A low-risk way to beat inflation
Demand for care-home places is strong and the sector should be able to raise prices ahead of costs, says Max King.
The public thinks of care homes as synonymous with old people’s homes but, as Rupert Barclay, chairman of Impact Healthcare (LSE: IHR) explains, these can be divided into three categories: residential homes for the elderly, for those who are infirm and for those with dementia.
“People don’t put their relatives into homes because they are old but because they can no longer look after themselves or be looked after at home. If they are incontinent or immobile, they need care... it takes two people to lift someone out of bed into a chair or wheelchair,” says Barclay.
This means Britain’s ageing population is not necessarily a driver of increasing demand for care-home places. People live at home for longer, even if home involves stairs – doctors regard exercise as essential. Alternatively, they move into assisted-living properties with on-call help. With medical care for dementia and infirmity improving, there is no guarantee of long-term growth in demand.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Two firms funding care
At present there is a shortage of places in care homes, which are nearly at capacity. These have specialised facilities and equipment and high staffing costs. Operators without access to necessary capital for ownership lease their properties and focus on the management.
Two listed companies provide operators with the capital: Impact Healthcare with 128 properties, 6,800 beds and £530m of property assets; and Target Healthcare (LSE: THRL) with 99 properties, 6,835 beds and nearly £900m of property assets. As this implies, Target’s homes are twice the size of Impact’s but there are other important differences.
Target has grown primarily through acquiring new properties, often direct from a contractor who has built to order. Impact doesn’t build many new homes and a high proportion of its residents are funded by local authorities, earning lower rates. Instead it acquires decent properties with over 20 years of life and attractive yields, which it seeks to supplement through incremental investment with a higher rate of return.
Both companies’ properties are spread across the country and the tenants are diversified. Target has 28 and Impact 14, avoiding tenants managing just a single unit. As landlords, they avoid operational risk but need to scrutinise their tenants lest they get into financial or operational trouble. Leases are long term but can be transferred between operators and rents are inflation protected. Both funds augment returns with a moderate level of debt, of around 10% of net assets.
Both trade at modest premiums to net asset value. These premiums are constrained by the obvious wish to issue more equity for acquisitions. Impact raised £40m earlier in the year and another £22m recently but, with a £300m pipeline of potential acquisitions, would like to raise more. Barclay admits that “we’ll have to let one or two projects go.” Target raised £125m last September. Both yield around 5.5% and dividends are expected to rise.
Keeping up with inflation
“The fundamental thesis for care is strong,” says Barclay, “while the operational and reputational risk for us is low.” Operators will be concerned about staff availability and their ability to pass on higher costs. However, average weekly fees have risen ahead of the retail price index for the last 25 years.
The need to provide care for the infirm has been recognised across the political spectrum. Last September, the government set out proposals including “a health and social care levy” to provide the required funding, a cap on care costs in England, less means-testing, and funding for improved infection control and testing. “Government reform provides greater certainty for long-term funding,” says Impact. This makes both Impact and Target appealing for those seeking an attractive, inflation-linked income with low risk.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.
After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.
-
Four AI ETFs to buy
Is now a good time to buy AI ETFs? We examine four AI ETFs that investors might want to add to their portfolio
By Dan McEvoy Published
-
Chase boosts easy-access interest rate - savers could earn 4.75%
Chase is offering a boosted interest rate which is fixed for six months, on top of the standard variable rate
By Jessica Sheldon Published
-
Halifax: House price slump continues as prices slide for the sixth consecutive month
UK house prices fell again in September as buyers returned, but the slowdown was not as fast as anticipated, latest Halifax data shows. Where are house prices falling the most?
By Kalpana Fitzpatrick Published
-
Rents hit a record high - but is the opportunity for buy-to-let investors still strong?
UK rent prices have hit a record high with the average hitting over £1,200 a month says Rightmove. Are there still opportunities in buy-to-let?
By Marc Shoffman Published
-
Pension savers turn to gold investments
Investors are racing to buy gold to protect their pensions from a stock market correction and high inflation, experts say
By Ruth Emery Published
-
Where to find the best returns from student accommodation
Student accommodation can be a lucrative investment if you know where to look.
By Marc Shoffman Published
-
Best investing apps
Looking for an easy-to-use app to help you start investing, keep track of your portfolio or make trades on the go? We round up the best investing apps
By Ruth Emery Last updated
-
The world’s best bargain stocks
Searching for bargain stocks with Alec Cutler of the Orbis Global Balanced Fund, who tells Andrew Van Sickle which sectors are being overlooked.
By Andrew Van Sickle Published
-
Revealed: the cheapest cities to own a home in Britain
New research reveals the cheapest cities to own a home, taking account of mortgage payments, utility bills and council tax
By Ruth Emery Published
-
UK recession: How to protect your portfolio
As the UK recession is confirmed, we look at ways to protect your wealth.
By Henry Sandercock Last updated