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On the radar

Old money: investing in residential care

Old money: investing in residential care

By Sebastian Cheek
Wednesday 6th May 2015

Residential care homes are gaining interest from investors as a play on an ageing population, but headline-grabbing patient abuse scandals are causing some to keep their distance. Sebastian Cheek reports.

"On average 15.5% of over-85s end up in some form of residential care for typically the last year or year-and-a-half of their lives. There will be demand for new and purpose-built care homes."

Kenneth MacKenzie

Improvements in longevity may create a headache for pension schemes, but by investing in the care of an ageing population, investors can profit from the same demographic shift which is costing them significant sums of money. But the residential care sector has been hit with several high profile mistreatment scandals in recent years and convincing investors to overcome the regulatory and reputational risks will therefore take time.

The demographic argument remains a compelling one, however. According to charity Age UK, the over-85s is the fastest growing group in the UK. The Office for National Statistics (ONS) estimated there were 1.5 million people in the UK over the age of 85 in 2013, set to grow to five million by 2050.

The elderly are cared for in essentially three ways: through the National Health Service (NHS), local authorities, or private provision. Cuts in government spending in the first two areas have paved the way for private provision to take centre stage and asset managers have stepped into the limelight.

The Target Healthcare REIT specialises in the ownership of care home property. The portfolio has 28 assets and receives an income stream in excess of £11m from operators which, says Target managing partner Kenneth MacKenzie, results in a 6% covered dividend paid out on a quarterly basis with an RPI link.

“On average 15.5% of over 85s end up in some form of residential care for typically the last year or year-and-a-half of their lives,” says MacKenzie, “There will be demand for new and purpose-built care homes, but much of the existing stock is old – about 80,000 of the current 480,000 beds need to leave the market completely.”

Kames Capital recently extended the life of its Target Healthcare Property Unit Trust by five years until June 2020. The fund, which chooses “best-in-class” property assets (currently 14) in UK healthcare markets with an average lease length of 26 years, paid a yield of 8% over the past three years and has an RPI uplift.

Kames property investment business development manager Shaun McWilliam says: “Since 2010 we have never had a single tenant failure or missed rental payment so it has proved to be an incredibly resilient asset.”

According to John Godden, investment strategist at Montreux Capital Management, government cuts have meant the price point the state allows for elderly care has decreased in the last three years from around £600 per person per week to around £400.

“That has meant private pay is a bit more of a differential so people who can pay, do,” he says. “There is a rich vein of people who can afford the [ private] price point, which is £1000-1100 a week, through their pensions and capital assets.”

Montreux Capital runs the Care Home Fund, which invests directly in what it terms “premium care homes with high occupancy levels in areas where there is a substantial supply/demand imbalance”. The portfolio has a cash yield of just over 10% and with capital appreciation including the underlying properties, the portfolio increased by 17.9% overall last year.

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