Care home fund manager undeterred by Southern Cross debacle

Southern Cross, is the UK’s largest care home operator, with some 750 institutions housing more than 31,000 mostly elderly residents, and has been on the ropes since March. Its share price is somewhere around 10p today, down from 550p a share in December 2007, when its former chairman and three executive directors controversially sold significant stakes in the business ahead of a rise in the UK’s capital gains tax, just a year after it floated on the London Stock Exchange. 

August, who is also managing director of BlueSky Global Investors – a London-based, Luxembourg regulated boutique manager – stresses that Southern Cross’s problems are “company specific rather than sector specific”, and maintains that in spite of its widely-reported problems, the market opportunities created by the ageing of the Baby Boom generation remain.

“Southern Cross’s problems…are the result of rapid expansion over the last decade and poor management,” says August.

“The company grew to become the largest care home operator very quickly by acquiring smaller care operators and becoming over-leveraged as a result. [Southern Cross] also has a significant focus on local authority referrals rather than [on] private residents, which has resulted in margins and resident occupancy levels being squeezed.” 

August says that his new fund, which was launched in March, is a near-replica of BlueSky Global Investors’ existing Senior Homes Property Fund, which invests directly in care homes, assisted living complexes and retirement villages, mainly in Europe. Unlike that fund, however, the new BlueSky Care Home Fund has a greater focus on UK care home and assisted living properties, and is available in both sterling and euro share classes, according to August.

Launched 18 months ago, the BlueSky Senior Homes Property Fund has generated a compound return for investors of 12.28%, August notes, explaining that the issue of demographic change that is fuelling the growth of the care home industry is presenting “a very real problem” for European governments and their citizens – and as such, if managed properly, a compelling investment opportunity.

Sector growth ‘inevitable’

“Growth in this sector is inevitable, given the strong driving factors that are creating a demand/supply imbalance for care home assets,” he says. 

“The sector as a whole is performing well, particularly from an investment perspective. Many properties are leased to operators on 30-year leases with annual increases in the rent typically linked to the retail prices index, which is currently over 5% per annum.

"With rental growth at this level, the care home industry is performing very well from an income and capital growth perspective. And – with the prospect of demographic change increasing resident demand for care beds continuing for the next forty to fifty years – prospects are good for high quality assets in this sector.”

As for Southern Cross’s future, August says it is “difficult to predict”, though he says its recent struggles have already presented investment opportunities for others, including BSGI, which owns what he says is one of its best properties and is currently considering bids for it from seven would-be buyers.

“If the group is broken up, landlords with good quality assets are likely to secure new care home tenants relatively easily, with the operation of the home experiencing very little disruption.

“There is likely to be less demand from care operators for the company’s more secondary assets, which will emphasise further the two-tier market that has emerged in this sector – modern, purpose built assets in the right location will perform well operationally and continue to appreciate in value, whereas poorer quality assets in ‘over-bedded’ areas are likely to see resident demand and investor demand fall.

“Prudent investors are focusing on prime assets and new developments that have the flexibility to varying the type of care they provide, such as dementia, nursing or residential care, as this typically results in high occupancy levels and profitable tenants.”

BlueSky’s strategy

August notes that this is the approach BlueSky intends to take.

Strategically, BSGI is targeting European and Asian investors in particular, and is looking to generated dividends of more than 5% per annum for those investors requiring income, as part of its monthly-dealing, Luxembourg-regulated SICAV SIF structure.

BlueSkyGlobal is in the process of getting approval for a number of investment platforms,  according to August, who said that thus far it has been given the nod to be included on the platforms of SIPP Centre, Transact, Irish Life, Hansard and KBL Bank.