The two biggest nursing home operators in Ireland have made significant moves in recent weeks to consolidate their positions — both with the backing of huge overseas funds. It’s a sign that the opportunity presented by the undersupplied Irish nursing home market is starting to drive consolidation but there are many challenges ahead for the sector too.
AXA Investment Managers-Real Assets (AXA IM) — which operates a Europe-wide healthcare fund with almost £1.7bn invested — last week announced that it had bought a portfolio of 10 nursing homes with a total of 600 beds. It is to partner with the largest operator of nursing homes in the Irish market — Mowlam Healthcare.
That deal followed another eye-catching French-backed investment announcement over Christmas. The Sunday Independent reported that the country’s second-biggest nursing home operator, Carechoice, has kicked off a €100m investment plan that will see it build, extend and acquire new homes across the country.
Carechoice was acquired in 2017 by French investment fund InfraVia Capital Partners for a reported €70m. UK venture capital fund BGF was also recently reported to have invested €10m into another Irish nursing home operator, Brindley, and it has just appointed former health minister Mary Harney to its board, suggesting further developments are ahead.
So what is going on in the Irish nursing home sector that is attracting such investor attention?
The simple answer is demographics. The 2016 Census showed that the population aged over 65 had increased by 19.1pc since 2011. Indeed, the census recorded 456 centenarians, an increase of 17.2pc on 2011 and the projection is that the number of people over the age of 80 will have risen by 130,000 by 2020.
“People are living longer and that is a success story but with that there are challenges,” says Bank of Ireland head of healthcare Hilary Coates. She has a long track record in the health sector including helping to set up the nursing home regulator in 2007. In September she and her team at the bank published detailed research into supply and demand in the Irish nursing home sector that highlighted starkly a growing shortfall of beds over the next decade. The bank predicts a total shortfall of 7,500 nursing home beds nationwide by 2026.
“People over 80 use the health services more and the costs of care for people over 80 are two to three times of those under 60,” she says. International figures suggest that between 18pc and 22pc of over 84-year-olds need residential long-term care, according to Coates.
In Waterford, for example, the bank’s projections suggest that by 2026 the number of people over the age of 85 will have grown from just over 1.700 people in 2016 to over 2,500 people by 2026, with a fifth of them requiring long term residential care.
That translates into a projected shortfall of more than 300 nursing home beds in Waterford if no new long term residential care units are built in the county.
At today’s construction costs, a nationwide investment of at least €1.2bn in new private nursing home beds will be required to bridge this gap, quite apart from the hugely expensive upgrade that is likely to be needed in the state-run system.
Undoubtedly activity has picked up but those in the industry who have looked at planning permission applications that are coming down the track say that, for now, there remains a huge disconnect between future demand and supply and that proposed projects will do little more than replace older homes as they are removed from the system in the decade to come.
Nevertheless, the figures do explain the uptick in interest from major European long-term funds and investors.
Andrew Ovey led the acquisition, announced last week, by AXA IM of 10 Irish nursing homes. He believes that matching the long-term investment strategy that AXA IM brings to its healthcare investments with a high-quality local operator like Mowlam Healthcare is the best way to ensure high standards of care while also taking cost out of the market.
“As a long-term investor in healthcare it is important to build partnerships with operators and to understand that the key thing is the residents. Healthcare is about people looking after people and although we do our part through a real estate investment, we like to work with partners who provide great care.”
There are huge challenges ahead as the population of older people grows rapidly, says Ovey.
“The doubling of over 85-year-olds in the next 15 years presents a huge burden on healthcare provision,” he says. “I’m excited about the sort of opportunity we have in Ireland because there is a need for more beds, there’s a funding structure that supports the delivery of care and we are working with a top-quality care provider. These fundamentals mean we can bring institutional capital into the sector that can help lower the overall cost of care.”
Ovey is not prepared to say whether AXA IM’s clients will invest further in the Irish nursing home sector.
“I think the market has expansion potential. But the level of fragmentation is phenomenal. Outside of Mowlam Healthcare, there is just one group operating more than 10 care homes. There isn’t the opportunity to do a £250m sale and leaseback deal with one operator that would be more typical in the UK and across Europe.”
Consequently it can takes a huge amount of effort to find and execute the right deals in such a fragmented market, he says.
“We need to make sure that we underwrite secure investments for our clients and doing that piecemeal is challenging.”
Nevertheless, Ovey believes that the Irish market will see a consolidation of smaller players, not least because of pressures on funding, staffing and regulation.
“The burdens that these headwinds place on a ‘Mum and Pop’ care home are disproportionate to the business that they run. Economies of scale in compliance and human resources can be really significant for a portfolio of homes. Ultimately it’s all about providing quality care for residents.”
Recent deals suggest that Irish nursing homes are selling for 10 to 12 times their earnings, meaning the price of an average-sized home could be at least €15m, say well informed sources. This means, they say, that despite the huge opportunity presented by demographics, the use of this type of institutional capital — by the likes of AXA IM and Mowlam or Infra Via and Carechoice — is the only real way available to overcome the significant barriers to entry into the market.
Bank of Ireland, AIB and Ulster Bank are all said to be very open to backing projects in the market. For example, Bank of Ireland has a €700m lending fund available for nursing home projects and this could grow says Hilary Coates.
