%

33.01 56.01 70.29 87.77

387.10 473.10

591.49

737.04

2011 2020 2030 2040

Public Private

CAGR: 2.4%

Long term forecasts indicate that the care homes market in the UK is expected to grow at a sustained pace, with the private sector continuing to play a dominant role


10%

90%

Public Sector Private Sector

20%

80%

Organized Unorganized

25%

23%

13%

12%

5%

5%

4%

4% 4% 4% Four Seasons

Health Care Ltd Bupa Care Homes

HC-One Ltd

Barchester Healthcare Ltd Care UK

Methodist Homes

Anchor Trust

Providers No. of Beds

Four Seasons Health Care Ltd 23,446

Bupa Care Homes 21,720

HC-One Ltd 12,683

Barchester Healthcare Ltd 11,430

Care UK 5,007

Methodist Homes 4,812

Anchor Trust 4,203

Orchard Care Homes 3,879

Bondcare Group 3,781

European Care Group 3,719

Total 94,680

Public vs. Private Sector Breakup Private Sector Breakup Organized Sector Market Share (2011)

• The share of public sector care homes has decreased progressively in the last few decades, primarily as a result of high costs and budgetary constraints In 1998 public sector share of cumulative bed capacity was 18.36%

which decreased sharply to 8%1 in 2012 • In 2011, the Local Authority spend on care homes was £17

billion2(14.19% of total health care spend of UK3) which was reduced to £15 billion2 in 2013 (12.07% of total healthcare spend in UK3)

• The market is fragmented. In the private sector there are approx. 9,500 providers of which almost 80% own just one home3 . The two largest players in the private sector are Four Seasons and Bupa which account for 4.95% and 4.59% of total capacity respectively

Total Organized Capacity: 94,680

Source: Adult Social care in England, National Audit Office, ukpublicspending.co.uk

100% = 473,400

Fragmented market with the top 10 players accounting for only 20% of the private sector capacity


Regional distribution of care home market (2014)

377 434 385 295 621 850

582 469 472

1,4

50

1,1

55

1,2

74

57

5

1,4

29

2,4

26

1,7

51

1,3

45

1,1

46

0

500

1,000

1,500

2,000

2,500

3,000

3,500 Ea

st

East

M

idla

nd

s

Lon

do

n

No

rth

Eas

t

No

rth

Wes

t

Sou

th E

ast

Sou

th W

est

Wes

t M

idla

nd

s

York

s &

H

um

ber

Nu

mb

er o

f ca

re h

om

es

Nursing Residential

• Three regions namely South East (16%), South West (12%) and North West (10%) account for 45% of the 17,036 care homes in England. These regions also account for roughly the same proportion (44.3%) of care home beds

• Over 70% of the care homes are residential, the rest being for nursing

• Given that property prices are higher in the South East, South West and London, care home facilities in these regions are comparatively smaller averaging 24-26 beds, while those in the North (NE, NW and Y+H) average 31-33 beds

• Between regions, there is significant diversity in care home beds which are either under local authority or independent. In this comparison, London has maximum beds under local authority

28,385

39,455

43,026

46,144

49,621

51,270

57,706

63,628

84,052

10,000 30,000 50,000 70,000 90,000

North East

London

East Midlands

West Midlands

Yorkshire & Humberside

East

South West

North West

South East

Total care home beds

Region-wise total care home beds (2012)

The South East, South West and North West regions have the highest concentration of care home assets; London’s care home market is primarily Local Authority driven

Source: carehome.co.uk; Care Quality Commission

Care home bed diversity (2013)

41% 42% 46% 47% 49% 50% 52% 54% 67%

59% 58% 54% 53% 51% 50% 48% 46% 33%

0%

20%

40%

60%

80%

100%

Sou

th W

est

Sou

th E

ast

York

shir

e an

d

Hu

mb

er

East

East

Mid

lan

ds

Wes

t M

idla

nd

s

No

rth

Wes

t

No

rth

Eas

t

Lon

do

n

Independent Under LA


108

120

157 123

104

129

65

70

81

164 109

5

South East England

North West England

West Midlands

Yorkshire and the Humber

East of England

South West England

East Midlands

Greater London

North East England

Wales

Northern Ireland

Scotland

• Barring London, the southern regions have attracted more private participation and institutional funding (US REITs) in sharp contrast to the northern region where local authorities play a major role in the care home market

• Given the higher share of private paying residents, the average weekly fees are more in the southern region than in the northern region. In 2012 South East had 55% self payers, the highest in England

• In line with high private participation, weekly fee for care home is relatively higher in South East region In UK the average weekly fee for care

homes is £660 in 2013-14 South East has the highest average

weekly fee of £850 for care homes North East has the lowest average weekly

fee of £486 for care homes

Regional distribution of Care Homes of top 10 Private Sector Providers

Top service providers have consequently favoured the South East and North West; their presence in the Greater London area is conspicuously low

