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Care for the elderly - a sector overview

Insight into legislation, funding and the future of care homes.

The population of elderly people is forecast to rise significantly over the next two decades, with the proportion requiring long-term care increasing at an even faster rate.

How this unquestionable demand is serviced is still a topic for debate. It is likely that demand for low-level residential and domiciliary care for people in their own homes will experience a net decline.

Unfortunately, there is no co-ordinated plan for what new facilities will be required across the UK and it is likely that some developments may fail by being the wrong facility in the wrong place.


Whilst the number of care beds declined consistently over the last decade, that trend has now reversed, as new, larger homes have been opened. This expansion of the sector has coincided with a modest downturn in demand, as central and local Government has sought to use domiciliary care.

Occupancy levels

This has led to a short-term drop in overall occupancy levels, although this has not been a universal problem, with better homes continuing to attract strong support. The greater decline has been those homes providing poor quality accommodation/care.

Economic climate and legislation

Fees are unlikely to rise in the near future and, indeed, have been reduced in real terms in some areas. While the best homes have largely continued to receive good levels of referral, there is some evidence to suggest that Local Authorities have sought to cut costs by using the cheapest providers, irrespective of quality.

The introduction of the Health & Social Care Act in October 2010 has caused some uncertainty in the sector, due to the need for re-registration of all care providers. The outcome is likely to provide greater flexibility for most operators going forward. Cuts in the Commission’s resources are likely to result in fewer inspections and possibly slower registration processing.

Star Rating system

The current Star Rating system has been scrapped but another system is promised. It is likely that a broader (5-star) scale will be introduced which should serve to improve the transparency of quality. Unfortunately, we are likely to have a period prior to the introduction of a new rating system where homes will be forced to keep their current score – good or bad. As homes may have made changes to affect their rating, less reliance should be given to this.


Lenders are more looking to serviceability and experienced management than loan to value which we have seen reduce from 85% of MV1 to 70/75% of MV1.

Interest rate margins have also increased over the last three or four years and we have seen Banks move from Base Rate led lending to LIBOR (London Inter Bank Ordinary Rate) led lending.

The future of care homes

Over the next two or three years, stagnant fees and occupancy can be expected for many homes. Costs are likely to rise, particularly after the increase in VAT from January 2011.

Some care homes may actually benefit from the budget cuts as councils seek to find the most cost-effective way to provide care. Such scrutiny could lead to the closure of expensive Local Authority homes, reduction in hospital bed-blocking and/or a switch from costly domiciliary care.


Ultimately, the growing demand for long term care will underpin the sector in the medium and long term. We are likely to experience some flux and some casualties are likely. Most vulnerable will be operators who have geared too highly and homes which cannot provide good quality care. Well-run, well-financed care home businesses will have sufficient scope to absorb the short-term pressures and emerge in better shape to take advantage of the sector as it continues to grow.

At Lloyds TSB Commercial we aim to support those businesses that meet our criteria of risk and return with experienced management and strong serviceability.

Mark Ellis ACIB, Head of Care Home Banking, Lloyds TSB Commercial

All data from Laing’s Healthcare Market Review