Nick Kempe: Why we should be concerned that Real Estate Investment Trusts are expanding into the care home market

“Regulation of the care home market is very weak, with almost no attention is given to issues like sector consolidation, let alone questions about whether the owner of a care home is prepared to put care before profit.”

AMIDST the ongoing crisis in Scotland’s care homes, from the failure to prepare for a second wave of Covid-19 to the widespread denial of residents’ human rights, last week nine care home buildings in Scotland were sold by the Holmes Care Group for £47.5m to the Impact Healthcare Real Estate Investment Trust (REIT) before being leased back.  The implications for a new National Care Service in Scotland are significant.

The sale and leaseback deal has been on the cards for over a year. In December 2019, the Holmes Care Group, a company registered in Essex, placed all nine of the care homes it owned in Scotland into a new subsidiary, the Holmes Care Group Scotland Ltd. The new company is not due to lodge its first accounts until after March 2021, but it appears to have been set up as the legal means to agree the sale and leaseback deal. Impact Healthcare, in its very full annual report for 2019-20, declared it had reached agreement in principle to purchase nine care homes and to lease them back for 25 years.

Since the financial year end, the impact of Covid-19 in care homes – including a significant number of deaths at Almond Court, in Drumchapel, operated by the Holmes Group – has clearly not been sufficient to de-rail the deal. Nor does Impact Healthcare appear unduly worried by Nicola Sturgeon’s announcement at the beginning of September of a consultation on the possibility of a National Care Service in Scotland. Far from being worried about potential nationalisation, operators have “hailed the deal as a major vote of confidence in the sector”. The vote, of course, is from the capitalist interests that run the sector, not from care home residents, their relatives, the staff who work there or the wider population.  

Christie’s, who brokered the deal, described it as “the largest care home transaction to happen in Scotland in over 15 years”. It is just two years since Advinia bought 11 care homes in Scotland from BUPA, albeit for an undisclosed sum. Before that, in 2011, the collapse of Southern Cross saw an even larger number of care homes changing hands.  Just like in the housing sector, spin is rife.

Unlike Southern Cross and its largest successor, HC-One, the Holmes Care Group appears to have been focussed on providing better quality care. Among the nine homes sold, there is currently only one that has grade of Adequate from the Care Inspectorate. All the other grades are Good or Very Good, making these care homes better than the Scottish average. While there was a serious blip at Almond Court, which was one of the first care homes to be inspected for infection control at the end of May and which was issued with a letter of serious concern by the Care Inspectorate, management in the home appear to have quickly addressed the issues. Although the truth is not yet out, it appears quite likely the deaths in these care homes is attributable to the discharge of infected older people from hospital and this may have also led to serious temporary staffing problems.

Impact Healthcare also has an explicit focus on buying up “upper middle market care homes. That is reflected in the price they paid, an average of £5,277,000 for each care home or just over £73,000 per place. That compares to the £900,000 or £22,500 a place Highland Health Board paid for the 40 place Home Farm Care Home on Skye owned by HC-One where 10 residents. The difference in price tells you nothing about the actual cost of providing these care home buildings – an important factor that a National Care Service needs to consider – only how the current market works.  Given the adverse publicity it had received and its ongoing difficulties in securing qualified nursing staff on Skye, Home Farm had become a major liability to HC-One. They were probably more than happy to get £900,000 for the building.

The contrast in quality and price is highly relevant to the question of whether all or part of the care home sector should be taken over to form a new National Care Service. It illustrates that, given the political will, it should be possible to take over the worst performing homes in the public interest for relatively little. Conversely, that taking over better run services at current market prices would be very costly. While better run services, such as those involved in this deal, may not be the priority for takeover, the way current “market” pricing works does have major implications for a National Care Service designed for all. It is easy to imagine REITs demanding huge compensation for the loss of lucrative 25 year leases. 

The stated purpose of sale and leaseback agreement was to enable the owners of the group to release capital for their retirement while enabling the operation of the care homes to be passed on to their daughter. While the Holmes Care Group was larger than many family care home businesses, the sale such businesses on retirement has been a common phenomenon over the last 30 years that has played a very important role in the consolidation of the care home market. Between 2006 and 2019 the share of the market owned by providers owning one or two homes reduced from 49 per cent to 32 per cent. At the same time the share of the market controlled by providers owning between 3-80 homes increased from 24 to 47 per cent. While the growth of medium sized providers has also been helped by the break-up of some of the biggest providers who dominated the market 10 years ago, what we are seeing is a transition from small, locally owned care home businesses, often owned by people who had worked in health or social care, to services own by companies based in the City. The Impact Healthcare REIT is listed on the London Stock Exchange.

This highlights two issues that a National Care Service needs to address. The first is that people who might have the experience, ability and inclination to operate small care homes – and by extension community organisations or social enterprises – find it very difficult to raise the finance to buy care home businesses. Unless the changes, further consolidation of the sector and management divorced from local communities is inevitable. Second, regulation of the care home market is very weak, with almost no attention is given to issues like sector consolidation, let alone questions about whether the owner of a care home is prepared to put care before profit.