Source: Care Homes Trading Performance Review 2014 Knight Frank, ONS


London and South East – borough-level demand for care homes

Proportion of 65+ population

Bromley

Barnet Croydon

Havering

Enfield

Bexley

Hillingdon

Sutton

Harrow

Richmond upon Thames

Redbridge Ealing Brent

Hounslow

Greenwich

New Forest Arun

Wealden

Thanet

Chichester

Horsham

Rother

Havant

Fareham

East Hampshire Shepway

Lewes

Dover Worthing Eastbourne

0%

5%

10%

15%

20%

25%

30%

35% London South East England

• Top 30 boroughs of London and South East regions show a wide range in the share of 65+ population • In London, share of the elderly population ranges from 11% to 19% • In South East, it is relatively higher, ranging between 22% and 30%

Source: Care Home UK and Alchemy Research analysis

• For a deeper analysis, we have narrowed down on UK’s two regions – London and South East due to their resilient housing market fundamentals. Of late, housing prices have risen sharply in both these regions. Real estate property prices are among the key determinants in the investment and pricing decisions in private care home facilities

• This analysis is undertaken for the top 15 boroughs by elderly population in Greater London and South East for key parameters related to the care home market. It brings to the fore a spatial context of the underlying demand-supply dynamics


Spatial distribution of elderly population share

• The distribution of elderly population in the South East and Greater London area shows distinct patterns in spatial terms: In London, the 65+ population appears to be concentrated in the peripheral region, especially in the West and North Western

peripheries – a reflection of the high cost of living in central London In South East, the concentration of 65+ population is in the coastal locations of the region – partly on account of better weather

conditions and relatively lower cost of living



Spatial distribution of single-person households in 65+ age group

• London boroughs show a relatively higher number of single-person households among 65+ age population. In South East, the number of such boroughs are significantly fewer

• Presence of significant number of such households conveys the need for targeted care home facilities. Apparently, there is a need for care homes tailored to the high prevalence of single person households in outer London



Spatial distribution of care home bed penetration in 65+ age group

• Penetration of care home beds is defined here as the number of beds per 1,000 population in 65+ age group • Except Croydon in London, all the top boroughs in care home bed penetration are found in South East. This can be partly explained by the

rising number of self pay care home residents in the South East region, which has in turn fuelled the growth in private operator led care home beds



Spatial distribution of number of care home operators

• The peripheral area of London shows a significant share of the care home operators as compared to the South East region. Taking into consideration that these areas have a relatively lower concentration of care home beds, it is evident that most of these facilities are smaller in size with limited number of beds

• On the other hand, there is lesser competition in the coastal areas, as operators have built large facilities with comparatively greater number of beds



Competitive Landscape


• Due to competition, care home market players operate with narrow margins. Industry studies show that most operators face a highly elastic demand, due to which mark-up rates are low

• The market share of top 10 players is about 17% by revenue. Four Seasons Healthcare Ltd (FSHC) is the UK’s largest care home operator both in revenue and capacity terms followed by Bupa Care Homes

• HC-One Ltd is a new operator in UK care home market and is the third largest operator. The company came into being by acquiring care home facilities of the erstwhile Southern Cross which went into administration

Four Seasons and Bupa are the leaders, followed by Barchester and HC-One which are key mid-level players in care home market

Source: Company Websites

Competitive Landscape

0

10

20

30

40

50

60

70

80

90

0 5,000 10,000 15,000 20,000 25,000 30,000

Bed

s p

er h

om

e

Total number of beds

FRINGE MID LEVEL LEADERS


75 %

85 %

95 %

0 5,000 10,000 15,000 20,000 25,000

Occ

up

ancy

rat

e

Beds

• Occupancy levels for most of the top ten private players are in the range of 85-95 percent • The not-for-profit operators appear to be better positioned in terms of occupancy rates than their counterparts operating as ‘for profit’.

This can be possibly attributed to their service charges which are comparatively lower than that of the ‘for profit’ players Methodist Homes, a not-for-profit care home operator, has the highest occupancy at 96%

• The operator with lowest occupancy rate is Orchard Care Homes (79%)

Relative position of top 10 private players – occupancy rates

Source: Various care home operators

Methodist Homes (not for profit)

Anchor Trust (not for profit)

Care UK

Somerset Care (not for profit)

Orchard Care Homes

Barchester Healthcare

HC-One

Bupa Care Homes

Four Seasons Health Care


Investment Scenario


0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Sep-02 Jan-04 May-05 Oct-06 Feb-08 Jul-09 Nov-10 Apr-12 Aug-13 Dec-14 May-16

