What does the lending landscape look like for mental health homes?

In light of mental health awareness week and the continued effects of the pandemic being prevalent, mental health is in the spotlight more than ever before. The Centre for Medical Health has estimated that an additional 500,000 people will require support for their mental health in the next two years. From a real estate perspective, this inevitably leads to increased demand for residential facilities to provide care and respite to those in need of further support. 

A Learning Disability (LD) or Mental Health (MH) Home is a residential care home that provides personal care and accommodation for adults with Learning Difficulties and/or Mental Health conditions. These types of homes are classed as “specialist care” and there is often a range of care provided depending on the residents’ individual needs. Some residents might require minimal care, such as basic personal help and accommodation, whereas another resident may require more constant/involved and as such is best suited to a care facility which offers 24-hour support. This level of care promotes a long-term residency, with the tenants considering the property as their home. Therefore, placing increased importance on an owner’s ability to keep the asset stable and provide continuity in housing potentially vulnerable adults. 

The continued growth of LD and MH presents an appealing investment sector for lenders including some of the high street banks. However, lender’s criteria have tightened up over the past year with CQC rated ‘Good’ homes being sought after and, often, a must have criteria for these mainstream lenders. Homes with a ‘requires improvement’ or ‘inadequate’ rating will be considered by more specialist and niche lenders but due to the complexity of the facilities, they will usually expect the borrower to be an experienced operator with a successful track record of turning around said homes. It is important to work closely with experienced Sector Specialists within the banks, who genuinely understand the market to achieve the most competitive loan terms. 

There is currently a shortage of beds in MH homes and high demand where many boroughs are under-serviced. The workforce has had little growth over the past 10 years (BMA Report) and the number of mental health cases continue to rise, with 1 in 4 people said to experience mental health problems of some kind each year in England (Mind Charity). Therefore, this type of asset class can often meet a lenders’ social responsibility targets as these homes are a valuable addition to communities and can provide crucial housing for vulnerable adults.

Regarding the availability of finance for potential borrowers in this sector, Lenders are typically looking at 60%-70% Loan to Value against the Open Market Value of the business as a standalone asset. For an existing operator looking to expand their care home business, there could be several avenues open to help maximise their lending ability. 

So, what does 2021 look like for this sector? We are expecting to see several operators looking to refinance over the next year and expand their portfolio to meet both existing and anticipated demand. The sector is understandably likely to attract investors given that there is much opportunity here however, they will find that there are often significant barriers to entry due to the high regulatory requirements associated with the Sector. To stand a better chance of entering the market, investors would be wise to identify and onboard a credible and experienced care operator, to ensure that they are able to deliver the high standard of service warranted.