Investors find a new lease of life

Public-sector finance: Paul Gosling on a deal that could change nursing home provision
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The Independent Online
Apounds 17m deal between the nursing homes operator Ashbourne Homes and Abbey Life Assurance could prove highly significant. It is one of the largest examples so far of sale and lease-back of care homes, a device that is expected to finance most of the enormous expansion planned for the next five years in the nursing home sector. It is also a model that brokers are considering suggesting to universities facing revenue shortfalls.

It is predicted that a further 70,000 to 100,000 beds will be needed by the end of the century to meet the demands of an ageing population. This represents a funding requirement of pounds 2bn to pounds 3bn. Several of the larger operators have made recent share issues, and it is too soon to ask for more equity.

The obvious alternative, borrowing, would make the companies too highly geared. David Bruce, managing director of Abbey Life Investment Services, says that this new solution is sensible for a sector that has traditionally been capital intensive. "There is no need for them to invest in the underlying asset," he argues.

Investors obtain a high degree of security, retaining the premises for leasing to other nursing home operators, or for other accommodation, if the partner ceases trading. With the current state of the property market, the assets are likely to appreciate over future years.

Several investment houses are interested in similar deals, but the main stumbling block has been on yield rates. Abbey Life and Ashbourne agreed an initial yield of around 9.5 per cent. Other investors are looking for yields of 10 to 11 per cent, while care home operators are hoping to pay little more than 9 per cent.

The health care analysts Laing & Buisson agree with Abbey Life that investors looking for yields over 10 per cent are being greedy. Mr Bruce argues: "The new gilt market is 8 per cent - investors are looking for too much of a safety net. They don't understand the market."

But Nursing Home Properties certainly does understand the market, and is striking deals at 10.8 per cent. It raised pounds 15.5m last year from equity, with a further pounds 35m borrowed since then, and has so far placed pounds 29m with six tenants, all at 10.8 per cent.

Richard Ellert, chief executive of NHP, believes that it is Abbey Life which has got it wrong. "Abbey Life would not be able to sell their contract in the market tomorrow," suggests Mr Ellert. "They did not buy fixtures and fittings, and if the nursing homes lose registration tomorrow the properties would be valueless. You need a yield of at least 2.5 per cent above gilt."

Mr Ellert believes that comparing sale and lease-back with normal commercial lending is misleading, as investors are taking a risk over 25 years or longer. "The same applies to hotels, day care and kindergartens, they are all doing deals at double-digit yields. New tenants are coming to us every day with no trouble about the yield rates," adds Mr Ellert. He says that with 33 per cent margins, and 10 to 12 per cent net profits, operators can comfortably pay the higher rates.

Abbey Life says that having held equity stakes in the leading nursing home operators Cavendish Court and Takare for some years, it is familiar with the sector and understands the real risks better than others do.

"It is only a matter of time before big institutions get into the sector, and a number have looked into it and are becoming comfortable," says Richard Wood, associate in financial services with Knight, Frank, Rutley, the firm of property agents that is attempting to broker a number of deals with nursing home operators.

Although Knight, Frank, Rutley is confident that the sector will take off in a big way, it has found more resistance than it expected. "There are no problems conceptually, but on price, yes. Institutions still want more from nursing homes than they want to pay," says Mr Wood.

For a long time nursing care was seen as a state provision either nationally, through the NHS, or locally, by councils. This expectation is being eroded, and proposals about to be announced by the Government offering big incentives to people taking out nursing care insurance will provide a major boost to the sector.

Institutions now see a bipartisan approach, which seems to offer them safety beyond the next election. "The good thing is that it is apolitical, because the Labour Party in government would not pick up the tab," says Mr Wood.

The political risk for investors is that some of the operators could be forced to pay higher wages under a Labour government. But that may drive out small, often family run, homes, not the larger corporations. That would reinforce the existing trend towards consolidation through a few major players, making investments even safer.

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