The care home sector: Addressing demand and sustainability
Read time: 8 mins Added: 09/05/2025
Jamie Savage and Jon Hodgkins, Directors - Care Valuations at Christie & Co, consider the state of play for the care home sector in the UK, including Scotland, in 2025.
The care home sector has turned a significant corner since the pandemic, however, it still faces challenges. These include the recent 6.7% increase in the National Living Wage; another is the negative effects of the changes in Employers' National Insurance contributions. On the positive side, most local authorities appear to have gone some way towards recognising these additional costs by increasing fees for social care by around 6 to 7%.
Occupancy levels have recovered and currently average around 89%, but there is a minority of homes with depressed occupancy. This is usually for a deep-seated reason like oversupply and in some areas, problems with staff recruitment. For example, care homes in the more remote parts of Scotland and other rural areas are struggling to recruit the number of staff they need to improve their occupancy levels.
Management churn can also be very disruptive. The manager is often the key ingredient for a successful business as they are key to maintaining a home’s reputation and motivating and retaining staff, which has a direct impact on occupancy and staffing levels.
Another challenge is competition. The increase in build costs has slowed the development of new care homes, but Christie & Co’s Care Development team is actively selling development sites and new homes are being built in areas where there are few modern, future-proof care homes. The downside for older, underinvested care homes is the increased competition for self-funded residents.
Funding and fees
Research undertaken by National Institute for Health and Care Research (NIHR) confirms there is a link between a care home’s Care Quality Commission (CQC) rating and residents’ quality of life. Care homes with CQC ratings of Good or Outstanding typically have a higher proportion of self-funded residents which frequently translates into higher fees and better operating margins.
There has been quite an increase of almost 20% in weekly fees since the pandemic, although fees can vary significantly depending on location and the quality of the facilities.
Fee growth has been driven by rising costs, including wages, utilities, insurance, and food price inflation. As a result, self-funded fees have increased disproportionately. As local authority fees haven't risen by the same rate, the higher fees charged to self-funded residents are used to subsidise social services funded residents.
Staffing and shortages
The April 2025 increase to Employers’ National Insurance contributions is having a big impact on wage costs and therefore profitability, particularly for those care homes that are very reliant on part-time employees who previously earned less than the lower earnings threshold of £9,100 which has been reduced to £5,000.
After the pandemic there was a major shortage of staff which forced many homes to use expensive agency staff. More recently, expenditure on agency staff as a proportion of total wage costs has fallen as care providers have taken a more proactive approach to staff utilisation and recruitment, including sponsoring staff from overseas.
Energy and operating costs
Although the US administration has changed its stance on reducing energy costs, in Scotland the aim to achieve ‘Net Zero’ by 2045 remains a government objective and a challenge for the property industry.
Christie & Co have recently undertaken research on EPC ratings and heat and light costs. The research suggests that a care home with an EPC rating of C has, on average, an 18% saving in utility costs when compared with a care home with a D or E rating.
This is despite care homes getting bigger. New care homes usually have a gross internal area (GIA) of between 58 to 65 square metres per bed space, with hotel-standard facilities including cinemas and cafes. Older purpose-built, converted care homes usually have GIAs of below 50 square metres.
Not only can retrofitting help to reduce operating costs and increase profitability, but it can also help to increase a care home’s value and the number of potential buyers or value when refinancing.
Commercial investor backed corporate care providers expanding by sale and leaseback won't consider a care home with an EPC rating of C or below, but if retrofitting can lift a care home’s EPC rating to B, the number of potential buyers who are prepared to pay a premium for the right asset will be widened.
Market, buyer trends and pricing
2024 saw a return in buyer confidence which resulted in an increase in transactional activity across the market, especially from the first-time buyer and independent segments. However, deal times were delayed as issues with the registration process persisted. There was a clear re-emergence of real estate investment activity following a relatively quiet market in 2023, whereby investors adjusted to a range of factors including higher interest rates, inflationary pressures and an upward movement in government gilts. In 2024, yields stabilised and market activity saw a notable pickup.
Overall, care home prices in 2024 were up 1.0% on the previous year and multiples of EBITDA remain steady although, for the aforementioned reasons, operating margins are under increasing pressure. There continue to be many regional and national corporates with funds to buy care homes. Although some prefer the sale and leaseback route to funding an acquisition, many still want to own and operate their homes.
Acquisitive care home operators are primarily seeking care homes that are 'future-proof.' This means a care home with bedrooms that are at least 12.5 square metres (ideally 14 square metres plus), all with en suite facilities (preferably wet rooms) on level floor plates and off wide corridors. For every bedroom there should be a minimum of 4.1 square metres of communal day space which should be spread over several day rooms.
Evolving Care Home Standards
In Scotland, the Care Inspectorate’s influence on the design of new and converted homes is now being felt across the market. ‘Care Home for Adults – the Design Guide 2022 (PDF, 3.2MB)’ issued guidance on a number of things including recommendations for smaller homes (a maximum of 60 residents); a preference for smaller group settings or households with ten or less people within homes; bedrooms of a minimum 12.5 square metres plus en suites of 3.5 square metres in the form of wet rooms.
Whilst the approach is welcome from a resident’s quality of life perspective, there are additional build and operational costs which are having a direct impact on the cost of building new homes and reconfiguring existing care homes where the changes may result in a reduction in the number of beds.
To be economically efficient, unless a care home is operating as a ‘boutique care home’ it needs at least 25 bedrooms if it is owner operated. A care home with a salaried manager will need to have at least 40 or more bedrooms to cover the extra overhead cost of a manager.
In valuation terms, there is an increasing differentiation between care homes operating from converted buildings and purpose-built care facilities. Nevertheless, there is also a great deal of variation between older care homes and modern care homes with some of the former often offering a higher level of service and operating as hotels with care.
There are some very good operators in the market for converted and older purpose-built care homes, recognising that refurbishing and investing in older property can cost a lot less than building and fitting out a brand-new care home.
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