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Sancho Panza

Latest Buy-To-Let Craze: Buying Rooms In Care Homes

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Telegraph 22/8/14

'It’s buy-to-let, but with a special twist.

You buy a room in a care home and let it to an elderly person in the later or final stages of their life.

This might strike some as distasteful. All forms of property investment seem today to be controversial. But care home investments can be highly profitable, offering annual returns of 10pc or more – and the opportunity for capital growth.

There is a sudden profusion of care home investment schemes chasing savers’ cash. They are being marketed by developers who claim private investors can buy rooms in newly-built homes for as small an initial outlay as £35,000.

In the past month I’ve seen brochures inviting investment in three care home developments: one in Blackpool, one in Manchester and one near Calderdale, Yorkshire. “Make money with this hands free care home investment that guarantees you a 10pc return for ten years,” goes an invitation.

The Calderdale care home will have 70 “nursing and dementia beds” and 31 “assisted living apartments”, and investors have apparently bought more than half of the units already.

Putting down £70,000 would buy you a unit outright, and entitle you to the promised annual £7,000 return right away. Or you could invest £35,000 and waive returns in the early years as part of what the developer calls its “deferred payment plan”.

There is a promise by the developer to buy back the rooms from investors after 10 years at 125pc of the purchase price, so that’s £87,500.

Too good to be true? Quite possibly. These sorts of unitised property investments, such as rooms or suites in blocks of student accommodation, or single rooms within a hotel, have a patchy record. Some have flopped badly. Investors discover they cannot sell, because there is no secondary market for piecemeal rooms in a block; or that they are lumbered with onerous management contracts which wipe out some or all the returns. The properties might never even get off the ground. The sort of promotion being used with these schemes – the “hands free” opportunity and so on – might in itself sound a warning bell.

But with all of those caveats, it’s an area attracting huge interest. As I’ve written here before, buy-to-let is becoming more specialised as the yields on the more everyday types of property investment – the two-bed urban flats let to professionals, for instance – dry up. So you have landlords converting family homes into bedsits and letting them more cheaply to multiple tenants, and landlords targeting student accommodation – where again the yields are higher.

And as in most forms of investment, if private individuals are waking up to opportunities, you can bet the bigger, professional investment institutions have got there first.

There is a surge of institutional investment in British care homes. Earlier this year a US hedge fund bought 27 care homes. Pension funds and insurers including Aviva and Legal & General are also buying, as are Asian and Middle Eastern investors. Institutions are also funding new developments.

Knight Frank, the property group, puts the yield offered by care homes, at almost 10pc, at the top of the list of returns from property in the health sector. GP’s surgeries – which have long been attractive for their safe and steady NHS-backed rental flows – are near the bottom, at about 5pc.

But unless private investors are prepared to risk their capital with the sorts of schemes I referred to at the start of this piece, it’s difficult to access care home investment. Most of the funds snapping up homes up are for institutional, large-scale investors only.

This is a shame, not least because so many families have sobering experiences of just how costly care homes can be when their parents or other elderly relatives live there. Over the past year we've written many pieces questioning the level of care home fees, and their relentless increases.

Now we see where much of that money goes.'

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Why would the care home want to borrow from me at 10% when it could borrow from a bank at (say) 6%?

Something's not right.

indeed,if a private firm can make a profit of 10% per annum, then a council could do the exact same thing and offer the needy a 10% lowering in price of their final residence.

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Sounds like essentially the same principle as BTL. Defenceless old people, or impecunious hardworking folks, victims either way.

But I smell a rat. Care homes are a notoriously difficult business, and far from returning 10%, the more usual story is of going bust. Yes they're hideously expensive, but even if you discount all the adaptations, staff costs are astronomical for the nurse/inmate ratio you need once the old dears are so helpless as to go into a home.

Is someone getting suckered? I don't suppose personal investors in Southern Cross[1] lost more than a tiny fraction of what the article envisages investing.

[1] Southern Cross was Britain's biggest care home operator, until they went bust.

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The reason why care firms go bust is that the owners take too much money out of them. Southern Cross had been asset stripped by a private equity firm before it went bust.

The whole thing is a scandal and a big scam. Care homes should not be allowed to be run by profit hungry privateers.

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The reason why care firms go bust is that the owners take too much money out of them. Southern Cross had been asset stripped by a private equity firm before it went bust.

The whole thing is a scandal and a big scam. Care homes should not be allowed to be run by profit hungry privateers.

Southern Cross had been a listed company for some time before it went bust. Shareholders bought into it, presumably on a story of growing numbers of old people, and juicy yields. In fact, a story looking a bit like the one that gave rise to this thread.

If its previous PE owners had asset stripped it to the point where it had no value, why should anyone have paid good money for those shares? Asset stripping is a derogatory term, but seldom a meaningful one.

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I think the issue was that care home owners looked at the boom in numbers in the future and saw profits, whereas the reality is that the numbers are driving much more cost consciousness by councils on a 'per unit' basis.

