UK's Care Homes System on the Critical List

The spectacular dip in Southern Cross Healthcare’s fortunes has cast new light on the care homes industry.

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As the population ages in the Western world, you might have thought that care homes would be a license to print money.

Yet the UK’s biggest care homes company, which looks after more than 30,000 old people, has been struggling with a business model brought in under the previous owner, private equity firm Blackstone.

It is also battling rising wage and energy bills, at the same time as a trend towards placing fewer old people in care.

It is often cheaper for local authorities in the UK to keep old people in their own homes, with regular visits from health and social care workers, than in a care home.

Other operators including Four Seasons have suffered from this, as the majority of care home residents are funded by local authorities rather than from their own pockets.

Care home companies are all chasing more lucrative private-pay residents.

Under Blackstone, Southern Cross was broken into an operating company/property company model, with property investors buying bundles of freeholds for homes operated by Southern Cross, which committed to raising rents regularly.

Now, it has asked those landlords to cut its rental bill by around 30 percent.

Some of these landlords are in the hands of state-backed bank Royal Bank of Scotland, which may not want the potential public relations disaster of allowing a care homes company to collapse.

Southern Cross embarked on an ambitious growth strategy, buying up care homes in the expectation that the freeholds could be sold on quickly.

The credit crisis and the resulting fall in property values and difficulty in borrowing put paid to that. Blackstone had already listed the company on the public markets by the time the flaws in its business model became evident.

It now has until the end of June to try to stay afloat. After announcing a pre-tax loss of 310.9 million pounds ($501.7) for the six months to March on Thursday, observers believe this is increasingly unlikely.

Average occupancy in its homes has fallen as it has lacked the resources to update and repair them. Only 86.9 percent of its beds were occupied at the end of March, compared with 90 percent in March 2010.

One potential light at the end of the tunnel for the business could be British government plans to merge medical care of the elderly with local authority provision.

The government is planning to reduce "bed blocking" by elderly patients who are no longer acutely sick, by moving them from hospitals into care homes.

This could be a lifeline for Southern Cross.

Christopher Fisher, Southern Cross chairman, said: "Southern Cross is a low margin business and the progressive squeeze on its revenues over the last 12 months, while facing many upward pressures on its costs, means Southern Cross is now in a critical financial position and cannot afford to meet its future rental obligations in full."

"Over the coming week the key stakeholders will need to agree on a comprehensive package to restructure Southern Cross’s financial affairs so that a new, stable and sustainable corporate and business model can be developed," he added.