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October 29, 2020

The UK’s fledgling care home sector may target a very different demographic to its the burgeoning student housing market but its growth in the coming years could follow a similar path.

More consolidation, the emergence of specialist investors and a greater choice of living facilities are likely to take the care home sector into new territory.

“There’s around a five-year gap between the maturity levels of the two sectors,” explains James Kingdom, JLL Living Capital Markets research director. “However, the signs are that the care homes sector can grow and expand – providing new supply is increased and choice is widened for both residents and investors.”

Scaling up
Right now, the care sector remains fragmented, with smaller, inefficient homes held by a range of independent owners. However, with new larger, purpose-built homes emerging, it could provide greater economies of scale.

“New, purpose-built student accommodation (PBSA) helped drive that sector forward in a relatively short space of time, drawing in new capital and offering investors – particularly institutional – the scale required to be able to deploy large sums of capital for the medium and long-term,” says Kingdom.

Such has been the PBSA’s growth that today concepts range from traditional halls of residence on campus to city-focused, The Student Hotel, with its rooftop pools, modern furniture and trendy design in city centre locations.
Scale is particularly important for Europe’s largest care homes market, the UK, where some 10,000 new beds are needed per year for every year until 2030, according to JLL research.

“The issue in the UK is that smaller, outdated care homes drop out of the sector just as quickly as newer purpose-built ones are constructed,” Kingdom explains.

What’s more, 78 percent of care home beds are in properties not originally built as care homes. Extending existing properties brings its own issues of repurposing space to meet the restricted mobility of residents and building in facilities such as private bathrooms – things that can be much more easily accommodated in new builds.

Building in central locations
Whereas most recently built student housing is in well-connected central locations, care homes have traditionally been in more rural areas.

A move closer to urban areas would help not only to recruit much-needed staff but could also help families with visiting relatives – factors which can outweigh higher land costs, says Kingdom.

Location becomes even more important for semi-assisted living where easy access to retail and leisure amenities are a plus point for more active residents. Such assisted living schemes growing in popularity and catching the eye of investors such as Principal Real Estate Europe in Germany.

“A wider range of age specific options are needed, from retirement villages for growing active elderly populations with only minor conditions to later living which relieves pressure on the healthcare sector,” says Kingdom. “For investors and operators, more choice is also a way to diversify income.”

However, securing the right locations remains a challenge with other residential developers also taking an interest in the same sites.

“Where possible, central sites will need to be re-used rather than simply sold off for development by homebuilders,” says Kingdom, pointing to planning consent granted by the Royal Borough of Kingston-upon-Thames to provide 80 beds on the site of a former care home.

Bringing in the experts
More specialist investors will also be needed to help the care home sector develop at pace in a similar way to student housing.

“Larger scale providers and European REITs have only touched the surface compared with sector specialists in student housing,” says Kingdom, pointing to the likes of Unite REIT, which late last year bought competing student housing provider, Liberty Living in a £1.4 billion deal.

Such consolidation, in any sector, usually indicates a level of market maturity. “These kinds of deals are much further down the road for the care home sector. There’s no guarantee of that happening, but there is potential in the not too distant future,” says Kingdom.

With just 15 percent of the country’s care home sector held by private operators, compared with more than half of UK student housing, there’s still room for growth and, just like in student housing, more branded concepts.

Indeed, for now, building more beds to meet growing demand is the big challenge – and the much-needed next step in the sector’s development.

“Populations are changing rapidly with more old people, which will require a response in the coming years,” says Kingdom. “From the UK and Germany to Japan, it’s the defining issue of our time. And rising to that challenge will require the kind of trajectory that student housing went on.”

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James Kingdom

Head of Alternatives Research at JLL

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