Retrofitting your care home: The long-term impact on sustainability and values

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What is retrofitting?

Retrofitting a care home is the incorporation of new features, materials and/or technologies in an existing building to improve its performance as a care facility. Frequently, there is a focus on measures that will improve a property’s energy efficiency. Not only is this a practical measure towards sustainability but, for operators of existing care homes, when accompanied by associated works, retrofitting can improve a care home’s accessibility, safety, and operational efficiency, achieve regulatory compliance, improve residents’ quality of life and result in an uplift in value.

These measures are incorporated into the planning and development of new care homes to ensure new developments meet the latest standards, are ‘future proof’ as possible, and meet investors’ requirements in terms of environmental sustainability.

Why retrofitting is increasingly important

According to the Government’s ‘Carbon Net Zero Guidance Note’, published in 2022, it’s estimated that around 40% of the UK’s emissions that cause climate change come from the built environment. As up to 80% of these buildings will still exist in 2050, improvements must be made to meet this goal.

Despite last year’s change in government, an increased awareness of climate change means the impetus to improve energy efficiency remains, with the UK Government’s continuing commitment to achieving Net Zero greenhouse gas emissions by 2050. As a consequence, most lenders, institutional investors, corporate care providers and government organisations are focussing on improving sustainability. 

The clearest measure of sustainability is a care home’s energy performance certificate or EPC rating with a building’s energy efficiency rating from A (most efficient) to G (least efficient). “As part of the government’s effort to improve the UK’s energy efficiency and reduce carbon emissions, since April 2023, all commercial buildings being let or already leased must have a minimum EPC rating of E”. Although this requirement applies to only leased properties, the knock-on effect is that all owner-occupied properties are being assessed by the same standard. Making the minimum requirement of an EPC rating of E is just the first stage. From April 2027, all commercial properties must have a minimum EPC rating of C to be legally let, with proposals to require a rating of B by April 2030. However, it should be noted that, currently, there is no requirement for a care home to have an EPC unless it is being sold or leased, or significant changes have been made that might affect its energy performance. Most institutional investors and acquisitive care home operators expanding through sale and leaseback will only consider care homes with an EPC rating of B or above.

In addition, in February 2024, The Care Quality Commission (CQC) produced its quality statement on Environmental Sustainability which encourages care providers to “ensure the settings in which they provide care are as low carbon as possible”. The CQC is factoring sustainability measures into its inspections, and care home operators are aware that this will inevitably feed into their CQC rating.

How retrofitting can improve operational costs and value

With the care sector facing increased wage costs and most local authorities’ social care budgets under severe strain, many might ask whether it is worth investing in energy efficiency measures.

By analysing the profit and loss accounts across all the bank valuations and deals that Christie & Co manage, its Healthcare Consultancy team has identified that care homes with the EPC ratings of A or B have lower heat and light costs per square metre, and on a per bedroom basis than care homes with a rating of C. Similarly, care homes with a rating of C have lower costs than those with EPC ratings of D or E.   Whilst many of the care homes with a rating of B or above are modern purpose-built buildings, a significant number are retrofitted conversions and the majority of those rated as C are converted and extended.

The table above shows that adjustments to improve energy efficiency, which, in turn, reduce heat light costs, positively impact profitability. An investment that improves a care home’s EPC rating from D to C has the potential to improve annual profitability by an average of £320 per bedroom per annum; similarly, for a B-rated care home, the average potential saving compared with a C-rated care home is £249 per bedroom.

If undertaken effectively, the improvements and uplift in profit (EBITDA) will result in an increase in capital value. As an example, based on the above heat and light costs, if a D-rated care home attracts a multiple of 6.5 times EBITDA before any energy efficiency improvements, the potential uplift in value is £2,080 per bedroom (i.e. 6.5 x £320) if it can achieve a C rating after retrofitting works. For a 40-bedroom care home, this could equate to a circa £83,000 increase in value.

Most lenders offer ‘green loans’ with favourable terms for investments that have a positive environmental impact, such as renewable energy installations and energy-efficient building retrofits. However, the key to minimising disruption to the business and maximising the potential return is to incorporate retrofitting works as part of a wider scheme of improvements e.g. improving accessibility to residents or converting en suites WCs to en suite wet rooms.

Physical improvements to a care home’s layout and presentation can improve competitiveness and broaden its appeal to a wider range of potential purchasers if offered to the market, resulting in competitive tension and a higher multiple. Building on the example used above, if a scheme of retrofitting works includes improvements which result in energy savings and a multiple of 7.5, the potential uplift in value will be £2,400 per bedroom or £96,000 for a 40-bedroom care home.

The viability of retrofitting your care home, and the additional value potential in doing so varies case by case. Our team of care home transaction experts are at hand to support you with this decision.

If you would like to learn more about retrofitting or have a confidential chat about the value of your business, contact Jon Hodgkins: jon.hodgkins@christie.com or 07701 316 583. 

For performance benchmarking, contact Alex Taylor: alex.taylor@christie.com  or 07548 705 373

If you would like to explore funding options for your retrofitting project, contact the unsecured team at Christie Finance: flexible.finance@christiefinance.com or 01244 207 685