Investors vie for nursing home stock amid rising demand for places

There is a notable disconnect between the weight of investor interest in the Irish nursing home market and the number of transactions taking place, especially given medium-term opportunities in the sector.

This is according to Marian Finnegan, research chief economist at agent Cushman & Wakefield, which has just published a new report on the Irish nursing home sector.

“The nursing home investment market is currently characterised by a significant level of pent-up demand from both domestic and international investors, with very limited stock trading,” says Ms Finnegan. “Increased investor interest is driven by rising demand for nursing home beds, which is not expected to slow unless the level of new stock is dramatically increased. Throughout 2017, we may begin to witness some international investors acquire key domestic nursing home groups, in order to create a critical mass to satisfy their requirements.”

There is already evidence of international interest in the Irish nursing home market. UK Reit Primary Healthcare Properties (PHP) first entered the Irish market last October when it acquired a €6.7 million primary health care centre in Tipperary. Reports suggest that PHP is dramatically gearing up its investment in Ireland with €60 million of Irish deals done or in legals and a war chest of up to €150 million looking for a home in Ireland.

Six mixed-use buildings in Drumcondra for €1.1m

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R&D campus in Athlone expected to fetch in excess of €19m

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Stillorgan retail investment opposite shopping centre for €3.1m

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Ballyfermot retail and office investment for €2.7m

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Cushman & Wakefield’s report points out that the average occupancy rate nationally in the sector stood at 94 per cent in 2016. “In practical terms, this signifies full capacity,” states the report.

Meanwhile, the stock of private and voluntary nursing home beds in Ireland has “remained largely unchanged during the past few years” at approximately 23,000 beds across 433 nursing homes.

“Some increases in the supply of long-term beds have taken place through extension works, and the opening of some new facilities, notably through conversions,” according to the report.

But a number of smaller nursing homes have closed while others have reduced bed numbers to ensure compliance with Health Information and Quality Authority regulations. “The net effect of this has been no discernible change in the total supply of beds provided,” according to the report.

It’s unclear what is going to happen when the sector’s steady supply and full occupancy meet growing demand for nursing home beds brought about by Ireland’s rising elderly population.

Central Statistics Office figures show that the population aged 80 or over in Ireland is set to increase from 128,000 in 2011 to 344,900 by 2036. The number of people aged 85 or over is projected to grow from 58,200 in 2011 to 179,500 by 2036. "Growth in the 80-or-over age cohort, in particular, will place increasing pressure to provide long-term care facilities," according to the report.

However, the report says that the nursing home market is characterised by a significant amount of planning permissions granted for extensions and new facilities yet “very little construction activity is taking place”.

But some significant projects are under construction and due to complete in 2017, including a 149-bed nursing home by TLC Spectrum at Tonlegee Road in Coolock, Dublin 5; an 89-bed facility at Ballydonarea Lane in Kilcoole, Co Wicklow; and a 90-bed nursing home at Heathfield on Cappagh Road in Finglas.

Sixty-two planning permissions were granted in 2016 for nursing homes but 35 of these were for extensions (about 600 new beds) while new-build permissions had the potential to accommodate more than 2,000 beds. The largest project granted permission in 2016 was a 224-bed facility for a site at Leopardstown Valley Shopping Centre on the Ballyogan Road in Kilgobbin, Dublin 18.

“Several challenges remain for the development of new private nursing homes,” according to the report. “This is due to the low level of Fair Deal rates, of which little change is anticipated over the coming years, along with factors relating to staff availability and building costs.”

Under the Fair Deal scheme registered private and voluntary nursing homes negotiate with the National Treatment Purchase Fund on the maximum prices charged for long-term care. The rate is a means-tested contribution from nursing home residents with the balance covered by the State.

At the end of 2016, the average weekly Fair Deal rate nationwide was €884 per bed but this varies from €1,145 in Dublin to €774 in Donegal.

“The Fair Deal rate faces several uncertainties and challenges, notably from an operator and investor perspective,” according to the report.

“The low level of the Fair Deal rates, notably outside Dublin, and the fact that the operators are highly reliant on the income from them, have a combined effect in disincentivising investors entering the sector. The rates are set to only cover the cost of care, with costs associated with capital investments not included. Fair Deal agreements are renewed every 24 months on average. The short duration of individual agreements hampers forecasting future income streams.”