There have been a number of changes in the care home market over the last few years affecting longer-term trends in supply and demand. Whilst an ageing population and rising levels of disability and dependency among older people has increased demand for care home places, the growth in domiciliary care and stricter entry criteria by local authorities has reduced the supply of care home places, especially in the local authority sector.
The most significant change in the provision of residential care in the last 25 years has been the much greater involvement of the private sector, with a substantial growth in the number of mainly privately provided nursing home places replacing large numbers of NHS hospital beds for both geriatric and mental illness care. In 2017 more than three quarters of all care homes and care home beds are operated by the private sector in England, a significant rise since 2010.
Over the next 5 years, demand for care homes places is expected to far exceed the number of bed space additions provided. This is in part due to the decline in bed spaces provided by the public sector and private sector building not meeting the new demand. Care home development continues to focus on locations which are characterised by a strong self-pay market where higher fees provide investors with a stronger return on capital. However, finding appropriate development sites in these areas remains constrained by land prices and competition from house-builders, leading to a shortage of affordable sites.
There are some significant challenges facing the care homes construction sector with staffing and payroll issues a major concern. The introduction of the National Living Wage in April 2016 increased payroll costs and reduced profit margins. Many care homes operators already faced staff recruitment and retention problems which have now been exacerbated by the NLW and uncertainty over freedom of movement caused by Brexit. These factors have resulted in an increased reliance on agency staff, further impacting profits. Many care home operators face an uncertain and challenging trading environment going forward in which certain homes become financially unviable and the sector sees a higher level of closures.
Despite the challenges currently facing the sector, the private care homes sector continues to perform and attract new investment. The reduction in value of the sterling has made the UK market more attractive to overseas investors, particularly those from China and Malaysia. New investment is also driven by the growing number of older homes no longer fit for purpose and the increasing demand as the population ages. Additionally, the proportion of people entering care with specialist needs is increasing and is likely to remain a priority for operators, with a rise in the incidence of obesity, diabetes, dementia and other neurological disorders. In a time of constrained public-sector finances, the private sector will play an important role in updating existing and delivering new care homes. Because of these factors, the care homes sector is set to outperform the wider healthcare market in the long term.