Care home operators are obliged to maintain the highest care standards and the Care Quality Commission (CQC), England’s social care regulator, monitors, inspects and rates care home services and can de-register care homes when standards are not met. Lancet research shows that most de-registrations are made voluntarily, although there is a significant minority (around 16% of 377 closures in 2023) which de-registers due to CQC action.
Whether closures are voluntary or not, the UK faces a well-documented supply shortfall with care home de-registrations continuing to outstrip new registrations in recent years. Knight Frank research estimates that net care home supply grew by just 86 beds in 2024.
It’s clear that this combination of increasing demand through demographic growth and an ongoing reduction in supply provides a compelling growth proposition for investors in the UK care home market. The arrival at scale of investors such as Welltower™ Inc. (NYSE:WELL) clearly supports this. However, while the case might look clear-cut, we continue to see investors grappling with the reputational risks of a potential care home investment, whether these relate to a care home closure, staffing issues, or regulatory censure.
Many investors are rightly concerned that if one of their care homes fails, then the reputational consequences of putting elderly and vulnerable residents through the stress of finding alternative accommodation can be a bridge too far.
But investors should examine the reasons why care homes do actually close. It is rarely a sudden shock and reasons for failure usually reflect structural issues. Almost all care homes that do de-register (whether voluntarily or otherwise) are no longer fit for purpose.
This shouldn’t come as a surprise - JLL research estimates that two-thirds of existing stock was built before 2000. And around half of this stock was not purpose-built and was typically converted from other uses (often schools, hotels or houses), meaning they were arguably never truly fit for purpose and certainly not future proofed to meet current operational and ESG standards.
Maintaining the highest care standards in adapted facilities as they become obsolete is difficult, costly and operationally inefficient. Operating profit margins become squeezed as increased operational expenses such as energy costs, national minimum wage increases and rises in national insurance cannot be passed on easily to residents. The situation is compounded by older care homes run by smaller, sub-scale independent operators who may not be sufficiently capitalised to make the necessary investment.
Conversely, it would be very rare for a new purpose-built care home developed, constructed and operated by seasoned market players to close shortly after opening its doors or even during the fill-up period. As specialist debt investors funding the construction of new-build care homes, we look closely at the track record of the counterparties we are working with, consider in detail the demand dynamics of the local area and take into account how well the care home adapts to its local market.
Accordingly, we see the risk of an involuntary CQC de-registration and any associated negative reputational consequences as being particularly well mitigated and, as such, very low indeed.