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Dementia/ Real estate/ Impact investment – Is policy the missing link?

Would policy makers promote investment in care homes?

I have been living in UK for almost ten years now and two things never seem to end – the DFS sale and the performance of NHS in coping with various care and support requirements.  My lethargic stroll on the internet in 2013, in trying to understand NHS better, landed me on an article published by the department of health on Dementia.  Little did I know then of its impact then:

  • Around 670,000 people in England have dementia;
  • The number of people with dementia doubles every five years between the ages of 30 and 95(Fig 1);
  • The worldwide cost of dementia care is around $600 billion and that of UK is £19 billion(Fig 2)exceeding Cancer, heart disease or stroke;
  • 41% of these costs are accommodation costs(Fig 3); and
  • The number of people affected by Dementia is expected to increase costing UK £35 billion in 2026. 

Fig 1: Dementia prevalence post 65+

Fig 2: UK cost – Dementia vs other diseases

Fig 3: Costs of Dementia

With the ongoing spending cuts and continuous scrutiny of the NHS, my thoughts wandered back home revolving around potential options available to create a cost effective and sustainable eco-system in this space. I didn’t seem to have an answer then, I might probably have one now!

The UK care home market is worth £15.1 billion. With projections of the elderly (65+) to rise to 16.1 million in 2035 from 10.6 million in 2010, demand for care homes is far exceeding supply. There has been a greater degree of interest in this sector from real estate investment trusts from outside the UK. To quote a few examples,

  • Anchorage Capital, the wall street hedge fund, bought 27 care homes for the elderly across UK in 2014.
  • LA based Griffin-American Healthcare Reit II bought a subsidiary off Caring Homes owning 44 freehold elderly care properties for £300 million in 2013.
  • Ohio-based Health Care Reit bought the UK operations of Sunrise Senior Living and its five luxury care homes for £154 million in 2013.

Long term leases (25-30 years), higher yields, low US interest rates, and the shortage of stock to buy in the US have fueled interest in this space from these firms. However, the attraction of these trusts has predominantly been on luxury care homes, which is only a fraction of the overall need of the hour.

Creating a sustainable and cost-effective ecosystem, in my view, will require crafting of new or refinement of existing policies to promote the right behaviour. One potential option might be to attract the working population in the UK offering them tax incentives for investment in care homes. With over 31 million people employed in the UK, aged 16 and over, and average yields much higher than bank interest rates, this probably appears to be a sensible thing to implement. There is enough evidence in the UK to suggest that tax incentives can promote retail investment e.g. the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS). A report from the HMRC suggests that:

  • £10.7 billion of funds have been raised through EIS since its launch in 1993-1994;
  • 2,675 companies raised £1.03 billion in 2011-2012 and 2,395 companies raised £1.02 billion funds in 2012 – 2013 through EIS;
  • 20,075 investors claimed EIS income tax relief in 2011-2012, an increase of 77% year on year;
  • 1,100 companies received over £80 million in investment through the SEIS in 2012-2013; and
  • Almost 5,000 investors claimed SEIS Income Tax relief in 2012‐13.

With at least 18% of EIS investors and 30% of SEIS investors investing £50,000 in 2012-2013, the statistics indicate that right policies can provide the necessary back bone to lure retail investors even into risk asset classes like seed funding.  These policies have certainly benefited both the start-up community and the overall UK economy.

The flip side is these existing policies don’t appear to be cut out for investments in real estate, let alone care homes.  Investments in “Other Services”, comprising of real estate contributes only to 5%(Fig 4) and 3.1%(Fig 5) of investments raised through EIS and SEIS respectively.

Fig 4: EIS investment by sector – 2012-2013

Fig 5: SEIS investment by sector – 2012-2013

The limitations of existing policies present a great deal of opportunity and more needs to be done to probe in greater detail into the viability of this idea. As with any idea there are key foundational pillars that will need to be built to create a sustainable eco-system. In this case the forces of nature seem to have worked in our favour and now might probably be the right time to embark on this change for the following reasons:

  • We are out of recession. Unemployment is continuously on the decline, a fall of 76K on the quarter and 416K on the the year, as of 17th April 2015.
  • Population of over-85s in the UK is expected to expand by 85% by 2030 and a substantial proportion of the UK’s care home stock is unfit for purpose.
  • Healthcare investment has recorded average annual total returns of 5.4%, significantly outperforming All UK property’s flat returns of 0.0% p.a. (2007-2012)
  • Mortgage rates are at an all-time low. Five year fixed mortgage rates are sub 2%.
  • The formation of a new government is just around the corner. 

I personally believe that that the aforementioned factors quite strongly substantiate the case for change, a change that will address the change that will inevitably hit us all in the times to come, a change that promotes investment with a purpose from you, me, him and her, a change that benefits mankind for the greater good!!

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