In March, Knight Frank warned of an “impending care supply crisis” after forecasting that the UK’s elderly care market would, in the absence of a wave of new development, reach capacity by 2033.

Despite a 16.2% growth in the UK’s over-65 population, care home bed supply has expanded by just 2.4% over the past decade. Meanwhile, existing care home bed supply across the UK is in urgent need of upgrading, according to Knight Frank. Almost 80% of homes are more than 20 years old, rendering many functionally obsolete.

Against a backdrop of low supply, care home developers and operators are increasingly considering different types of locations for sites, including incorporating schemes into large urban regeneration projects.

Major new developments that feature a care home element include Mount Anvil’s Lots Road South in Chelsea, west London, which will have 65 extra-care social rent homes. Muse and Wythenshawe Community Housing Group’s £500m regeneration of the Manchester town’s centre also includes Brotherton House, a 109-home extra-care apartment building.

Vicky Tomlinson, partner and corporate health lead at law firm Browne Jacobson, says there has been a notable shift towards more centrally located developments in recent years. The firm advised developer Charterpoint on the mixed-use scheme at New Lubbesthorpe in Leicestershire that incorporates retail, healthcare and a 66-bed care home as part of a wider scheme.

Diverse developments

Jonathan Wright, real estate partner at law firm Knights, says that from a planning and development perspective, care schemes can offer developers a way to diversify risk and strengthen the viability of residential or regeneration projects.

“We are seeing developers adding care home components to residential developments, but more so to increase their chances of securing a successful planning outcome,” he explains. “There is often an unmet need for care home places, and local authorities welcome more diverse developments that seek to provide this.”

We are seeing developers adding care home components to residential developments
Jonathan Wright, Knights

For local authorities, integrating care provision into town and city centres aligns closely with wider placemaking ambitions and efforts to revitalise high streets. But there are also very practical benefits and social advantages to centrally located care facilities. For instance, residents are closer to shops, healthcare services, transport links and family networks, which can help reduce isolation.

Guy Brocklehurst, relationship director at Leumi UK, which specialises in lending in the healthcare sector, says care homes often provide a strong employment and community-use component, which can help support planning applications for larger schemes.

“They also offer developers an opportunity to secure a substantial lump sum or forward-funding arrangement,” he adds. “As a result, in what remains a challenging housebuilding market, care homes can provide an attractive complementary use and support the viability of a scheme.”

Development challenges

But bringing forward care home developments is not without its challenges. Tomlinson says that while planning authorities are “generally supportive” where schemes can demonstrate meeting local care needs, developers still need to navigate viability concerns, planning policy and use-class considerations, particularly where land has historically been allocated for retail or residential purposes.

Affordability remains one of the biggest challenges across the sector. Rising build costs, higher lending rates and increased running costs have reduced the number of locations where schemes are financially viable. According to Rachael Herbert, senior associate at law firm Dentons, in the current climate a care home scheme would need to be large enough to accommodate a minimum of 60 beds to be considered viable over the long term.

Diverse offering: Muse’s Brotherton House scheme in Wythenshawe includes a 109-home extra-care apartment building

In some locations, the care home element of a scheme will be exempt from affordable housing targets or paying the Community Infrastructure Levy that would apply to residential accommodation.

“In those local authority areas where developers are required to deliver high levels of affordable housing – typically 30% to 50% – the care home component of the scheme could generate a much lower infrastructure burden, which assists with the overall scheme viability,” Herbert says.

She adds that while planning policy is increasingly supportive of brownfield regeneration and the need to identify sites for specialist housing, it is rare for a local authority to allocate sites in central locations for care home development.

It’s just not viable to build a new care home in many inner-city locations
John Flannelly, Target Fund Managers

“The assessment of most urban care home schemes will start from a place of being in conflict with the development plan and will only be approved when the decision-maker is satisfied there are material considerations that justify approval despite the conflict,” Herbert says. “This is easier to satisfy where there is a housing supply deficit or specialist housing needs that are unmet, but the individual characteristics of the site and its suitability for a care home will always be relevant.”

Despite the abundance of disused office and retail buildings in town and city centres, few of these sites are suitable for conversion into care homes because of the floorplates. “In many cases, demolition and redevelopment of these unused premises is a more viable option, which can then mean that care homes would be competing with other, often more viable, uses for the same site,” Herbert explains.

Care costs

While it can be tempting for developers to target the premium end of the care market with new developments to help offset rising costs, that is not always the best policy as it can limit the potential number of care home residents.

Paul Batchelor, corporate partner at Knights, says it is best to have a proven care provider lined up at the outset before the site is even purchased to avoid potential pitfalls. “This is a key consideration for institutional funders when they model their funding of new developments because the quality providers with good ratings will run homes at near-full capacity, are able to afford the rent and, crucially, provide a safe environment for service users,” he adds.

With economic uncertainty rife, the outlook for the care sector remains attractive as investors look to allocate capital towards resilient sectors with long-term income potential. The combination of an ageing population, increasing life expectancy and growing demand for later-life care all point towards sustained growth for care places over the coming decades. As Brocklehurst says: “There continues to be demand from operators seeking both development finance and longer-term investment funding, particularly from groups looking to retain assets rather than develop for immediate sale.”

However, some question whether the bulk of care home development will shift to urban centres. John Flannelly is head of investment at Target Fund Managers, whose portfolio includes Target Healthcare REIT, which comprises 86 operational care homes valued at £903m. Flannelly believes the argument for a huge shift towards more urban care home development does not stack up. “It’s just not viable to build a new care home in many inner-city locations,” he says. “We’re not seeing lots more opportunities compared with 10 or 20 years ago.”

With care homes, a traditional investment thesis based on the size of a tenant’s balance sheet does not apply, Flannelly says, adding: “If you’ve got the right building in an area where there’s demand for those beds, you can set the rent to a sensible level for that market and you’ve got an operator that cares for residents, the financial bit tends to work.”

Chelsea’s pensioner development

A development partnership between Mount Anvil and Kensington and Chelsea council will deliver 274 homes at Lots Road South, including 65 extra-care social rent homes, designed to help residents over 55 and in receipt of home care to live independently, with 24/7 onsite care support available.

This is the first time Mount Anvil is delivering extra-care housing. Marcus Bate, a director at the company, says: “With an ageing population, demand is increasing for these kinds of homes and embedding them in the heart of this development was absolutely crucial for our partners at Kensington and Chelsea council.”

Bate says the extra-care homes will give the residents living in them an enhanced quality of life, providing safe, affordable homes and care as well as the option to live more centrally in London than they may have been able to otherwise.

“As opposed to being on the outskirts in an isolated facility, they will be embedded in an inclusive community of residents from many different backgrounds, ages and stages of life,” he says.

Amenities in the wider development include a community centre, a café, a communal garden space and new public green spaces.

The extra-care homes and all the general-needs social rent homes will be purchased by the council. Given current viability challenges across the residential market, Bate says public-private partnerships of this nature are an opportunity to drive housing delivery.