EUROPE - Cuts in public sector spending and increased regulatory scrutiny have hit the profitability of care home real estate investments in the UK despite strong long-term fundamentals, according to care home property investor Public Service Properties Investments (PSPI).

PSPI chairman Patrick Hall said restricted debt markets, the UK government's austerity measures and a lack of local authority funding throughout the UK had hit occupancy rates and profitability across the sector.

Despite a 3.3% increase in rental income last year and a real estate portfolio valued at £256.4m (€306m), PSPI - which has French insurer Federale Assurance as a majority shareholder - will need to deal with more than £80m debt due to mature in September this year.

As a contingency plan, PSPI is currently in negotiations with European Care Group, its sole UK tenant, with a view to strengthening its capital structure via asset aggregation and refinancing of the combined portfolio.

RP&C International, which manages PSPI's assets on its behalf, attributed the embattled firm's recent performance primarily to senior debt providers lending "on a more cautious and selective basis".
"The lack of availability of senior debt for operations and acquisitions remains a critical factor going forward," it said in a statement. It also cited the impact of counterparty risk associated with the largest UK operator's recent failures in creating "an even more challenging market".

"Although we do not expect significant changes in government support for the care home sector, there are a number of factors, such as later-stage referrals of residents, that have affected occupancy and profitability," said the asset manager.

Although the UK represents 69% of PSPI's portfolio, the outlook is significantly more positive for the more stable German care home market, which accounted for 19.3% of PSPI's portfolio.

"We do not foresee material changes to government support for residents who cannot afford to pay for care," it said.

Overall, results posted by the firm on Monday indicated in 9.5% (£25.8m) decline in the value of its property portfolio since the end of 2010.

PSPI has recently attempted to reverse the decline with a value-added strategy on its UK property portfolio.

A selective refurbishment programme for its German investments resulted in a 25-year lease renewal with its German care home operator in February.