The Guardian view on the care home sector: trouble looms as rents rise

When Britain’s largest care home operator, Southern Cross, collapsed in 2011, it heaped anxiety on elderly residents and ignited a debate about the role of private finance in the sector. The company had sold off most of its freehold properties to landlords, leaving it with a £230m annual rental bill. Many of these properties were locked into 30-year leases with increasing rents. The bulk of the company’s income came from local authorities, so when councils clamped down on spending, Southern Cross buckled. “This model doesn’t work through hard times,” its chief executive said.

Those times seem to have returned. A new report warns that the UK care system now risks sleepwalking into a crisis of rising costs because of how care homes are financed. Investors are piling into the sector, and have spent an estimated £7.5bn buying up healthcare properties over the last five years. The authors estimate that up to half of for-profit care home groups are leasing their homes from landlords. This is a ticking timebomb, they argue: as rents rise in line with inflation, some care home operators may have to increase their fees, even while landlords’ profits soar. They estimate that care home landlords are making £515m in profit annually.

There is a risk that a two-tier system is being created, where wealthy areas with more privately funded residents – who can afford to pay higher fees – attract more investment, while poorer areas are left behind. In 2017, the Competition and Markets Authority warned that companies were building nearly all new homes in areas where they could attract more self-funded residents.

Care home operators that sell their properties to investors are locked into rental contracts that rise annually with inflation. If inflation remained low, the risks of this model would be minimised. But high inflation is creating a fragile situation that makes failures more likely. The 2014 Care Act enabled the Care Quality Commission to warn local authorities in England about homes that are at risk of failure. In reality, this is like watching a slow-motion car crash. The CQC has no power to intervene to prevent failures, or to restrict companies from siphoning money out of the system.

In England, debates about how to improve social care begin and end with funding. Cuts to local authority budgets have squeezed the sector. But providing more funding without addressing the financial gymnastics that underpin many large care companies would be like putting water into a leaky bucket. Rising rents may force care home operators to find other ways of reducing costs by cutting staffing levels. The pressure of meeting rental payments may see some companies leave the sector – forcing elderly residents to move. There are already not enough care home beds to meet the needs of an ageing population, raising questions about the viability of a model that prioritises investors’ profits.

Labour has pledged to make care companies financially sustainable and “kick out” those that are “leeching” money out of the sector. Another solution would be for ministers to support a policy of local provision and allow councils to borrow to invest in care homes. In 2021, when presented with evidence that up to a fifth of fees at one care home company were spent on paying off debts to its investors, Jeremy Hunt described the leakage as the “unacceptable face of capitalism”. Mr Hunt is now chancellor. He is in a position to fix this – and he should do so.