Profiteering in care home sector likely to push costs up further, says report

Martin Shipton

The UK care system risks sleepwalking into an escalating crisis of rising costs because it’s increasingly seen as a way for property investors to make big profits, according to a report launched in Wales by the nation’s biggest trade union.

Unison Cymru hosted an event at its Cardiff headquarters where report author Vivek Kotecha of the Centre for International Corporate Tax Accountability and Research (CICTAR) called for the re-creation of a public care service run by local authorities.

The report – partly funded by Unison – reveals that an estimated £1.3bn per year (£24.8m a week or £8,000 per bed per year) of rent is being paid to private landlords across the UK, with profit margins as high as 80%.

It states: “The market for UK care assets is estimated to be worth £245bn. Investors are attracted to the sector for a number of reasons: demographics (ageing population); shortage of capacity; and long-term secure income. These factors make the sector particularly attractive for pension funds and similar investors desiring long-term stable income. However, there are risks associated with the sector. Primarily the ability of a tenant to continue to pay rent and reputational risks if poor care is provided.

“The influx of investment has pushed up demand – and prices – for well-located care homes, while pushing down the yield. Private investment is also highly selective in nature. Locations favoured are in wealthy areas, with a large proportion of private payers, leaving parts of the UK that are in need at a loss. This is in contrast to the levelling up needed.

“Care operators can benefit from investing with or selling properties to investors for a number of reasons. Real estate investors can provide a readily accessible source of funding, and quick profits can be made from building and then selling new homes – a Grant Thornton case study showed how a 43% profit can be made on an 80-bed home.

“Operators can also use them to improve the financial performance of their homes through up-front investment, where buildings are instead bought by investors, while selling the property and operating companies separately can lead to a higher sale price.”

Downside

But the report goes on to say that even from the care homes’ point of view, there can be a downside: “Despite making quick money, selling a home means operators are locked into long-term rental contracts that will rise annually with inflation, up to a yearly cap. This puts pressure on the operator, and ultimately the residents, to maintain fee increases, which may be more difficult to afford if high inflation persists.”

The report concludes: “Existing restrictions on local authority – or public – ownership of care homes should be revisited. Public funding could be used to cheaply and equitably commission and/or develop new care properties, particularly in areas of greatest need. Alternatively with pension funds of their own, it’s possible to imagine that local authorities may be better placed to act as landlords for properties in their areas for a more reasonable rate of return.

“The enhanced ability to oversee their tenants’ businesses could help ensure more funding is spent on staffing and direct care costs, and may provide an advanced warning of possible care failures and business collapse. If they are not pressed to make an immediate or maximal return, local authority landlords may be more willing to allow different types of operators to provide care such as community-led groups.

“With a growing need for new and upgraded care homes, coupled with rising inflation, the UK risks sleepwalking into a situation where the care sector is either locked into escalating costs, or is unable to provide new care homes at all in many regions. Government must act now to prevent this two-tiered system from becoming the norm. A more considered policy approach is necessary to provide the chance to level up all regions, and create the infrastructure needed for future quality care.”

Let down

UNISON Cymru care lead Mark Turner said: “People who need care and care workers are being massively let down by the current system.

“Huge amounts of money are being drained from an already struggling sector to line the pockets of landlords and private companies.

“Care directly provided by councils is the only way to reverse this and ensure money so badly needed by those providing these vital services is spent supporting them and not private profit.”

Mr Kotecha said: “The reliance on private care home landlords charging ever increasing rental payments pushes up costs in the long term.

“It may also concentrate new care home development where property prices have increased rather than areas with greatest need.

“Specific reforms could recover an estimated £1bn per year in the UK to fund adequate staffing levels and better pay.

“The Welsh Government is well placed to show progressive leadership and to make reforms a national priority to improve the quality of care for some of the nation’s most vulnerable citizens.”