How bank lending is shaping future care home provision by Jon Chapman - Pinders business valuers

In the years since the credit crunch, the banks have, unsurprisingly, adopted a more cautious approach to their lending with this, in part, being imposed by tighter regulation but also the general economic and political uncertainty. Confidence to lend into the care home sector has been further eroded by questions over post-Brexit staff recruitment and the inability of Government to come up with a plan of action.

At least Boris has the latter sorted! But will this be enough to reverse some of the trends in bank lending we have witnessed of late?

Whilst the upward trend in future demand makes investment into the care home sector an appealing prospect for the lenders, the vast majority have moved their focus to larger and more modern facilities. Worryingly, only one of the major banks now has lending criteria which will allow homes with fewer than 25 beds to be considered. And, several banks are positively encouraging customers with smaller homes to look for finance elsewhere.

Unfortunately, it would seem that an incorrect correlation has been made which links size to risk and some top-performing businesses are in danger of being turned away due to this numerical threshold. The challenge for such homes is further compounded by a widespread aversion to first-time buyers – the traditional market for these smaller units. Finding a purchaser for a smaller care home business is not the issue – finding one who can secure bank funding is.

Our experience at Pinders is that many smaller homes are enjoying good trading performance, particularly those able to offer exclusive, boutique-style accommodation for self-funding clients. Even some homes with a focus on publicly supported residents are doing well, benefiting from the increasing pressures on Local Authorities to find affordable care. So, the current operators may not need to be concerned until they look to invest in improvements to their properties or decide to retire and sell.

At that time, the inability to find a funded buyer, and the potential to exploit the alternative use of what is often a residential-style property, often results in closure of the care service. And that’s the hidden threat for Mr Johnson to consider.

Currently, 11.6% of the registered care home beds in the UK are within homes offering 25 places or fewer. That amount to over 53,000 beds.

• England 11.7%
• Scotland 9.7%
• Wales 15.7%
• Northern Ireland 7.8%

An even higher proportion of the total capacity in Wales is within smaller homes and the position is more evident in some parts of England, with all of the following counties being above the national average.

County Number of Beds in homes registered for 25 or less Proportion of Total Beds in the County
Isle of Wight 532 31.2%
Devon 2,697 25.0%
East Sussex 1,843 21.8%
Cornwall 906 20.9%
Dorset 1,488 19.2%
Lancashire 2,585 19.0%
West Sussex 1,547 17.7%
Hampshire 2,128 15.5%
Leicestershire 937 14.0%
West Midlands 2,258 13.8%
Bedfordshire 499 13.7%
Herefordshire 226 13.0%
Somerset 1,191 12.7%
Norfolk 1,027 12.7%
Lincolnshire 1,272 12.3%
Essex 1,620 12.2%

Local Authorities are facing a significant challenge in meeting their local care needs and the process of ‘market-shaping’ has to factor-in both financial and planning constraints, as well as the views of the Care Quality Commission as regulator. One has to doubt that they have, as yet, factored how lending policies may erode a significant proportion of their current resources into their thinking.

Of course, this erosion is far from inevitable and market forces dictate that a vacuum will attract new entrants willing to take advantage of the opportunity offered. There is clearly a profitable gap in the market for lenders willing to take a less prescriptive approach, supporting good quality borrowers looking to run good quality businesses, irrespective of their size.

Let’s hope so as Boris has plenty of other problems to solve!

Jon Chapman
Pinders business valuers