Costs leave nursing homes looking sickly

The Investment Column

This is a crucial time of year for the UK's growing private nursing home sector. Most of the elderly occupants of its homes depend, wholly or partly, on funding from the state or local authorities, whose financial year has just begun. But since the Government started handing responsibility for financing to cash-strapped local authorities in 1993, nursing home operators have faced a squeeze on their main source of financing and confusion over its timing. Occupancy levels have been hit accordingly. Takare, the second-biggest operator in the sector, reported last month that average levels had fallen 2 percentage points in 1995, ending the year at 94 per cent.

The group warned that its own levels would fall again in 1996, a problem that is likely to be common to the industry, as local authority budgets are again squeezed by central government. Laing & Buisson, a specialist consultancy, estimates that cuts in funding put at pounds 120m this year could spell between 10,000 and 12,000 fewer places. If that lands disproportionately on the private sector, as expected, that could spell a reduction of around 5 per cent. Meanwhile, the rate being paid to nursing homes for residents still covered by DSS payments has been increased by a meagre 2.7 per cent this year.

And while sales growth is being constrained, care homes are facing a pincer movement on costs. Nurses' pay for instance, which rose nearly 7 per cent last year at Westminster Health Care, the biggest operator, is rising well ahead of income. The industry is also being forced to start depreciating property and adopt more conservative practices in accounting for start-up costs. These technical considerations, have a serious impact on profits for a sector expanding at 15-20 per cent a year.

A much bigger unknown is what impact national politics will have on the sector. Difficulties faced by the Government in financing tax cuts in this year's Budget could spell tighter limits on local authorities' budgets, while it is not yet clear what Labour's attitude to private nursing homes will be.

With all this negative sentiment, it is easy to see why shares in the private sector have underperformed the rest of the stock market. But as our table shows, many stocks are trading at substantial discounts to net asset value derived from discounted cash flow calculations by Merrill Lynch. Two of the better companies are looking more fully valued. Westminster Health Care has a credible strategy of diversification away from nursing homes to so-called "higher dependency" units for patients who need more nursing care and where funding is more secure. Quality Care Homes is also well run and has a low cost base, but a high proportion of state-financed residents and could be hit by a minimum wage.

Goldsborough and CrestaCare are looking relatively attractive as recovery plays, but these are only for the brave. External factors, combined with industry rationalisation, are likely to mean that the sector will remain under a cloud for a while yet.

News
peopleFrankie Boyle responds to referendum result in characteristically offensive style
News
news
Life and Style
Couples have been having sex less in 2014, according to a new survey
life
New Articles
i100... with this review
PROMOTED VIDEO
Voices
Holly's review of Peterborough's Pizza Express quickly went viral on social media
Sport
footballTim Sherwood: This might be th match to wake up Manchester City
Arts and Entertainment
musicHow female vocalists are now writing their own hits
New Articles
i100
News
ebooksAn unforgettable anthology of contemporary reportage
News
news
Arts and Entertainment
musicBiographer Hunter Davies has collected nearly a hundred original manuscripts
News
Blahnik says: 'I think I understand the English more than they do themselves'
people
Arts and Entertainment
Michelle Dockery as Lady Mary Crawley in Downton Abbey
TVInside Downton Abbey series 5
Life and Style
The term 'normcore' was given the oxygen of publicity by New York magazine during the autumn/winter shows in Paris in February
fashionWhen is a trend a non-trend? When it's Normcore, since you ask
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior BA - Motor and Home Insurance

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Market Risk & Control Manager

Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Day In a Page

Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam