The bigger picture

After the catastrophe of Covid-19, will the care home industry remain frail or will it come back stronger? Freddie Evans and Adam Scott of Mansfield Advisors LLP attempt to find out

The care home sector for older people bore the devastating brunt of the Covid-19 pandemic. Staff worked tremendously hard in difficult circumstances to protect their residents in confusing and dangerous circumstances, especially in the first wave. Providers had to display frontline leadership of their workforce and infection control measures during Covid-19.

Some groups have fared better during the pandemic, had their local reputations boosted and gained share. But even the best providers will be earnestly wishing now for some clear view of a brighter tomorrow, on the other side of the current NHS app ‘pingdemic’ affecting worker availability and ongoing concerns over vaccine coverage of their workforce.

Where do we go from here?

First, let’s consider the terrible impact Covid-19 had on UK care home residents.

Sector occupancy dropped c.10% to a low of c.79% in July 2020. There were signs of recovery between the first and second waves, with occupancy 82% in September 2020, before falling again slightly to 80% by January 2021.

The main cause of the occupancy drop was the unfortunate fatality rate among this highly vulnerable population. Deaths during the first wave even exceeded the official figures owing to national delays in mass testing.

Up to the time of writing, more than 41,800 deaths in care homes have been recorded in England and Wales with Covid-19 on the death certificate. This is not far short of 10% of the care home population.

There was c.42% higher mortality in care homes in England and Wales from March to mid-September 2020 compared to 2015–2019.

These official figures are likely to be an underestimate, particularly the 20,667 deaths recorded during the first wave where testing capabilities were limited. Excess deaths for the period show c.27,000 deaths and this is likely a better representation of the true toll.

The number of excess deaths in the second wave was relatively low at 1,300, despite there being 21,677 Covid-related deaths recorded. Far fewer care home residents died from other causes during this time than in previous years.

These tragic death figures and the severe restrictions on visits caused admissions to plummet, and some homes would not have accepted new residents even if there were willing families, as they fought to keep their homes infection-free.

Families of the frail on the brink of admission found ways to look after them in their homes for longer, including domiciliary care packages, and furloughed families were able to assist with some more informal caring arrangements.

However, even the darkest of periods must come to an end. The vaccines are working, and as the country reopens and the furlough scheme ends, we expect a return in demand, including some much-delayed residents. We project occupancies to recover to pre-pandemic levels by late-2022.

Aside from these occupancy challenges, there are other immediate questions around financial viability that need answering.

Operating costs for care homes have significantly increased during Covid-19, not only with PPE requirements but the lifetime of many products such as furnishings and mattresses have decreased. At present, the NHS is covering some of these extra costs, but questions remain around how long that funding will last and what the long-term costs to care homes will be.

There is a long-running mismatch in price expectations between owners and potential buyers of the larger groups

John Godden, chief executive of Salutem Care and Education confirmed: ‘PPE was always bought on our own in the private sector, now the local NHS provide it for you.’ He added they are trying to guess when this will stop, the rules around what the NHS will provide, and what operators will need to supply, because at the moment it is ‘very grey, which is a problem’.

When NHS grants and local authority special assistance ends, the costs will have to be passed through higher fees.

Staffing has long been a challenge for the sector, where pay levels are similar to the retail and hospitality industries but the working environment can be tougher. Throughout the pandemic there has been increased sickness and staff absence, though somewhat mitigated by more job applications.

Since the hospitality and retail sectors have been restricted there have been 39% more applications to social care roles between January and March 2021 versus the same period in the previous year. The impact of competing sectors now reopening remains to be seen.

Further difficulty will be posed by legislation coming into force in November that will require all care home staff to be vaccinated. In June, only c.70% of staff have been fully vaccinated.

We fully support the requirement for compulsory vaccination, however controversial generally, in order to protect those in care from both death and avoidable suffering. It will be interesting to see if significant staff leave, both for the sector and to understand the strength of ‘anti-vaxxer’ sentiment.

Recent transactions

Looking at investment activity, there have been transactions at the premium end of the market, with some long running deals likely to complete soon. But it was between 2014 and 2018 that there was a period of more M&A activity, with transactions such as Porthaven’s acquisition by Fremont Realty and HC-One’s acquisition of 122 Bupa homes.

Private pay focused groups have been favoured by investors as greater flexibility to set prices allows these groups to operate with higher margins. Multiples for some high performers have again risen back to prices last seen before the great financial crisis c.15x EBITDA, such as the Porthaven acquisition. Multiples above 10x are certainly achievable.

Another high-profile acquisition of a premium provider was Signature Senior Lifestyle by Canadian group Revera in 2018. Property based deals have also been popular, however Four Seasons withholding rent on leasehold sites without warning in October 2019 will have been a reminder of the risks in trying to own the property alone.

The level of activity was already slowing pre-pandemic. There is a long-running mismatch in price expectations between owners and potential buyers of the larger groups.

There were three failed processes among the top four providers across 2018 and 2019 for both the private-focused chain Barchester Healthcare and the more local authority-focused chains HC-One and Four Seasons. These latter providers have older portfolios, but portfolio rationalisation has steadily made them more attractive propositions.

Both Bupa and Four Seasons sold tranches of their homes in 2017 and 2019 respectively, and by March 2021, HC-One was selling 52 homes and closing four.

Last month, Sunrise Senior Living went public with its withdrawal from the UK market, with Signature and Care UK taking over management of the group’s 46 homes. Revera, which owns both Signature and Sunrise, is rationalising its premium portfolio in the UK.

