November 28, 2023

October 13, 2023

5 min


Social care outlook: signs of recovery point to opportunities for growth

Mark Gross

Mark Gross

Partner, Head of Development Capital


November 28, 2023


5 min


Social care outlook: signs of recovery point to opportunities for growth

Mark Gross

Mark Gross

Partner, Head of Development Capital

  1. Occupancy rates across the social care sector are rebounding reaching an average of c.85%
  2. As inflationary pressures ease, energy and staffing cost pressures subside
  3. The overall workforce picture is also beginning to stabilise
  4. How could public policy impact the sector?
  5. Consensus has crystalised around the ESG investment opportunity presented by the social care sector, particularly around the ‘S’ element and the value of care in our communities

In his latest outlook on investing in social care, Mark Gross, Head of Development Capital at Downing, strikes an optimistic tone on the sector's recovery and growth prospects.  

More than three years after the UK’s care sector was rocked by the arrival of Covid-19, I am encouraged by the sector’s recovery and optimistic outlook. The private pay market has rebounded as consumer confidence in care services returns. Knight Frank reported occupancy rates across the sector at c.85% - a number of operators with homes across the UK now trading well above these levels. I expect these occupancy levels to continue to climb in certain areas, particularly given the subdued levels of new beds coming to market.

In my 2023 new year outlook, I reflected on the pain of inflationary pressures. We have thankfully seen that pain ease as energy and staffing cost pressures subside. Average private funder fees have increased by an average of 11% across the elderly care sector, and for the most part, operators have been able to pass on inflationary costs. In the broader context of cost-of-living pressures and heightened media attention on price increases, increased costs have on the whole been accepted by private fee payers. While volatility risk remains around energy prices as we look to the second half of the year and the colder winter months, we have seen real evidence of the sector’s abilities to pass on cost increases as operators provide a genuine needs-based service.

Operating performance is increasing, and construction cost inflation is subsiding. The risk of further base rate rises has eased, and general inflation is also coming down faster than expected. However, the cost of new debt remains high and is expected to stay that way for the foreseeable future. Therefore, we expect the pace of development to remain subdued. At a macro level, we believe existing operators and developers will benefit from the slower pace of new developments given the anticipated shortfall in market-standard bed supply relative to demand. Clearly specific local markets will need to be considered carefully.

Local Authority funding pressures continue

Local Authority funding pressures, though not felt equally in all regions, show no sign of easing. The latest survey by the Association of Directors of Adult Social Services (ADASS) illustrates this in stark terms, with 76% of Directors reporting that they are ‘not confident’ they can meet their statutory care duties.

As a result, we are seeing significant variation in the capacity of commissioners to engage in fee uplifts that fully reflect increased costs. Furthermore, the quality and potential of Integrated Care Systems (ICSs), on the whole, remains largely unclear, and they have proved more fruitful in some areas than others when it comes to strengthening local healthcare markets. However, this inconsistency should be no barrier to investors who can identify high-quality opportunities in specific local markets based on an in-depth understanding of the conditions in that locality.

Increasing acuity drives demand for higher-quality specialist care services

What is more consistent across both private and local authority markets, particularly in elderly care, is the increasing acuity of people moving into care. We believe that this will continue to be the biggest driver of demand and is the causal factor seen by many operators behind higher rates of resident turnover and lower average lengths of stay.  

If we look back at 2011, the average length of stay in a care setting was around 2.2 years across the elderly care sector. Anecdotally, this was widely seen to have reduced to c.1.8 years before the pandemic. Knight Frank’s 2022 UK Care Homes Trading Performance Review suggests that this figure has further shortened again to c.13 months.

This means we are seeing the nature of the type of care being provided fundamentally alter. In particular, and for the foreseeable future we expect to see heightened demand for modern, purpose-built facilities that can deliver nursing, dementia and end-of-life care. However, we believe older-style purpose-built assets that are capable of refurbishment and can sit towards the top end of their local market should not be overlooked. Of course, there will always be exceptions to the rule.

Driven by the Government’s Transforming Care agenda, the population and individual lifestyle changes, supported living and higher acuity specialist care services also remain strong areas for investment. As with elderly care, swathes of opportunity exist in this space for investing in the refurbishment and upgrade of older assets. Mental health is also an area to watch as commissioners are reporting rapidly increasing referrals for this type of care.  

An improving workforce picture

We are also seeing a more stable workforce picture across the social care sector than when I last shared my reflections in January, largely due to the impact of the Health and Care Worker Visa changes. However, a deeper look at the latest Skills for Care workforce statistics shows that while overall care workforce vacancies decreased by 7% this year (to 152,000 vacant posts), the 70,000 new overseas care workers that joined the UK labour market (up 50,000 on a year prior) masked what would otherwise have been a worsening situation in the domestic workforce. Put another way, without the visa changes, the number of vacant roles would have increased to over 200,000 (up 23.9%).  

