Healthcare Market Commentary and 2011 outlook

It’s been a while since the last DS Partners market commentary and I thought it would be useful before the Christmas party season starts to give a brief summary of the market this year and the outlook for 2011.

Over the course of this year, we have seen much change with a new coalition government and the uncertainty that that brought as well as the financial issues amongst some of the Eurozone members such as Greece and Ireland. Many feel that the Banks, despite the European stress testing that went on, still have on going liquidity issues and what funds they do have, they are not willing to lend to more risky projects and very much on their own terms.

We have also had the changes in structure of the CQC and yet another whole new way of regulating care homes and the loss of the star rating system – something which the market found very useful as a rating of quality. There has also been much consolidation in our sector with a number of smaller agents and other ancillary businesses being sold to competitors or closing down.

A lot of this uncertainty is leading to a market where the top end projects are attracting funding. These are the deals where the care homes are in effect ‘future-proofed’ with large room sizes and room for expansion. The type of operators that have this kind of budget to purchase these types of units normally can get used to the new normal funding levels of 70% or less and typically have a war chest of funds ready to buy in buyers’ market. Many operators have been waiting for such conditions for a number of years.

Smaller and individual operators are faring less well with the Banks as the Banks want to minimise their risk and will only lend again up to a maximum of 70% into this market and only on deal where the chance of success is very high. The paradox in this area of the market is that if you are an operator in this business cycle, why would you want to sell an income generating business? The deposit rates on offer at the Banks and relatively low price multiples mean that there is not much incentive to sell which is limiting the new stock coming on to sell.

In terms of an outlook for 2011, our prediction would be for more of the same in terms of lending conditions but with slow growth and the added complications of the timing of any Bank of England Base Rate rise. There is much uncertainty about how any potential rate rises will affect the wider economy, as I am sure that there are plenty of households and businesses that are only just managing to make ends meet while Base Rate is at 0.5%.

The other economic worry at the moment are the more fragile economies of the Eurozone with speculators and the bond markets taking increasing notice of public debt levels. Greece and Ireland won’t be the last economies to need a hand out from the ECB/IMF. You can read more about this in this article here.

This uncertainty in global markets gradually falls down to the risk analysts in the Banks and so I think that we can expect to see more of the same cautious lending through 2011 until there are real tangible signs of growth in the UK and the government’s cuts program starts to take effect.

This means more lending to safe projects at the new normal loan to value levels and the Banks still writing their own ticket in terms of interest rates and fees due to the limited competition in the market. We also feel that while we are still in this low interest rate environment, we will continue the cycle of limited stock coming to the market and limited Bank lending to only the good quality parts of this stock. This will explain why the same poorer quality stock is sitting on the books of some of the agents, metaphorically gathering dust.

Whilst a good broker can still have some influence on the loan to value and pricing of the deal, the importance now rests with a number of factors; firstly, the quality of the stock involved in the deal, the quality of the operator and how they have been running their business and lastly, the contribution coming into the deal from the buyer. Banks prefer cash coming into deals now instead of equity in other property, although if overall gearing is low and cash flow/profitability is strong then it can be look at in this way.

From all at David Stephen Partners, we wish you all a festive Christmas and wish you every success for your business in the New Year. If we can assist in any way with any business sale or finance project, we would be delighted to assist. Please visit our website at http://www.dspartners.co.uk/ for contact details and further information.

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Buying a care home in administration – things to consider

It’s been a while since my last blog entry and I thought I would update by writing a short article on what seems to be an endless stream of care homes that are in administration that are hitting the market for sale. Whilst the buying a home in this situation may seem daunting, as long as you do your homework and have the right advice, it can be easier in many ways.

In many people’s view, it would be quite difficult for a care home to end up in this situation. At it’s most basic level, fee income comes in, expenses go out and the difference between the two is profit. Whilst in most cases this is true, a lot of the homes that we have seen that come to the market in administration are due to reasons that are nothing to do with the home itself. For example, we are dealing with a case at the moment where the operator had overstretched themselves with other projects and in a recent case we dealt with, it was unpaid taxes that cased the problem.

Whatever the reason, there are certainly some good opportunities to be had. Savills are selling an 88-registed care home in Yorkshire for £2.5m which in a better market and out of administration, would be worth significantly more. Additionally, you are dealing with a receiver and it is in their interest to keep the home running efficiently to secure the best sale price. They will be easier to deal with than many vendors and will give over what information they have to make the process as straightforward as possible.

When buying a care home that is in administration, here are a few important points to consider;



Establish the reason why

This is important if you are raising commercial funding on the purchase. Many lenders will be much more reassured if they know that the problems were nothing to do with the care home itself. If the problems are in connection with the care home, then an action plan can be created to solve the problems that caused the home to be in difficulty.


It should be noted however that the chances of raising funding on the home if the problems are to do with it are greatly diminished, unless you are an established operator with significant cash flow.



Surround yourself with professionals

When buying a care home out of an administrative receivership, it is not the time to cut costs on professional fees. Given the likely nature of cost cutting that may have occurred before the receivers were called in, there may be many pitfalls that await you through the purchase process. It is therefore a good time to get an experienced, healthcare specific commercial solicitor involved. The slight increase in fees over that of the small high street practice, will save you much time and money in the long run.

In fact, this is good advice for all healthcare purchases but more so for homes in administration. We are happy to recommend a small number of good firms (please contact us for details). A good broker is also essential unless you are an operator with a suite of bankers. You will need someone dedicated to drive the funding process through.



Act fast

This is probably the most important of all of the above factors and again this is good generic advice for any purchase but especially the case if the home is in administration. In most cases, there will be a bed block put in place by the CQC and due to the nature of the care home business, the passing of residents will mean that the goodwill of the business will diminish with each one.


If you are trying to raise commercial funding with a bank, the goodwill element will be critical to their

calculations of debt servicing and as such, it is important to drive the deal through as quickly as possible to secure the bank funding.

As an example, we are currently acting for a client buying a care home registered for 28 that is in administration. We were introduced to the deal 10-days ago and have already met with Banks and are awaiting the formal offer of funding. When choosing the lender that we wanted to do the deal, an equally important factor is the speed of which the bank can move, as well as the other usual factors of margin, loan to value etc.