Korian, a French operator active across multiple European markets, acquired Berkley Care Group. Korian’s move into the UK is the first real sign here of pan-European consolidation. We expect further interest from the larger European operators.

The UK market is relatively unconsolidated and fragmented further upon the collapse of Southern Cross in 2011. The top ten providers peaked at 27% of supply, now down to 21%.

Some argue that diseconomies of scale work against consolidation, and these appear in chains of several hundred homes. However, even if this is accepted for the sake of argument, it does not preclude many smaller chains growing towards 100 or further towards the size of a Barchester Healthcare.

Care home demand

Prior to Covid-19, elderly care home demand was on a stable trajectory, though decoupled from older population growth from around 1993. Since peaking in the early-1990s, demand steadily declined despite sustained growth in the population of older people.

Care home use shifted from being a default residential option to being reserved for only those who needed continual oversight and frequent care episodes throughout the day. Simultaneously cheaper alternatives comprising home (‘domiciliary’) care and ‘extra care’ in retirement communities have become more widely available.

Local authority admission criteria thresholds were steadily raised. Demand projections should have been taking these changes into account. Historical forecasts using simplistic population growth projections materially overestimated demand, however, there have always been more sensible approaches.

For over a decade, we have combined the so-called ‘Brookings assumption’ from the eponymous Brookings Institution, with the mid-2000s survey on ‘Care Home Likelihood by Age’ from LaingBuisson, overlaid onto national statistical projections.

This ‘Brookings assumption’ denies the lazy assumption that, as life expectancy increases and there are more elderly people, the volume of care required will increase in direct proportion. Instead, it argues care home demand follows the share of population in the last period, say two years, of their life. A decade’s worth of annual updates has demonstrated repeatedly to us the logic of this.

For many years, articles in the popular press and some official pronouncements showed care home demand increasing sharply, along with the very old population. This did not happen, and demand went sideways for many years.

But crucially, even allowing for the reality of the ‘Brookings assumption’, the substantial increase in the 85+ population from the mid-2020s onwards will be too large to be offset by any countervailing factor, including healthier bodies and minds and more homecare.

The late-2020s will see a rise in demand not seen since the 1980s, but having been burnt before by such projections, investors are not pinning any hopes on demographic analysis, despite much talk of its inexorable pressures.

Payment model

Stepping back to look at the big picture, we have been waiting for older people’s care reform for a decade, since the financial crisis turned into fiscal austerity for local authorities, and specifically elderly care.

The burden of paying has fallen disproportionately on the households with some financial assets, but not – normally – those with only a house.

This is arguably unfair but could last indefinitely because the residents themselves are certainly not able to argue their case, and the argument becomes one between the financial self-interest the different segments of their middle-aged children and then quickly slams up against the Conservative political shibboleth of the family home versus any other asset.

There are solutions – the Irish model, variations on the Dilnot Commission to name just two – to sharing the risk between the individual, their family and the taxpayer. Yet any workable combination of choices requires a minister to embrace a single set of them and persuade the prime minister that they are worth backing. We were told that the government was close to making a decision, but now any announcement has been postponed to the autumn.

The prize for the Treasury, if not without risk, is more private spending from housing equity on care for older people

The current incumbent Sajid Javid has held relatively brief positions in various ministries, including culture, business, housing, the Home Office and the Treasury over the last seven years, without having a clear legacy. Now in his role as secretary of state for health and social care he is surely highly motivated to do something important.

The strongest argument that we actually see action sooner rather than later, is the simple calculation that totemic reforms should not be attempted shortly before the next general election and any reasonable approach at all is more likely to lessen the electoral risk of the confusion of this unresolved issue.

The prize for the Treasury, if not without risk, is more private spending from housing equity on care for older people.

Most proposals involve protecting more household financial assets and a lifetime spending limit on the ‘care’ half of elderly care homes, if not the accommodation of the ‘home’ part. In return, the value of the house would be always considered, even if the occupants would not have to sell in their lifetimes.

Though these changes were strongly rebuffed under Theresa May’s government, repackaging them in the wake of the pandemic when public spending has been at all-time highs, could be successful.

Whatever form the reform takes, it should reduce the funding pressure that local authorities are under and allow for operator margins to recover. Improved margins would increase investor interest and encourage replacement of inadequate infrastructure.


Care homes exist in their own micro-markets with several local peers. We do sometimes analyse the country at county level, to gain a higher-level impression of where is best for portfolio expansion or divestments.

However, to summarise for this article at the regional English level and recent years, there has continued to be net capacity growth in the Midlands and South East. Most has been private focused. There has been only limited development elsewhere, and the South West and East of England are still the regions relatively undersupplied.

The North East and around Yorkshire still have a slight relative overcapacity after some growth earlier this century.

Prior to the Covid-19 catastrophe, the premium market had certainly warranted prudent new builds and once the dust settles, it will again.

If a white paper finally explains who will pay what for public elderly care, and assuming it is actually implemented, then that will reduce uncertainty, but even more importantly for investors, likely increase total spending over time.

Covid-19 and the tightening labour market has anecdotally rung the closing-time bell for many of the weaker independents, especially if smaller properties are not up to modern standards.

The time is fast approaching when sellers become realistic; there is clarity on the current challenges and smart investors will be able to make a timely bet on the supply-demand cycle turning back in favour of providers.