Occupancy rates rose across all sectors in the second half of 2013, with the specialist care sector experiencing an upturn, reaching 91 per cent occupancy for the first time since H1 2001. Despite increased demand pressure on fees continues, according to the 19th biannual Care Homes Review from specialist healthcare advisors Colliers International.

Occupancy

The report, which focuses on the five key performance indicators of the care home industry, including occupancy rates, average weekly fees, payroll costs, non-payroll costs and profit margins (EBITDAR), found that occupancy levels are looking positive in all sectors. In nursing and specialist care occupancy is around 90 per cent; whereas, occupancy levels in personal care remain just below that figure.

Adam Lenton, Head of Healthcare, Colliers International said: “It’s pleasing that we are seeing this positive trend in occupancy. We, however, continue to see the acuity levels of residents increase and along with pressure on fees in some areas, this continues to make for some challenging trading conditions”

Average Weekly Fees

Average fees have fallen in long-term elderly care with nursing care weekly fees experiencing the biggest decrease during H2 2013, a decrease of £13 (two per cent) to £648. Personal care has suffered the least from inflationary pressures, nominal fees reduced to £518 per week in H2 2013, a decrease of £5 per week in six months. In contrast, specialist care fees have increased by £66 (more than 4.6 per cent) in H2 to £1,490, up two per cent on H2 2012.

Adrian Ilott, Director of Healthcare, Colliers International said: “Demographic pressures are still driving demand but fiscal pressures are limiting the fees that are being achieved, putting pressure on nursing home income levels.”

Profit Margin (EBITDAR)

Despite pressure on care home businesses due to lower occupancy levels and continued cost constraints, profit margins have remained stable since 2012.

It was bad news for the specialist care sector, which saw a decrease in profits of 2.6 per cent to 37 per cent. This fall is mainly due to non-payroll costs such as heating and lighting, which are up 10 per cent from 2012 and 143 per cent from 2002 to £16 per person per week on average.

Payroll Costs

Despite marginal profit increases, care home workers saw a decline in wages across all sectors in the second half of last year. As a proportion of total revenue, wages in the nursing and personal care sectors make up 56.3 per cent and 50.9 per cent, respectively. Wages in the specialist care sector have also gone down and now stand at 52.1 per cent.

Adam Lenton, continued: “With the national minimum wage in October 2014 set to increase to £6.50 (an increase of 3%), it is likely that EBITDAR levels will continue to be put under pressure, particularly by those operators who are unable to pass the cost on by increasing fees”.

Non-Payroll Costs

The report also reveals that non-payroll costs remain broadly unchanged. It showed a slight rise in the long-term elderly care sectors, as well as an increase of more than one percentage point in the specialist sector.

Dr Walter Boettcher, Director of Research and Forecasting, Colliers International said: “Care home businesses have had to compete on fees in order to maintain and increase occupancy. Despite increased cost pressures and price competition, profit margins are looking positive in the long-term elderly sectors, mainly due to operators close control of pay roll expenditure.”

Care Homes Investment Market

Colliers’ report reveals that the investment market is heating up, reminiscent of pre-downturn levels between 2005 and 2006. Increased interest in the care home asset class stems from rising competition in the main property asset classes, which has occurred as investors look for opportunities in alternative sectors.

“This surge of attention has pushed investment yields down by 50 bps over the last six months. Care home yields are on average 8.2 per cent, but the market is polarised between prime covenant-led stock, including the recent deal by Methodist Homes Association (MHA), trading at sub six per cent yield and secondary opportunistic assets trading at higher yields than the benchmark.

“As capital value growth turns positive we expect compression in 2014, resulting in total returns to this property sector reverting back to double figures for the first time since 2010; returns could match those achieved in 2007 of 15.5 per cent,” concluded Walter Boettcher.

View the report