While the issues are slightly complicated by sale and leaseback agreements, which separate responsibilities for providing care from capital and buildings (known as the OpCo/PropCo model as its called) any effective regulation should cover the rent that is being charged. 

Real Estate Investment Trusts tend to be more transparent than other companies.   In its last annual report Impact Healthcare reported that it owned 86 care home properties for which it received £23.1 million in rent. This comes to an average rent of £268,600 per year or, with 5601 beds, approximately £4,100 a place. Adjusting for occupancy, that means approximately £90 a week of each care home fee goes on rent alone, without taking account of maintenance costs which are the responsibility of the operator. The details of the lease with Holmes Care Scotland Ltd have not been revealed but Impact Health Care appears to be confident it will provide investors with a 6% rate of return, which implies rent per an occupied place of over £80 a week. With interest rates so low, even if care homes were taken over at market prices, the public sector could at present provide these buildings for far less, releasing money for care.

The longer terms implications of this deal, however, is that over time more money will go in rent.  All of Impact Healthcare’s leases provide for rent payments are to be increased by the Retail Price Index and in the case of Holmes Care the lease is due to run for the next 25 years. Unlike the Consumer Price Index, RPI includes housing costs and therefore property value inflation.  In the last few years it has on average been 0.9 per cent above the CPI which is now being used to make pay awards. If these trends continue – and that appears likely given housing is prime area for speculation – then rent is going to be an even higher percentage of fees in 25 years than now.

Care home landlords may have learned to be slightly less greedy than they once were – Southern Cross’ demise was precipitated by annual rent increases from the sale and leaseback of the homes it once owned that were above the rate of inflation – but they are still focused on extracting considerable sums of money from the sector.  

Impact Healthcare believes “that the RPI linkage in our leases is sustainable” because, while over the last two decades the RPI has increased on average by 2.8 per cent per annum, the fees charged by care homes have been increased by 3.7 per cent per annum. What has been happening is that self-funders, people who owned their own houses before being admitted to care, are being squeezed by providers for every penny they can get. While some of this money returns to the middle classes through pension funds which invest in the care home market, much goes to private investors and contributes to the widening gap between rich and poor. 

It is a complete myth that ever-increasing fees are needed to make up deficiencies in local government funding, currently £714 per week in Scotland for nursing care.  Tackle the rent issues and high-quality care provided by a well-paid workforce could be supplied for around £800 a week.   The problem is that attempts to control care home fees have failed miserably allowing a market free for all. The Free Personal and Nursing Care Regulations, which gave prospective self-funding care home residents the right to choose to come under Local Authority contracts and approved fees, are now totally ignored as are the recommendations of various inquiries into the need for transparency about fees. Those failings are reflected on the web pages of the Holmes Group. Nowhere does it say what fees it charges to self-funders.  

Real Estate Investment Trusts originated in the USA in 1960 but were not introduced to the UK until 2007. They now exist in over 30 countries. Ostensibly intended as a means of enabling small investors to own shares in property, they have become yet another means of avoiding tax with similar rules applying in different countries.  In the UK and the USA, as long as the REIT pays 90 per cent of income it receives in rents as dividends to investors, it is exempt from corporation tax. 

REIT involvement in health and social care in the UK has been steadily increasing. The initial focus was on GP surgeries – effectively a private finance initiative that is ultimately paid for by the NHS. REITs operating in this area include MedicX, Primary Health Properties (308 assets worth £1.4bn) and Assura (525 properties valued at £1.7bn). GP rents usually increase by between 3 per cent and 5 per cent every three years. 

REITs are now rapidly becoming a favoured vehicle for “investing” in the nursing home market. The US-based Omega Healthcare owns over 50 care home buildings in the UK. Target Healthcare REIT now owns four care homes Scotland, three run by the Balhousie Group, while Impact Healthcare also owns care homes operated by another medium sized Scottish Provider, Renaissance Healthcare.

The implications of the Holmes/Impact Healthcare £47.5 million deal for a National Care Service should not be underestimated. Long-term year leases with escalating rents have consequences for care home residents, their families and staff. Either self-funding residents will end up paying even more for reasonable quality care or what is spent on staffing will be cut further, reducing the quality of care and the quality of life experienced staff. It is not just Providers who suck money out into tax havens that need to be tackled.

One of the most fundamental questions that the consultation on a National Care Service needs to consider concerns social justice. How could such a service help reduce inequality rather than driving it through low wages and redistributing income from the middle classes to the rich as at present? Disentangling a national care service from the capitalist system will be a considerable challenge requiring much broader issues – such as how the banking and investment system should operate – to be addressed. 

Impact Healthcare is probably right in believing that at present the Scottish Government has no real intention of radically reforming the care home sector or care system more generally. That could, however, change with sufficient pressure from stakeholders in the sector and the general public.  Common Weal has started working on a submission to the consultation on a National Care Service that will make the case for fundamental reform and describe the detailed reforms that are necessary – including how we stop care homes being traded for profit.

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