Wednesday, October 21, 2009

What’s going on in the UK residential care market?

I have written a lot about the perilous state of some of the biggest companies in the UK residential care business. Too much investment in property at too high a price creating too much debt with too little thought about the long term consequences.

Ooops nearly forgot. Too much faith in the simplistic notion that an increasing number of older people means that care home fees are on a one way journey in the upward direction.

The magazine Health Investor (subscription) has an article suggesting that Royal Bank of Scotland has: “earmarked some £250 million of capital for various development projects in the residential and social care sector.”

The argument goes that there could be a bonanza for companies, with cash, being able to buy land at greatly reduced costs and probably also get building work done at knock down prices.

I am not so sure. There are two elephants in the room. First, domiciliary care is definitely the flavour of the day. Older people want to stay in their home longer and Government loves it because it is cheap. Second elephant, is a massive pressure on funding for elder care that is about to hit as public expenditure is slashed.

The Health Investor article tempers its views with some pessimistic opinions from people in the Care Industry who say that it is impossible to raise funds for new developments.

I have another explanation why RBS might be freeing up a few millions for further investment in the Care Sector. This bank was the largest investor in the sector during the boom times and has consequently taken the biggest hit as asset prices tumble. The bank has funded a lot of development projects that are just about coming on stream and will start to eat more cash.

I suspect the new money is going to find its way in keeping the bank’s existing investments alive rather than funding new ventures. Anybody from RBS like to comment? Dick Stroud

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