In the eighth of a series of real asset investment case studies, Kate Arnold, Portfolio Manager at Gravis Capital Management, looks at private care homes.

Private care homes form a vital part of the UK’s long-term care infrastructure. They provide residential, nursing, and specialist dementia care; offering residents personalised support in safe, dedicated environments. At the same time, they help to relieve pressure on the demand for the NHS and Local Authority funded beds.

While the sector has faced a challenging financial environment in recent years, with increasing operational costs and labour shortage, it remains a strong investment sector. The UK population aged 85 and over is approximately 1.7 million (c.2.5% of the total UK population) according to the Office for National Statistics. Projections indicate this number will nearly double by mid-2047 to 3.3 million (c.4.3% of the UK's population). An increasingly ageing population means rising demand for social care and, given the limited capacity within the NHS, the role of private care homes becomes increasingly important.

Over 2016 and 2017, Gravis, as investment adviser to GCP Asset Backed Income Limited (“GABI”), recommended it invest in four private care homes across the UK, creating 271 new beds. The investment was made in conjunction with counterparties who are proven developers and operators of high-quality care homes. The pipeline of investments (with the provision of debt funding for construction, ramp up - the time taken before the home is fully operational - and working capital) targeted exclusively private sector customers, in areas where there was an under provision of high-quality homes. A follow-on investment was made in 2021 for an additional 70 bed care home.

Each of the investments GABI has made into this portfolio of private care homes has further diversified the recourse, providing additional coverage and downside protection. Four of the five investments were senior secured against the underlying asset, and cross-collateralised to further enhance the security package, with the facilities also benefitting from inflation protection.

Each of the care homes were designed with residents’ needs at the forefront. The homes have a range of facilities that vary by location and offer the full spectrum of care and support to meet individual needs and requirements. Partnering with a sponsor that places resident care at the forefront of everything they do was pivotal in growing the relationship from a single investment to a portfolio of care homes that piece together a best-in-class service for tenants and attractive returns for GABI.

Care home revenues are generated from resident fees; post construction, a ramp up period of 18 months to full capacity is forecast, at a fill rate of 3-4 beds per month. Taking this slow and steady approach ensures a high level of operations and appropriately trained staff, which means residents benefit from a high level of care.

The care homes have a 100% focus on private pay clients, with no beds available for residents who are supported by the Local Authority. This is both fee related, and market driven. Private pay care homes attract significantly increased resident fees compared to Local Authority funded fees. The demand for private care homes continues to grow. As Local Authority budgets are becoming increasingly stretched, more people are turning to the private sector where we are seeing an under supply of high-quality care homes.

GABI benefits from the stable cash flows associated with long-term occupancy and strong demand for high quality care homes. The facilities attract an average rate of c.8%, with the all-in rate being charged by GABI significantly higher than market at the time of investment, where funding of 70% could be obtained for between 3%5 – 4% all in rates. GABI was able to achieve a premium as a result of offering a higher debt to equity ratio on the project level gearing. In Q1 2025 one of the homes in the portfolio was refinanced achieving an IRR of 10.17%.

Recruitment and labour costs remain a persistent challenge, with care homes particularly affected by immigration and visa policy changes. Cost inflation - be that utilities, resident costs or regulatory compliance costs - put pressure on margins if not fully offset by fees, and the sector continues to see increasing regulatory and ESG requirements.

However, as noted, there is robust underlying demand for private care homes, which is set to grow significantly over the coming decades as life expectancy increases, and the proportion of the population over-85 continues to rise. This strong demand and the current under supply of high quality, and particularly specialist dementia or acute-care beds, coupled with consistent average weekly fee growth in the private pay market, will see private care homes continue to be a compelling sector.

Due to the capital costs, regulatory burdens, and economies of scale, the sector will likely see a shift towards more purpose‐built, larger scale care homes, as opposed to conversion or refurbishment of existent older properties. As the sector evolves further, we will likely see increasing consolidation and M&A activity. With the secondary market also gaining traction, as long as demand remains strong and the supply constraints currently being experienced persist, the investment case will remain strong.

Important Information

This article has been prepared by Gravis Capital Management Limited (the "Investment Manager“ or “Gravis”) and is for information purposes only. It is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. Any recipients of this article outside the UK should inform themselves of and observe any applicable legal or regulatory requirements in their jurisdiction and are treated as having represented that they are able to receive this article without contravention of any law or regulation in the jurisdiction in which they reside or conduct business.

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Gravis Capital Management Ltd is authorised and regulated by the Financial Conduct Authority; registered in England and Wales No: 10471852 and its principal place of business is at 24 Savile Row, London W1S 2ES.