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Housing and residential care: how do lenders view the sector?

Funding for care assets is less accessible and more expensive than for social housing. Henrietta Podd, director – debt capital markets at Allia C&C, outlines the financial perspective on the care sector.

This article was first published by Social Housing 

It is difficult to talk about the care sector, whether for older people or those with special needs, without sounding either emotional or political. This is particularly true now when providers are struggling with the unprecedented challenges of COVID-19.

In the next few paragraphs I want to consider dispassionately how housing associations (HAs) with care assets and care home charities are viewed from a financial perspective, and how this affects their access to funding.

Care is a very fragmented sector and in this article I concentrate on one area, residential care, where assets and services are regulated by the Care Quality Commission (CQC). While my comments apply to the whole sector, there is a particular focus on care for older people.

A complex sector

Care provision is complex and ever-evolving, with the private sector, local authorities, charities and HAs offering residential care to both local authority and private pay residents. In England in particular, HAs have been moving out of care, while in the devolved regions they more commonly continue to operate a more integrated ‘cradle to grave’ model.

This has left England with a patchwork of operating models where some HAs lease assets to care operators; others commission care from third parties for home delivery; while a third group are registered with both the Regulator of Social Housing (RSH) and CQC and provide accommodation and care in care homes and, increasingly, extra care accommodation. They constitute some of the largest and most comprehensive care providers in the country.

HAs have faced challenges in funding specific care assets, although these are probably minor in comparison with the difficulties faced by the care charities. They arise from a number of factors:

  • It is a complex sector with diverse business models and high operating risk
  • It has a difficult state funding regime, with uneven local delivery through local authorities
  • There is a strong element of cross-subsidy from private payers and development profits
  • Assets generally have limited alternative use
  • Subject to one (CQC) or multiple regulatory regimes (plus RSH and Charity Commission)

This makes it a riskier business than affordable housing, with a problem that arises from a lack of funding rather than simply the price.

This arises from:

  • A bank lending model that is largely focused on the private sector
  • A gap in long-term institutional lending
  • A developer-led model focused on expensive sale and leasebacks


While HAs benefit from dedicated teams within banks which understand the regulated non-equity model and recognise its strengths, charitable care home providers generally find themselves talking to bankers more focused on private sector providers.

These are weaker or more highly leveraged operators (often private equity-owned) with significant rates of insolvency. As a result, banks – where they are willing to be involved – look for tight covenants, robust security and wider margins.

Funding for care assets is therefore more difficult and expensive than for social housing, with margins on five-year revolving credit facilities for pure care home operators some 0.75 to one per cent higher. Furthermore, housing associations have found charging care assets to their banks a perennial problem.

The current crisis has highlighted this problem. While the largest care providers have been able to access government schemes such as the Covid Corporate Financing Facility and the Coronavirus Business Interruption Loan Scheme intermediated by the banks, medium-sized and smaller HAs and care home charities have found it difficult or impossible to access these facilities despite apparently meeting published criteria. The size of their funding needs also makes it difficult to access schemes like Big Society Capital’s Resilience and Recovery Loan Fund without additional bank support.

Institutional Investment

With the focus on ESG and socially responsible investment, care assets should be a good place for institutional investors to deploy their funds.

A number continue to buy and lease assets to care providers, where they are distanced from operations and benefit from near-equity returns. But they are much more hesitant to lend to the care home sector, and even the retirement living sector, because they do not distinguish between the the over-leveraged private equity model with its focus on short-term shareholder gain and the approach taken by the charitable providers.

There are exceptions: a small number of ethical funds and private placement investors have recognised the attractions of the charitable care model and see it as an area where they can reasonably require a higher return, but also benefit from a stable long-term investment delivering very high social impact.

Encouraging more lending and institutional investment into care

As noted earlier, HAs have had a better experience of funding care than charities solely operating residential care homes. Banks and investors seem more comfortable with the mixed model (general needs or supported housing and care), operating in an RSH-regulated environment. And because of their mixed portfolio, they have greater scale in terms of assets and a cushion of stable income.

These housing associations are in a good position to represent the wider not-for-profit care sector as a vital component in filling the care gap for the future. To some extent they have been discouraged by higher operating risk and lower operating margins – but this is to ignore the higher social benefit they provide. And some HAs have been highly successful and still benefited from very high credit ratings – for example Sanctuary and Housing 21.

However, charities without a large social housing component will continue to find funding a challenge unless there is a change in lender attitude. Waiting for government to change the funding regime will take too long. A greater understanding of the sector – what makes for good outcomes – would be a first positive step. And, dare it be said, considering a regulatory regime for care operators that addresses viability as well as governance, regardless of size, whether public or private sector, could give considerable encouragement to lenders to commit more to the sector.

Henrietta Podd, Director – Debt Capital Markets, Allia C&C