Taking care of the market

May 26 2009 by Jez Davison, Evening Gazette

Age is definitely on the side of the care home business. But will it live up to expectations, asks JEZ DAVISON

RAJ Singh, Angela Swift and Matt Matharu have either made - or are hoping to make - millions from the impending ‘silver crisis’, where demand for care provision for the elderly is already outstripping supply.

But making money on the stooped back of an ageing population - especially one whose own asset value and therefore its ability to fund a comfortable decline is rapidly depreciating - is not as easy as statistics make it sound.

One in four of us will be over 65 by 2031, but according to care home entrepreneur Matt Matharu, the sector is not a shortcut to a quick buck.

Matt, who owns six care homes in the Tees Valley, says: “Our profit is in the asset of the home. It’s a slow investment process. If you try to make money quickly you inevitably end up cutting costs and cutting corners.”

With the industry facing a multitude of challenges, including higher minimum wage costs, and stalled projects caused by the property crash, the investment market has already raised a big question mark over the viability of the care home sector.

According to Christie + Co’s Business Outlook 2009, average property values in the care sector slumped by 16.89%, outstripping even that of pubs (11.63%), restaurants (14.92%) and retail properties (6.48%).

Some firms have already had their fingers burned.

The UK’s biggest care home operator, Darlington-based Southern Cross Healthcare, made an operating loss of £8.6m in the 29 weeks to March 29, compared with £3.6m in the same period in 2007-2008.

The firm, which issued a profits warning last year, also saw like-for-like mature occupancy fall 1.5% to 88.9% - due partly to a rise in resident deaths during the cold winter months - leading to a 7.5% fall in adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) to £28.5m.

But CEO Jamie Buchan described it as a “resilient” performance and sees “tremendous” long-term potential in the sector - although he raises questions over who will pay for services in the future, especially with the public purse strings likely to be tightened.

Matt Matharu claims the Government cannot afford to reduce funding for care provision.

“Ninety-nine per cent of care homes are struggling with fee and occupancy levels,” he says. “Government funding has to be continued otherwise a lot of care homes will go out of business and put hundreds of people out of work.”

In the meantime, Angela Swift and her husband are hoping to create 100 jobs by investing around £1.5m of their personal savings in Reuben Manor, an 83-bed Yarm-based care home due to open in June.

After visiting more than 100 care homes in the UK, Angela was “disappointed by the lack of innovation” in provision for the elderly.

“I didn’t come across the right standard of care for years,” she says.

“There was a gap in the market for niche, person-centred care. A one-size-fits-all approach just doesn’t work.”

Reuben Manor, the first home set up by Silk Healthcare Ltd, already has 25 confirmed reservations.

It will include different levels of care depending on patient needs. From £600 per week, residents can receive specialist treatment for dementia and palliative care in what it describes as “engaging” surroundings.

Angela hopes to have five more operating within five years - including another in the Tees Valley with specialist mental healthcare provision. Her ambition will require quite a spectacular return on investment. But it can be done.

Raj Singh has been busy building his care home portfolio under the £30m Prestige Group, which includes a £3.7m, 67-bed home on the former site of Skerne House in Darlington, for 15 years.

Although the recession has forced him to put on the back burner plans for an £11m care village in Nottingham and a 74-bed facility in Hull, it’s not derailed his plans to double the value of the group - even though it will take longer than the original target of 2010 to get there.

“They’ve been put on hold until we can get funding,” he says. “It’s a tough environment if you’re involved in building and construction.”

For extra security in the downturn, he’s fallen back on a ‘build and lease’ model which has seen Southern Cross take a 30-year lease on Skerne House in exchange for annual rents of £245,000.

He says: “Build and lease is a safer bet as you have guaranteed (rental) income. Running a care home is more of a headache - but you make more money.”

Raking in the cash is not the sole aim of some investors.

Glenn Pickersgill described his acquisition of SureCare Services, a large domicilliary care business in Guisborough, as “care-driven, not money-driven”.

Since the purchase of the home “for a lot of money” last year, he has re-launched the business as Heritage Healthcare and is currently bidding for public sector contracts to deliver homecare services to people across the region.

He says: “Twenty-four hour care is extremely expensive. A lot of people want care as and when they need it.”

He remains coy about when he will see a return on his original investment - but he’s confident he will in time. With a predicted 66% of the UK population demanding care at home by 2038, he could be right. But it’s a long time for any investor to wait for the goose to lay the golden egg.

“It could take years but if some of the contracts we’re bidding for come off, who knows? This is a long-term investment,” says Mr Pickersgill.