Acquisitions are beginning to drive consolidation in the sector but ultimately the only way the supply gap will be bridged is if new homes are built or existing ones are extended, says one source. And there is one huge problem that has greatly slowed activity: the huge rise in construction costs in the Irish economy.
In 2015, the average cost of construction per bed was €135,000 but that has risen in just four years by 20pc to €165,0000, according to sources. By contrast, the amount paid to nursing homes by the Fair Deal scheme — the Government’s nursing home support scheme which is the sometimes controversial mechanism for paying the fees of at least 90pc of nursing home residents — has only increased by 4pc in the same period.
“What was an eight-year payback on a typical project is now a 12-year payback,” according to one well-informed industry source. “Obviously the remit of Fair Deal is to get the best value for the State but it can place a difficulty on nursing home operators who see costs spiral but have no way to increase sales.”
The fee that the Fair Deal scheme pays out is based on a county average. So, for example, a nursing home in Dublin might receive €1,250 per resident per week, while a home in Donegal could receive €825.
“But the cost base, for example what you have to pay nurses, is pretty much the same wherever you are and certainly not enough to bridge the gap between sales,” says the source. “I believe you are going to see homes in rural areas fall away.”
CBRE Healthcare director Cormac Megannety says he is also seeing the same trends in the nursing home market. “We have seen a lot of interest from big European funds in this sector, some of which has translated into deals. But no one is looking at building nursing home in the countryside.
“The economics don’t work in rural Ireland. It is all Dublin-based. If I want to build 100 beds in both Donegal and Dublin it is going to cost €16m in both places but I will be paid about 50pc less per patient in Donegal. That means that the nursing home I build in Donegal is only worth half of the one I build in Dublin. When you go to a bank to fund that it is hard to justify.”
Of course, there are challenges facing those who want to build in urban areas too. Suitable sites are not plentiful and expensive, says Megannety. “Residential developers are also looking for sites and they will outbid those looking to build nursing homes. But we have sold a lot of sites in this sector in the last two or three years.”
The upshot of this, according to a number of sources, is that, although investment in the sector will mean that the supply gap will be narrowed or even closed in urban areas such as Dublin, rural areas are facing a supply crisis in the future.
In other words, older people and their families who live in rural Ireland who require nursing home care will increasingly need to leave their communities and head far from home to find a place in a nursing home.
While ever-improving standards mean that the quality of the home will be better than ever, this does present a big challenge to a sector that first and foremost benchmarks itself on the quality of care.
Again, the Bank of Ireland research highlights this. Some of the major shortfall in nursing home beds in 2026 is expected in counties including Tipperary (an expected shortfall of 439), Donegal (expected shortfall of 581), Galway (expected shortfall of 487), Mayo (expected shortfall of 480) and Kerry (expected shortfall of 500).
“With Dublin benefiting from more attractive Fair Deal rates and better access to staffing, the expected level of nursing homes built in counties with lower Fair Deal rates may not materialise,” says Coates. “The capital value of greenfield nursing homes once operational may, as a result of the Fair Deal rates and increased staff costs, be lower than the development costs.”
Staffing is a huge headwind for the industry but in terms of rising costs and big turnover rates, she says. Others in the industry agree. One knowledgeable source says that turnover of the two key grades of employees — nurses and health care assistants - is as high as 48pc.
“Imagine working in an environment where this time next year half the people you are working with could be gone because they see opportunities elsewhere. Bigger operators are able to introduce employee assistance, education, training and career pathways to reverse attrition. But it is putting huge pressure on smaller operators.”
Megannety believes that deals such as the AXA IM acquisition and the plans outlined by Carechoice do provide an obvious model for badly needed consolidation amongst the country’s smaller nursing homes that can help to alleviate some of these problems.
“The sale and leaseback model is ideal for those people in the industry who have run a home for 30 years but who are now approaching retirement. This model allows them to stay in the business they love but instead of owning their own business they now pay rent on the premises. The advantage is the support they have from a bigger group and the fact they can pass on the business to their children debt-free,” he says.
“It is a very attractive model that is going to become more the norm. The European guys who have come over here to look at the sector wonder why all of these owners aren’t looking at this model.”
Coates agrees that there will be consolidation both nationally and locally in a similar way to how the pharmacy sector has developed. But she does see a continuing place for smaller rural often family operated nursing homes in the future.
“It’s not an easy sector to enter. There are always tensions between business and care. This sector is at its core not a property model but a care model and the quality of care for older people is completely key. When we are assessing nursing homes what we look for is an alignment of interests. If it is good for the resident then it is good for the investor. The first issue is the quality of care.”
She believes that the model in rural Ireland will be about existing operators extending their homes to give additional beds.
“There is very much a place for both smaller operators and consolidated operators. There is already great innovation out there. I was in a nursing home recently that was a converted hotel. The lobby had been used as a coffee shop and local people would come in for food and for a place to chat. It has become a real hub in a village that previously had no community centre or even a cafe. That is a very different model but for rural people who have been used to their neighbours calling in all their life it is a model that works. There is an advantage to both models.”
Whatever approach is taken, research by Coates and the observations of those in the industry, suggests that there will need to be plenty of activity in the coming years if the country is not to face a nursing home crisis in a few short years.