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Rising land costs worsens shortage of nursing homes

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Woodlock Nursing home in Portlaw, Co Waterford. Photo: Mary Browne

Woodlock Nursing home in Portlaw, Co Waterford. Photo: Mary Browne

Woodlock Nursing home in Portlaw, Co Waterford. Photo: Mary Browne

THE current rising costs of development land in the Dublin area may exacerbate the challenges to meeting a major shortfall in supply of nursing homes and beds in the area as well as near some other major cities and towns.

Research by BDO for Nursing Homes Ireland (NHI) shows that almost 8,000 new nursing home beds or the equivalent of about 100 new nursing homes are needed in order to meet the needs of an increasing number of elderly people.

A fall off in the pace of supply in recent years contrasts with the trend, not alone during the boom but even in the early years of the downturn.

From a position where as many as 1,000 beds a year were being provided up until 2009, the rate of supply has fallen to less than 340 a year between 2009 and 2012.

This fall seems surprising considering how the cost of development sites fell by 90pc in some cases between 2007 and 2010 and there were also suggestions that some of the loss-making hotels could be converted into nursing homes – something that has not materialised.

Furthermore, the Fair Deal scheme introduced in 2009 and the threat by the Health Information and Quality Authority (HIQA) to close down inadequate nursing homes, suggested increasing opportunities for the private and voluntary sector. These prospects enticed some major international nursing home operators into Ireland and saw the emergence of a new for-profit business model.

However, the financial attractions of the business have changed in recent times and most recently the increasing cost of development land in the areas with greatest opportunity are just one of the factors currently trending against the development of new centres.

More importantly NHI, the organisation representing 346 operators, is concerned at the uncertainty regarding the funding and future of the Fair Deal system whereby the State pays up front towards patient care.

NHI members are also concerned at the way in which the State, through the National Treatment Payment Fund, sets rates with individual operators.

The BDO report, commissioned by NHI and titled 'Health's Ageing Crisis: Time for Action', also points out that the uncertainty on the state fees is affecting the willingness of financial institutions, equity investors and nursing home operators to fund new developments and this has also contributed to the slowdown in investment.

BDO says that in order to fund new nursing home projects, banks require upwards of 30pc equity investment and short financing periods. But the state payments for patients focuses only on meeting the cost of care and does not allow for capital costs or capital repayments.

"As a result, the financial returns available to nursing home operators and funders are not as attractive as are available in other sectors, and considerably below the 12pc," which is considered an acceptable return.

Another major financial concern is the ability and capacity of operators to invest in and maintain their existing facilities.

The scale of the financial investment involved can be gleaned from further research commissioned by the Irish Independent which shows that in the last five years 646 nursing home projects, including extensions and upgrades to existing homes and HSE projects, entered the planning and development pipeline.

Many of these would have been in response to the new HIQA standards which include increased bedroom and day- room sizes.

CONSTRUCTION

Dublin accounted for 138 of these projects, with a combined construction cost of €951m or an average of €6.9m each.

This research conducted by Construction Information Services shows activity in the pipeline in most of the 26 counties over the five years.

The most active areas to see projects include: Co Cork with 72 projects at a combined cost of €276m or an average of €3.8m; Meath with 47 at a combined cost of €74m or an average of €1.6m; Co Kildare with 41 at an average of €2.4m; Co Galway with 38 at an average cost of €2.8m; and Wicklow with 31, or an average cost of €3.6m per project. Some of these may not be developed for any number of reasons.

Indeed, the NHI points out that after a 44pc increase in private and voluntary sector bed capacity in the 10 years up to July 2012 there was little or no new development of additional capacity in the preceding year.

The CIS research shows that religious orders are still quite active in undertaking nursing home projects although some of these may be for their own members. Major private sector operators that are active include Sonas, with a Sligo home and TLC, with projects in Dublin and Kildare.

Part of the reason for the substantial growth in capacity up to 2010 was the provision of tax incentives for private investors to invest in new homes. This allowed investors to write off the cost of their investment against their income tax over a seven-year period.

The ending of this incentive has been a major problem especially now that banks require nursing home developers to provide 30pc of the cost.

In order to meet the needs of this growing sector of the Irish population and the shortfall in capacity, the BDO report recommends new financial measures. "Measures to be considered could include, among others, changes to the treatment of VAT on the development of new beds and the extension of the Employment and Investment Incentive Scheme to the nursing home sector."

Indo Business