It's been a tough few years for care providers amid a pandemic, staff shortages, rising costs and increased scrutiny from the Quality Care Commission. Finally there's light at the end of the tunnel in the form of increased local authority income, growing occupancy rates, and the return of overseas staff.
How are operating conditions improving and what does this mean for M&A activity in the sector?
In 2022 care fees increased by 3.3% on average year-on-year, with private pay homes achieving around 8.5% fee growth, according to a Knight Frank report on UK healthcare property. For many operators, this wasn't enough to offset the unexpected inflationary pressures that came to epitomise the year.
Negotiations in 2023 are different: operators have a clearer picture of rising costs and need to thrash out better deals with local authorities. This has resulted in some quite remarkable year-on-year fee increases, in some cases reaching double digits. A clearer picture of averages will emerge once all local authorities have published their 2023/4 fees.
Figures released by Somerset County Council demonstrate the reasoning behind some of the increases.
Increases, of course, are relative to what each authority paid the prior year. Still, the overarching data indicates that care home operators are shifting from price takers to price makers. This is further borne out in Scotland, where operators took the rare step of rejecting a centrally proposed 2% universal increase to all local authorities.
Elderly care occupancy levels rose to 83.4% in 2022 compared with 79.4% in 2021, according the Knight Frank property report. If this trend continues, they should soon reach the pre-pandemic five-year average of 88.8%.
Further research by Knight Frank also shows that, while bed supply has grown by just over 2.7% in the last decade, the over-65 population has grown by around 19%. The slow emergence of new beds is due to the deregistering of a large volume of ageing care home stock. Newer homes are replacing these but not at a fast-enough rate. Geographically, only two regions – the West Midlands and East Midlands – enjoyed a net gain of beds over the last five years.
Brexit, the pandemic and increasing demand for social care have combined to create a skills shortage. This remains a problem, leaving 165,000 recorded vacancies in adult social care in 2022, according to insight from Skills for Care. However, two factors have served to ease the pain in the first half of 2023:
In February 2022, the Home Office added care workers, care assistants and home care workers to its shortage occupations list. This enabled operators to directly recruit overseas sponsored workers to these roles. According to government statistics, this helped ease the way for 58,000 overseas care workers, home workers and senior care workers to join the UK workforce in the year to March 2023.
Food and energy inflation has hit the UK’s minimum wage workers harder than most. A recent poll of over 1,000 UK employees across all sectors showed that more than half had requested extra hours due to cost of living pressures while19% had taken on an additional job.
This trend has extended to care homes, reducing dependency on agency fees as in-house staff work more hours. Together with overseas sponsored employees, this has led to a much-improved position on agency costs, which can be more than three times the normal hourly cost of employees.
High energy prices have been an overriding concern for operators. However, many were protected during the worst of the crisis with fixed-term, hedge-style, forward contracts. Wholesale energy prices have fallen since a peak in August 2022, providing further encouragement.
European and Asian base rates are comparatively lower than those in the UK and the US, giving property funds from these areas a significant competitive advantage.
We expect to see more follow in the footsteps of Belgian REIT, Aedifica, which completed seven transactions in 2022. In October 2022, it invested approximately £13.5 million to build a new elderly care home in York to accommodate 72 residents. The deal typifies the REIT’s other deals as it seeks to expand in the UK and Ireland through new-build provision.
Interest rates have caused yields to increase in the range of 0.5-1.0pp. This has gently tempered valuations leading to a meeting of expectations between buyers and sellers.
With operating conditions improving in the care home sector, and M&A starting to tick up in the private healthcare space in 2023 so far, the outlook bodes well for further improvement in the rest of the year.
Today’s care home operators have survived some of the worst trading conditions in recent history. They have emerged leaner, fitter, and well placed to soar with favourable tailwinds.
For more insight and guidance, get in touch with Peter Jennings and Daniel Smith
UK fire and security sector M&A review 2025
The Aerospace and Defence (A&D) market entered 2026 with more momentum than at any point in the past decade. Geopolitical instability, rising defence budgets and a recovering commercial aviation cycle have not only lifted performance – they’ve reshaped portfolio priorities and accelerated consolidation across the sector.
National Apprenticeship Week serves as a valuable reminder of the role apprenticeships play in helping organisations prepare for the future. Every year, I see more evidence of how vital they have become – not just for developing new talent, but for equipping people at all stages of their careers with the skills they need to thrive.
