In recent years the stock of care home beds has barely increased in the UK.  Whilst there has been new supply created from new developments, and the very occasional repurposing of former other-use facilities, these have only just about kept pace with the rate of closure of old homes.

The care homes that have closed have tended to be the older stock of smaller homes that often are a combination of 3-5 Victorian terraced houses that have been linked together across floors. These homes typically have 15-30 beds and 4-8 bathrooms. These homes close as they:

1. are not fit for purpose.
2. performed poorly in COVID (where patient infection control was very difficult without en-suite facilities).
3. are challenging for staff recruitment and retention as staff like to work in new propose built facilities.
4. are operationally and economically challenging with split floor levels and very poor energy performance.
5. have poor economies of scale as fixed cost are spread across few residents as compared to larger market standard homes with 66-76 beds.

The pace of smaller care home closures has accelerated as the shortcomings above have become starker with a very challenging staff recruitment market in the last few years and the stratospheric rise in utility costs disproportionately affecting the smaller older homes with poor energy efficiency.

Whilst smaller older home closures are reducing the stock of care beds in the UK the supply of replacement new beds is set to plummet over at least the next 3-4 years. This reduced supply of new beds is a result of four significant factors.

COVID

The pandemic shifted the focus of all care home operators to dealing with the crisis that had enormous care, reputational and financial challenges. This meant that for several years there was no focus on signing new agreement for leases on new homes as no one could plan more than a few weeks ahead.

Many care home operators are also developers/land promoters, so this lack of activity was compounded with so little, if any, focus by senior management on the securing of sites and in the promoting of planning applications.

Unbudgeted building cost inflation

The pandemic exposed the fragility of supply chains – especially international one. Therefore, when there was some recovery in construction activity post COVID the lack of availability of construction materials immediately pushed up building material costs making development  unviable for new starts-on-site and fundamentally unprofitable for on-going construction projects. As a result, several contractors failed and a number of sites bought at strong prices were mothballed. Recent evidence highlights that construction is now beginning to increase as build costs have stabilised and there is evidence land prices have started to decline restoring some margin to developers.

Truss/Kwarteng budget

The resumption of development throughout the early quarters of 2022 was abruptly interrupted with the rapid rise in interest rates triggered by the financial markets lack of confidence in the Truss/Kwarteng September budget. Whilst the budget coincided with an international repricing of debt the UK experienced some of the steepest rises in debt prices. This pricing change once again made development riskier and less viable. Simultaneously, and a lot less reported, was the exit from the lending market of many banks and the sudden lack of appetite from long-term investors to enter into forward funding deals (effectively a form of debt) as they focussed their attention to the severe impact the new interest rate environment was having on their portfolios and their return criteria.

Planning authorities

Finally, the last three years have witnessed the near complete breakdown of the planning system in many areas of the UK. As of 12 May 2023 nine council planning departments were at risk of being placed into special measures by central government after failing to decide planning applications in time. Hinkley & Bosworth recorded the lowest percentage of applications decided on time at 46.5% followed by Guildford on 50.1% and Epsom & Ewell on 52.5%. The impact has been that the already slow UK planning system has become glacial at best delaying the start of good projects that would benefit society and the economy.

These four significant factors above are likely to mean that over a four-year period only two years supply of new care home beds will be added to the UK stock. Twinned with the increased rate of old home closures the result is an overall reduction in the stock of UK care home beds. Perhaps most worrying of all is that, unless the planning system regains its’ functionality, the supply of homes will remain very constrained.

Whilst central government cannot be blamed for COVID or international supply chain issues, without being overtly political, they are squarely to blame for the disrupting consequences of their budgets and for not providing the incentives for local government to take their planning departments seriously. Whilst there has been so much debate about the reasons for the UK’s slow growth it seems inconceivable that action has not been taken to remove the brake of a slow planning system and its negative impact on economic activity.

The lower number of new care homes coming through the development pipeline over this four-year period is also going to impact the real estate investment market. At the point that demand for alternative real estate investment steps up the number of new homes available to purchase will diminish. This must surely underpin the value of existing assets and enhance purchaser competition for the limited number of new homes being built.