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UK care home sector must modernise to meet the demands of an ageing population

Date Published: 18/03/24

The UK’s private sector care home industry is in a precarious state. Years of underfunding, a post-pandemic surge in demand, and chronic staff shortages threaten the quality of care and have pushed some independent providers to the brink. While the near-term industry problems mount, the long-term investment opportunity is intact and growing.

Staff shortages and insufficient fees

At the heart of the crisis is a severe, long-standing shortage of care workers, fees that have not kept pace with rising wages, and inflated costs for energy, labour and food. Underpaid care workers are leaving the profession, creating a recruitment and retention crisis. Rising wages, however, present a dilemma as this could further inflate costs for residents and their families. In England, social care funding operates in an interdependent two-tier system, comprised of state and self-funded residents. Driven by rises to the national minimum wage, local authorities have had to increase their funding; however, this tends to lag inflation, prompting care home operators to prioritise serving self-funded residents for whom fees can increase more rapidly, allowing operators to maintain margins. Over time, this balancing act becomes more difficult for care home operators who must weigh up the proportion of state and self-funded residents, the degree to which annual fees for state-funded residents meet the rising cost of quality care, and whether any deficit can be passed on to self-funded residents to balance the books.

Average UK residential care home fees have risen by almost 20% in the last two years, with some self-funders in affluent areas paying close to £100,000 annually, according to LaingBuisson, the healthcare data provider. Regional disparities further exacerbate the situation, with care homes in less affluent regions facing greater challenges compared to those in wealthier regions, compounding the challenges for private sector providers in those regions. Less affluent areas typically experience worse service quality due to lower staffing levels. Independent providers heavily reliant on inadequate local authority funding are particularly vulnerable, struggling to balance rising costs (e.g. staffing levels per resident, pay rates, property costs, food and heating), while maintaining service quality, operational efficiency and higher debt servicing costs due to elevated interest rates. While there has been significant progress in supply chain normalisation for medical supplies, shortages persist which contribute to treatment delays and increased expenses for providers. The unintended consequence of these market dynamics is that care home operators are disincentivised to provide care for less affluent and vulnerable state-funded residents.

The Independent Care Group has warned that small providers could be forced to close, while others risk being forced to close by the Care Quality Commission (CQC). Care homes most at risk of failure are providers highly dependent on local authority funding, which is widely considered inadequate to cover operating costs to provide quality care. Between 2011 and 2023, the CQC shut down 804 for-profit care home facilities for failure to meet industry standards, according to a data analysis by a team at Oxford, Michigan and Roskilde universities, reported by the Financial Times.

Opportunity amid the challenge

Amidst these hurdles lie opportunities for growth and investment for savvy investors. Investment in UK care homes slumped to just £500m in 2023, according to Colliers’ data, due to pricing uncertainty and capital restraints among healthcare investors. The bulk of activity was recorded in the prime care home segment, accounting for 80% of volumes, followed by around £150m traded in the central London medical offices market. The slowdown in M&A and real estate investment activity in the past year is attributed to the increased cost of finance, while healthcare sector equity market sentiment limits the growth ambitions of REITs. In the near term, the lack of transactional activity has reduced clarity in the bid–ask spread between buyers and vendors, but as interest rates eventually come down over the coming 12–18 months, sentiment and transactional activity should improve. Colliers predicts a bounce back in UK healthcare real estate investment volumes to more than £1bn in 2024.

Increased investment in the healthcare sector helps alleviate pressures on the NHS and primary medical care services as the UK’s growing and ageing population continues to increase stress across the system, exacerbated by the prevalence of resource-intensive treatments for increased frailty and dementia associated with a growing elderly population. These trends act as an inevitable long-term demand driver for healthcare services, as the state-funded healthcare system struggles to keep up. At the same time, increased integration of private and public sectors offers avenues for growth – particularly in segments like the private acute hospital market.

The technology imperative

Well-performing care homes with strong financials, stable occupancy rates, robust staffing levels, a commitment to modern ESG practices and digitalised health services, are potential acquisition targets for private equity, REITs and large corporates. Investors are increasingly turning to how technology can alleviate some of the operational pain points in care homes. Some solutions help address environmental concerns, cost savings and even enhance care delivery. For example, technology solutions can help operators and owners monitor energy consumption and waste produced. Once data is tracked, capital expenditure plans around increasing energy efficiency and reducing waste can be implemented (e.g. replacing heating systems and windows, increasing insulation, and switching to renewable energy sources). In addition, artificial intelligence (AI) has the potential to improve care coordination, ensure seamless communication and information flow between providers, automate medication reconciliation, streamline administration, develop personalised treatment plans, and empower patients with tools to manage their own health. These technologies, while in their infancy, have the potential to increase operational efficiencies and enhance profitability.


For care home operators seeking to navigate challenges in the care home sector, BTG Advisory can help providers modernise and digitalise operations, streamline processes, source fresh finance, or execute a restructuring while maintaining a patient-centric care delivery focus. Our healthcare sector knowledge can guide operational efficiency, regulatory compliance, ESG, and risk management.

BTG Advisory can also help unlock the potential of underperforming care homes. We combine operational, financial, and technological expertise to streamline processes, optimise workflows, and improve efficiency. Our team works to maximise revenue, reduce costs, and ensure sustainable profitability. For example, we help identify technology solutions to enhance care delivery and generate ongoing savings. For investors looking to increase exposure to the sector, BTG Advisory offers comprehensive M&A advisory services, from identifying high-potential targets aligned with your investment criteria to guiding you through the entire transaction life cycle – due diligence, deal structuring, negotiation, financing and post-deal integration.


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