Possibly.

I suspect more important is the explosive growth of red tape surrounding "vulnerable people". And perhaps its secondary effects, if maybe it's driven volunteering out of the sector. A fair chunk of the work must involve Just Being There, and if red tape had forced a supply of near-free labour from healthy 65-year-olds "giving something back to society" to be replaced with full-cost salaried bodies, that would indeed account for financial problems in the sector.

But I don't know. Neither can I be arsed to find out. So if I were to invest in the sector I'd be buying a pig-in-a-poke. So I put my money elsewhere. Hmmm, that's not entirely consistent ... I have some other investments whose markets I don't really understand either :wacko:

Edited by porca misèria

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The PE asset stripping is done so as to make the company look more attractive to shareholders. In the short term it is, and for shareholders who constantly switch their investments around intending to make a fast buck, it works.

The problems manifest
themselves further down the line. Properties are sold off and rented back, staff numbers slashed and so on. The PE asset strippers leave the firms too lean to cope with market fluctuations and so a slight downturn will see the firm hit real difficulties as there is no 'fat' left to absorb such variations.

I have long been an opponent of PE and believe that in its present form as practised by the big funds it should be outlawed.

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The PE asset stripping is done so as to make the company look more attractive to shareholders. In the short term it is, and for shareholders who constantly switch their investments around intending to make a fast buck, it works.

The problems manifest themselves further down the line. Properties are sold off and rented back, staff numbers slashed and so on. The PE asset strippers leave the firms too lean to cope with market fluctuations and so a slight downturn will see the firm hit real difficulties as there is no 'fat' left to absorb such variations.

I have long been an opponent of PE and believe that in its present form as practised by the big funds it should be outlawed.

You seem to be confusing several different things and attributing them all to PE. That's just confused. What management might do is largely orthogonal to ownership, with the proviso that Private Equity can often afford to take a longer-term view than a stockmarket-listed company, as the latter tends to be punished mercilessly for any downturn.

Properties being sold off might be a perfectly rational strategy. Of course if the proceeds aren't re-invested it reduces the value of the business, but that's a management decision, just like outsourcing other functions. My one-man business outsources its red tape and accounting because it's much less hassle than doing it myself (and much cheaper than employing a beancounter). Outsourcing premises is a similar decision on a bigger scale. It may be a bad decision, but that's a different matter.

Slashing staff numbers is usually an efficiency drive when a company is in crisis and the alternative may be bankruptcy. There's an association there with companies who specialise in taking on poorly-performing companies and turning them around. Some, but certainly not all[1], of those turnaround companies are PE. Specialists tend to be PE, because they're the ones whose shareholders are happy to see them buy up a company when everyone else regards it as bargepole territory.

FWIW, I have a six-figure sum invested in Private Equity. All of that is long-term investments, specialising in companies too small to raise money on the stockmarket, and wanting longer-term support than bankers want to offer. Since the companies make little or no profits, the returns come when a company is sold on or floated on the stockmarket. And those returns currently pay my rent B)

[1] Just this last week or two we've had the saga of Carillion and Balfour Beatty, two listed companies, where one looked to take advantage of the other's weakness to take it over in a move that would've involved lots of layoffs amongst UK employees. And that's just a story of mild weakness, not the going-bust league.

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You seem to be confusing several different things and attributing them all to PE. That's just confused. What management might do is largely orthogonal to ownership, with the proviso that Private Equity can often afford to take a longer-term view than a stockmarket-listed company, as the latter tends to be punished mercilessly for any downturn.

Properties being sold off might be a perfectly rational strategy. Of course if the proceeds aren't re-invested it reduces the value of the business, but that's a management decision, just like outsourcing other functions. My one-man business outsources its red tape and accounting because it's much less hassle than doing it myself (and much cheaper than employing a beancounter). Outsourcing premises is a similar decision on a bigger scale. It may be a bad decision, but that's a different matter.

Slashing staff numbers is usually an efficiency drive when a company is in crisis and the alternative may be bankruptcy. There's an association there with companies who specialise in taking on poorly-performing companies and turning them around. Some, but certainly not all[1], of those turnaround companies are PE. Specialists tend to be PE, because they're the ones whose shareholders are happy to see them buy up a company when everyone else regards it as bargepole territory.

FWIW, I have a six-figure sum invested in Private Equity. All of that is long-term investments, specialising in companies too small to raise money on the stockmarket, and wanting longer-term support than bankers want to offer. Since the companies make little or no profits, the returns come when a company is sold on or floated on the stockmarket. And those returns currently pay my rent B)

[1] Just this last week or two we've had the saga of Carillion and Balfour Beatty, two listed companies, where one looked to take advantage of the other's weakness to take it over in a move that would've involved lots of layoffs amongst UK employees. And that's just a story of mild weakness, not the going-bust league.

Rentier scum :D

Edited by kjw

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