The collapse of the UK's largest provider threatened to plunge the sector into turmoil. Louise Isaac explains why investors should not panic

Care homes have long been considered one of the safer investment opportunities available in the UK, given the strong demographics and underlying profitability from well-run facilities.

However, over the past 18 months an almost seismic shift has take place within the sector, culminating in the collapse of the nation's largest care home provider, Southern Cross, in July last year.

Amid the plethora of media coverage depicting every detail of its demise, it is easy to overlook the fact that, within a period of just three and a half months, an estate of 752 homes, 31,000 residents and 44,000 staff was successfully transferred to around 50 new operators and 80 landlords. All things considered, a fairly remarkable achievement for a company in financial turmoil.

The ability to pull together so quickly and to find workable solutions to complex problems reflects the resilience of the sector. It is a characteristic that will serve the industry well over the next few months as it attempts to adapt to the significant structural transformation that has taken place, and seeks to make sense of a new - and potentially improved - care home sector.

With the number of people in the UK aged 85 and over set to increase fivefold in the next 70 years (Lang & Buisson research), the sector clearly has the nation's demographics on its side. However, it must not simply rely on an ageing population if it wants to remain an attractive investment case.

While previously 18% of the elderly in the UK required long-term care, that figure has now reduced to approximately 15% and, with more people seeking domiciliary care and alternative forms of retirement homes, the sector will need to think more laterally to respond to the rapidly developing industry.

Recognising the need to diversify the offer, investors have already begun to broaden their portfolios, looking beyond the traditional forms of elderly residential care homes, to include more specialist services, such as care for children and people suffering from dementia, brain injury and learning disabilities, the demand for which is forecast to growth.

As well as highlighting the need for a more diverse selection of assets, the collapse of Southern Cross has also raised questions about the way care home portfolios are managed.

This has led to a rise in the prominence of the management-agreement model, whereby investors are directly involved in the operation of their homes.

This approach, pioneered by Quercus, has already been adopted by several providers, including HC-One, the company formed by Southern Cross's biggest landlord, NHP, to run its 248 homes. It provides investors the flexibility to increase returns by improving the operational performance of their homes, rather than relying on fixed rental arrangements.

These agreements strengthen the relationship between operators and landlords, and ensure closer attention is paid to the performance of homes.

The ability to monitor not only the trading levels of the home but also the standard of
care on offer and the physical condition of the asset, as well as having access to a team of experts with experience in the sector, is important to for both landlords and investors as they seek to learn from the mistakes that helped bring down the nation's largest care-home provider.

While investor and lender uncertainty continues to surround the sector, the conclusion of the Southern Cross story brings with it renewed confidence and, if new ownership structures, a more even distribution of homes between operators, and improved services and conditions for residents are an indication of things to come, the sector should have a very healthy future.

Louise Isaac is an asset manager at Quintain