Why Southern Cross isn’t the end of the care-home industry

It costs nearly £7m to build a 60-bed care home, and government funds are running dry. But lenders are stepping in where they see impressive opportunities. Laura Chesters looks into the future of the sector

Marjorie Beasley, 91, can't quite remember how long she has been living at her care home in Herne Bay, but it has been a few months. She is, though, relieved to have carers on hand who attend to her every need: "They look after me very well here. I am happy and go down at lunch time for dinner but I have supper in my room – I always have ice cream."

Her neighbour, 90-year-old Amelia Brocklesby, moved in to the Signature Senior Lifestyle's Miramar home a little over two months ago and is mightily happy that the bed is comfortable. The bed at her previous care home, a few miles away, was not.

"I need a lot of care," she says. "I need help getting up and getting dressed and everyone here is so kind and so, so sweet. It is such a tough job for them."

Mrs Beasley and Mrs Brocklesby are the lucky ones. Unlike some residents of rival care-home owner Southern Cross, there has been no threat of eviction from this luxurious care home on the Kent coast.

Southern Cross, which owns more than 700 homes across the UK, has been in dire financial circumstances for the past year. The group was owned by Blackstone until 2006, when the private-equity giant made around £600m in a stock-exchange flotation. Since listing, costs have been cut and money raised from the sale and leaseback of its properties.

The result was that earlier this month, landlords had to agree that Southern Cross could reduce its rental payments and sell off some of its homes in order to stave off financial ruin.

Analysts sang the demise of the City's and private equity's affair with the care-homes business. However, the sector is not a total bust, and properly managed care homes can still work for both owners and residents.

A Cross to bear

Craig Woollam, head of healthcare at property adviser Savills, points out that the sheer size of Southern Cross made it "unwieldy" and "expensive to manage". Rents were high and the private-equity model meant that there was a lot of debt on the balance sheet.

"When you get a problem like this, the reputational issue for care homes quickly spirals," he sighs. "The Southern Cross issue is not a care-home issue, it is the specific circumstances of Southern Cross's business."

Woollam's colleague, Andrew Surgenor, agrees: "With all the negative press on the sector following Southern Cross, the key is to focus on the care. That is what it should always be about."

Southern Cross's problems escalated when fees from local authorities for the care of elderly patients flat-lined because of government cut-backs. Staff wages and rent bills were on the increase, the number of residents on the decrease, so the business was haemorrhaging cash.

Henry Harris, a healthcare partner at surveyor Edward Symmons, argues that the major problem was the way Southern Cross had negotiated its property deals. Management had bet that fees would keep rising, as would the number of residents, and so did not drive a hard enough bargain on how much rent they had to pay.

"Southern Cross is a victim of a poor sale-and-leaseback structure that was badly arranged," says Harris. "This isn't about private equity or sale and leasebacks being wrong. It is about rents set at the wrong level."

Although Blackstone has taken much of the media flak, the bulk of the unaffordable sale-and-leaseback deals were actually arranged after Blackstone sold out: more than 150 homes were built after 2006.

A place to invest?

Figures suggest care homes remain an attractive investment, as the number of elderly people in the UK will continue to grow. More than two million people will be over 85 in two decades' time.

Although Southern Cross is the biggest single owner of care homes in the UK, most are actually owned by small businesses with just one or two locations each. More than 2,500 homes are in private ownership and Southern Cross has less than 10 per cent of the private market.

The 1990 Community Care Act encouraged private investors to pile into the sector. The property boom meant that there were cheap loans available to build the homes. These were then sold-off to investors to fund further developments, and the care homes would take-up an operational lease.

Just as the property crash brought down the owners of offices and shopping centres, so care homes struggled. The model is complicated by the diverse levels of help the individuals require and the amount available to spend on them.

For Mrs Beasley and her friends, the price to live at Signature's Miramar home starts at £750 a week and can go up to more than £1,000. This is at the top end of the price and care barometer. Signature, which has three developments and is planning a further four, provides small apartments with their own front doors in a care-home complex.

Herne Bay resident Irene Smith is on her way back from getting her hair washed and set in the salon at the care home. The 84-year-old joins her husband, Ned, who headed up industrial relations at the National Coal Board during the miners' strike in the 1980s, back at their ample apartment. He says: "The thing that impresses me here is the way they look after it. It is immaculate. Obviously this is not a cheap place but it is great value for money."

To keep the home "immaculate" and to build it in the first place takes a lot of cash. Signature uses a mixture of bank debt, sale and leaseback and other funding models to construct the homes. But the fees paid by local authorities would not meet the cost of staying at Miramar, so it has few residents whose costs are covered by social services.

Currently, Kent County Council pays around £400 a week for each resident in care. This barely covers rent and food in most care homes, let alone the cost of nurses. Penny West, operations director at Signature, says that relying on local authority fees is simply "not a viable business model".

Southern Cross has a higher than average number of residents funded by the state, meaning that charging higher fees is, in some cases, impossible.

The Facebook generation

Building a care home of around 60 beds, including the land, requires £4.5m to £6.5m. On top of that are the costs of cleaners, staff, nurses and food. And there is a funding crisis looming, as the Government tries to find the money to care for an ageing population.

Ernie Graham, who owns six homes in Britain through his Graham Care Group, says: "The care sector needs a huge amount of capital injected – billions upon billions. I would say that any sale-and-leaseback plan should be a partnership between the landlord and the tenant. It should be a partnership so no one loses out."

The key is to provide additional services, making residents willing to shell out their own cash. Graham has just introduced social networking to his homes. Residents, via their carers, can stay in touch with their families via texts, Facebook and email, on a system run to ensure updates and photos can be shared.

The banks are clearly impressed. Clydesdale is providing loans to help build Graham's next two homes.

The future of care homes

Southern Cross's travails do not spell the end for the sector, even though the image of the firm battling with trade unions over the number of carers and workers it has sacked will linger.

Speculative investors will gain from the increasing over-85 population. But, chillingly, the Government will soon be unable to afford to cover the costs of housing the nation's elderly.

As things stand, everyone will probably end up paying for their own care – one way or another. Hopefully, there will be enough money to pay for three-course lunches cooked by an in-house chef somewhere like the Miramar.