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Every lender should be interested in care homes – here’s why

By: Stuart Blair, Director of Debt Finance, OakNorth Bank

As a debt finance director working at OakNorth Bank, I often get asked whether there are any sectors that we’re particularly interested in and where I see the greatest growth potential. As a lender, OakNorth Bank is sector agnostic – we focus on providing loans of £1m-£25m (though we have done loans that are as large as £50m) and since our launch in September 2015, we’ve lent over £4bn to hundreds of businesses across the UK. These range from care homes, nurseries, and schools, to bars, restaurants, hotels, private equity firms, debt funds, professional services companies, property developers, and even hydroponics companies. However, I’ve always found care homes to be interesting for several reasons.

For one, the growth potential in the care home sector is massive. The UK, like much of the developed world, is ageing at an alarming rate – the number of people over the age of 85 years old is predicted to more than double in the next 20 years. As a result, occupancy rates tend to be very good no matter where you go in the UK.

Earlier this year, Care Concern Group, one of the UK’s most highly-regarded care home operators for dementia and general nursing, needed additional capital (£9.4m) to continue its expansion efforts and acquire a care home in Birmingham. One of my colleagues found it to be a particularly interesting deal, as it once again gave us the opportunity to support a strong management team who have built a roster of over 80 sites with an average of 87% occupancy rate, while providing the team with the funds needed to combat the lack of supply for care homes in the West Midlands. Another business, LV Care Group, has done an exceptional job serving the elderly community in the Isle of Man and Jersey.

Due to insufficient supply, care home owners / operators need a lender that is nimble, fast-paced and well-equipped to create a bespoke loan that fits their needs. Because of legacy systems, a tick-box approach and lack of speed, most high-street lenders are ill-equipped to offer and provide borrowers with the type of lending experience needed to facilitate a loan within the care home sector.

It’s a heavily regulated industry (as it should be) which means there tends to be good corporate governance in place. Similar to schools and Nurseries which are regulated by Ofsted, the care home industry is regulated by the Care Quality Commission (CQC). If a care home wants to get a good rating, it has to make sure it’s adhering to high standards and meeting all the necessary operational requirements imposed by the CQC.

From a lending perspective, CQC ratings make it easier to identify strong businesses, as these ratings help lenders assess the quality of the business and how it’s managed (good, outstanding, etc.). If you can see that a care home’s rating has increased from good to outstanding and has maintained this rating for a steady amount of time, you can infer that the management team has taken proactive steps to improve the quality and amenities of their care home.

Care homes are an increasingly appealing sector to invest in largely because this industry tends to be fairly recession-resistant. The reality is that people will continue to age. Even in times of economic uncertainty, whether it’s catalysed by Brexit or COVID-19, people will continue to need specialist care which can only be provided through a care home or hospital.

In addition to the above, the care home industry is vital for society. According to research from Age UK, the number of people aged 85 and up – the group most likely to need additional health and care services – is projected to rise even further, almost doubling from 1.4 to 2.7m over the next 20 years. These care homes provide the elderly with a vital service and ensure that the last years of their lives are lived in comfort and in the company of friends and other tenants who have similar health challenges.

Additional research from Age UK stated the number of older people in need of support and extra care – whether publicly or privately funded – will increase to almost 1.2m by 2040.

Now more than ever, do we need to ensure that the elderly are well taken care of and receive the adequate attention and care they need.

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