The UK care sector is grappling with its most challenging period in recent memory, according to the latest OakNorth Care Sector Tracker, with mounting financial pressures, severe workforce shortages, and regulatory hurdles creating a perfect storm for providers across the country.
Workforce Crisis Reaches Breaking Point
The sector’s staffing crisis has reached alarming proportions, with over 131,000 vacancies – triple the UK average – now plaguing care providers. The situation has been exacerbated by the Government’s announcement in May that care workers will no longer be recruited from overseas as part of a crackdown on visas for lower-skilled workers.
The impact has been immediate and severe. An 81% drop in overseas care worker visas, coupled with the closure of the care worker visa route, has left providers scrambling to fill essential roles. The Department of Health & Social Care’s April 2025 workforce survey painted a stark picture: 71% of adult social care providers now find recruitment challenging, with 37% expressing serious concerns about sustaining service levels over the next six months.
“Better pay in other sectors was cited as a primary factor affecting both recruitment and retention,” the report notes, highlighting the sector’s struggle to compete with other industries for staff.
Financial Pressures Mount
Care providers are facing an unprecedented squeeze on their finances. April’s changes to employment costs have hit particularly hard, with a 6.7% increase in the National Living Wage, employer National Insurance contributions rising from 13.8% to 15%, and the earnings threshold lowering to £5,000 – all taking effect simultaneously.
These staffing cost increases, combined with soaring utility bills and commercial water rate hikes of up to 50%, have disproportionately impacted smaller providers already operating on razor-thin margins. Care England estimates a staggering £2.2 billion shortfall for residential care, underscoring the scale of underfunding facing the sector.
Despite local authority and NHS funding uplifts of 6.1-7.4%, these increases remain insufficient to bridge the widening financial gap, leaving many providers in precarious positions.
Market Consolidation Accelerates
The challenging operating environment has created a stark divide between well-capitalised operators and struggling smaller providers. Alarmingly, 39% of providers are reportedly considering exiting the market, with past closures already displacing 20,000 residents.
However, the sector’s long-term prospects continue to attract significant investment interest. Major M&A activity in May included CareTrust REIT’s £448 million acquisition of Care REIT plc and Omega Healthcare’s £260 million purchase of 45 care homes, demonstrating continued confidence from institutional investors.
US investors have been particularly active, accounting for over 68% of the £531 million invested in the UK elderly care market during the first quarter of 2025. This international interest reflects growing confidence in the sector’s fundamentals, despite current operational challenges.
Development Pipeline Under Pressure
New care home development has slowed dramatically, with planning approvals at a 45-year low. New regulatory requirements, including mandatory sprinklers and enhanced energy efficiency standards, combined with severe planning delays and high construction costs, have created significant barriers to expansion.
This development bottleneck comes at a critical time, with delayed hospital discharges and rising dementia cases driving strong underlying demand. Occupancy rates remain robust at above 88%, with average fees rising nearly 10% year-on-year.
Sustainability Challenges Loom
The approaching 2027 energy performance deadline presents another major challenge. Around 70% of care homes will require retrofitting to meet the EPC B target by 2030. While rising energy costs are accelerating the push for efficiency improvements, capital constraints – particularly among smaller providers – may limit their ability to invest in necessary upgrades.
Reasons for Cautious Optimism
Despite the challenges, Ben Barbanel, Head of Debt Finance at OakNorth, sees potential for positive transformation: “These challenges are driving much-needed innovation and consolidation across the market. We’re seeing well-capitalised operators adapt by modernising facilities, embracing sustainability, and enhancing care quality to remain competitive.”
The report highlights several factors supporting cautious optimism for the sector’s future:
Strong Underlying Demand: An ageing population and high occupancy levels continue to drive fundamental demand for care services.
Potential Policy Relief: The next six months may bring clarity on planning and regulatory reforms under the Levelling-Up and Regeneration Act, potentially easing development bottlenecks.
Pension Reform Impact: The Government’s planned consolidation of pension schemes into £25 billion “megafunds” could improve retirees’ financial flexibility, potentially expanding the customer base for premium care services while attracting long-term investment into the sector.
Looking Ahead
The report suggests the next six months will be pivotal for the sector. While the recent rise in inflation to 3.5% may slow Bank of England rate cuts, investors remain cautiously optimistic about long-term prospects.
“Operators that can demonstrate resilient trade performance, regulatory compliance, and a clear growth strategy are well-positioned to thrive,” Barbanel concludes. “With strategic investment, policy reform, and smarter delivery models, we believe the sector can emerge stronger, more efficient, and better equipped to meet the needs of future generations.”