Inve

stm

ent

(£ m

illio

n)

Private equity investment in care home market

• The majority of PE deals has been in the sub-£500 million range. The major portion of PE investments was attracted by Four Seasons Healthcare Ltd followed by Care UK, ANS Plc, Myriad Healthcare Ltd, and Avery Healthcare among others

• Investments by Bupa Care Homes and Four Seasons Healthcare Ltd were for their capacity expansions • US Real Estate Investment Trusts (REITs) have invested heavily in UK care home market US REITs interest is partly driven by saturation in their domestic markets. Other key factors include long lease in care home sector in UK

(25-30 years) and better yield (in UK it is 7% compared to 3% in US) Notably, US REITs are not interested in running care homes themselves but in sale and leaseback deals for which they are on the lookout

for reliable care home operators • Banks in UK are increasing their lending exposure to the care home sector

Attractive demographics and supply-demand dynamics have attracted funding from US based REITs as well as PE firms...

Source: Healthcare Investment in 2014, Knight Frank, Residential Elderly Care 2014, Grant Thornton

REIT deals


11.29

10.98

10.06 10.11 10.38

5.1%

4.8% 4.2% 4.0% 4.1%

0%

1%

2%

3%

4%

5%

6%

9.4

9.6

9.8

10.0

10.2

10.4

10.6

10.8

11.0

11.2

11.4

2009-10 2010-11 2011-12 2012-13 2013-14

Shar

e in

to

tal o

ld a

ge p

ub

lic

exp

end

itu

re

Exp

end

itu

re (

£ b

illio

n)

Personal Social Services for Old Age People Public Expenditure4 Total social protection public expenditure

223

230

240

250 251

205

210

215

220

225

230

235

240

245

250

255

2009-10 2010-11 2011-12 2012-13 2013-14

Exp

end

itu

re (

£ b

illio

n)

• Total social protection expenditure was £223 billion in 2009-10 which increased to £251 billion in 2013-14. But during the same time expenditure on elderly people decreased

• The reduction in spending by government came in the aftermath of growing budgetary constraints in meeting the rising demand for social care among older people of 65+ age In 2010 the central government reduced the budgetary allocation to local governments by 26% from 2011-12 to 2014-15 In 2013, the government announced a further 10% reduction covering period till 2015-16 Local authorities correspondingly reduced their spending on adult social care. This resulted in a growing number of older people having

to use their own resources to support themselves or go without care

...effectively filling in the void created by declining government spending on elderly care

Source: Public Expenditure Statistical Analysis 2014 HM Treasury, Nuffield Trust


Outlook


Strong demographics support investment opportunities

High fees and house price inflation, attracts developers Market size and growth

• UK’s demographic structure is clearly showing a pattern towards rising share of elderly population due to improvement in life expectancy as a result of better healthcare services and lower fertility rates

• The 85+ age group in particular is the fastest growing segment in the elderly population

• In addition, the presence of a significant share of single-person households in the elderly population, points to a defined scope of providing tailored care home facilities

• There are major concentrations of elderly population across regions, enabling potential investors and operators to focus their efforts on these regions

• The average fees of the care home in UK is well supported by house price inflation

• Self payers are increasing and hence this is an opportunity for the investments in the development of premium care homes

• Regional level analysis shows higher fee is associated with the Southern regions

• For residential care home, Greater London takes the highest average weekly fees level at £663 followed by South East £648.

• The profitability of these regions is supported by the greater prevalence of the private paying residents, which helps cover the staff cost and associated property costs

Regional growth of care home facilities

• Spatial distribution of elderly population shows that there is a growing preference in this segment to be located in coastal regions of UK – this particularly holds true in case of the South East region

• Similarly, peripheral area of London finds a greater prevalence of elderly population (as well as those in single-person households) which could be increasingly tapped by prospective investors seeking wider reach of care home facilities

• Housing market dynamics in the South East and London regions will have ramifications on planned care home facilities – care home unit sizes for instance vary between London and South East due to the costs involved

Outlook for care homes remains attractive, characterised by strong growth potential, high returns and increased funding from institutional investors

• Progressively, public expenditure based health care spending will account for a smaller share of overall expenditure

• The size of the care home market is projected to expand by over three times – the private sector will corner a predominant share of this potential investment opportunity

• The leading care home service providers can be expected to consolidate their position in the market further, considering that this remains a highly fragmented market as of now

• The market may be expected to attract investments from Sovereign Wealth Funds and such other international financial resources in search of higher yields and assured growth


Contact

Niladri Paul

T: + 91 (0) 343 255 0131 M: +91 (0) 980 008 6550

Email: [email protected]

www.alchemy-research.com

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Care Home Market in the UK 2015 - Alchemy Research and ... · Given the market’s fundamentals...

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