While the visa changes are not necessarily a long-term solution, there are other reasons to be optimistic about the care workforce. There are some signs that workers are increasingly recognising care as a reliable employment option protected against wider economic uncertainty, as a result we’re seeing more people choose permanent employment contracts over agency work. This is helping to improve the quality of care and reduce regulatory risk and staffing costs: thereby improving overall operational performance and injecting stability into the market. We believe that corporate operators in better-invested facilities and certain locations will be disproportionately benefiting from the improving employment environment over the ‘mom and pop’ operators in small and inefficient older-style buildings.

How could public policy impact the sector?

Social care worker helping elderly man off the bed

The looming possibility of a shift in the public policy and fiscal landscape resulting from a 2024 General Election may lead to less stability for some parts of the market. The Labour Party currently holds a 20% lead in the opinion polls (data: 04/10/23) but its position on social care and tax policy has yet to be crystalised. June’s Fabian Society report on a National Care Service, commissioned by Labour, indicates that increased regulation on commercial providers may be introduced, while elsewhere there are signals Labour may align capital gains with income tax rates.

The Welsh government continues its discussions around a potential ban on for-profit children’s care provision and potentially other elements of social care - I believe this is driven by political ideology with little consideration for the practical implications of adopting such an approach. Factors such as upfront capital requirements, potential reduction in capacity, reduced service user choice, infrastructure to manage complex operations efficiently and loss of private provider market will be difficult to replace if things don’t work out. There is no indication that any other part of the UK is considering this -  and rightly so.

Going forward, we expect to see the potential for tax and regulatory changes to drive more exits from the market. Across social care and specialist education, this presents significant growth opportunities as corporate providers consolidate what is currently a very fragmented market.

In summary, any current or future UK government can’t afford to make missteps on social care and education policy. The government can’t afford to risk damaging a high-needs-based sector at a time when the gap between supply and demand will continue to grow. They also can’t come close to affording to solve the problem on their own. The private sector is and can remain a valuable partner and should not be used as a political pawn to blame for many of the structural issues that the private sector is helping to address in an efficient manner.

Increased interest in ESG

As predicted at the start of the year, a consensus has crystalised around the ESG investment opportunity presented by the social care sector, particularly around the ‘S’ element and the value of care in our communities. Individual operators and investors are integrating their own ESG initiatives and it is interesting to see the recent forming of a Social Care Sustainability Alliance which aims to drive ESG progress and share best practice amongst all providers, while further helping evidence the positive ‘social’ impact of investing in social care. Energy bill shocks have increased interest in energy efficiency and delivering low and no carbon new builds, delivering further progress on the ‘E’ element.

Elsewhere, there is an opportunity in special education to demonstrate sustained progress on the ‘G’ element, with strong Boards and Management teams working to drive higher quality standards and bring well-invested services to the UK market to meet rising local government demand. However, growth in this area will likely rely on the scaling up of existing operators and continued improvements to regulatory performance, negating the potential impact of a shortage of management talent while creating new services.  

Looking ahead at social care trends

With the winter months ahead, it remains to be seen how much of the £600 million support package announced by the government in July will address capacity challenges on the ground. This was a two-year package, much of which was aimed at the NHS. Following a Downing Street NHS winter planning meeting in mid-September, the government announced how £200m of the fund would be spent this year – including setting aside £40m for Local Authorities in the worst performing areas to support their local social care markets.  

Government and NHS ICSs remain focused on improving hospital capacity by speeding up discharges into community care settings, with more people coming out of hospital with complex health and support needs. Meanwhile, Commissioners will continue to grapple with increasing demand and the increasing size of care packages needed to meet higher acuity.  

To tackle this, Local Authorities will be able to use the £40m fund to buy more services aimed at keeping people out of hospital, more packages of home care which allow people to leave hospital more quickly, and more specialist dementia support in the community to keep people out of hospital in the first place. This is further evidence of the wider pressure on the system and the desire of the government for greater integration between social care and the NHS to address chronic NHS waiting times.  

As we head into the second half of the financial year, the appetite for specialist and higher acuity care shows no sign of stopping, and broader lifestyle and demographic trends will continue to drive demand across all care segments. The private pay market will need to continue to fill gaps in local service provision, while a renewed focus on quality and sustainability will help minimise the risks posed by political uncertainty while delivering great social impact.

Find out more about Downing's activities within the social care sector

Investing in Social Care at Downing

Downing Development Capital is an award-winning investor that partners with exceptional management teams to help realise their growth ambitions and to maximise the potential of their business. Typical sectors it looks at include healthcare, education, hospitality & leisure, living and IT infrastructure.

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