Private finance and supported housing: an investigation

Mr Thorneycroft says that high rents were “definitely” part of the reason that First Priority’s weren’t being paid by the council and suggests that these rents came about “because of the way it’s financed”.

One expert suggests that some of these housing associations may only exist in order to claim the higher rate available from the taxpayer for SSH.

Mr Wickremeratne goes further: “Commercial property investment companies are seeing the national health, the taxpayer, the public exchequer as just ones that can be absolutely fleeced.”

Andy Brandon, managing director of Henley Group’s aggregator arm, Henley Social Investments (HSI), disputes this. “What apparently looks like a high rent, there are reasons for that, such as a three-bed house being required for a single tenant, whereby the rent will reflect the size of the property,” he tells Inside Housing.

“It’s an inefficient development process because of the granularity of the developments and because the needs are so tailored. What we need on top of the cost is a standard developer’s margin.”

Asked what this margin is, Mr Brandon says: “It’s a standard industry development margin. There are no excessive profits to be made in buying, renovating and then selling these properties.”

A spokesperson for the REIT Triple Point, meanwhile, argues that the homes are “often both better for tenants and cheaper than traditional alternatives such as residential care”.

Figures from the regulator reveal that some other housing associations with similar business models to First Priority have similarly high void rates

Another problem at First Priority, according to Mr Thorneycroft, was the high number of empty homes, or ‘voids’, where no housing benefit was being paid but the association still owed lease payments to its investors.

Voids, according to experts in SSH, are almost inevitable.

Mr Wickremeratne tells Inside Housing about a deal he signed with Westmoreland and Henley where he agreed to take on the void risk on a five-bed home.

“We put two individuals in: one in a standalone converted annex and one into the house,” he recalls. “In theory, [we thought] we’ll get three other people into the house and it’ll all be fine. The individual went into the house, [and] his behaviour escalated to quite an extreme level.

“He was a young man who would go to college but he was a big, big young man. His behaviour escalated in such a fashion that he started biting. He would bite women more than males. And literally, the care workers had to have protective guards up their arms.”

The council told Exclusive Care that it couldn’t put any more people in the home because it wasn’t safe. As a result, Mr Wickremeratne says, the home has three voids and Westmoreland and Henley are chasing him for about £97,000.

Meanwhile, figures from the regulator reveal that some other housing associations with similar business models to First Priority have similarly high void rates, making their margins even tighter.

And when margins are tight, risks are magnified.

Last summer, a Westmoreland tenant, Hayden Daniels, took his own life.

Mr Daniels lived in a home in Gloucester owned by Henley and leased to Westmoreland.

The council says that Westmoreland was claiming money for care and support on this home and others but not providing an agreed level of care to its vulnerable tenants.

In a statement made to the council’s investigatory team three months after Mr Daniels’ death, Chris Maitland, his housemate, said: “We used to get support but from about August of 2017 I have not received any support.”

A spokesperson for Westmoreland reveals that the previous care provider ceased trading in 2017. They tell Inside Housing: “The support provision was not recommissioned by either the city council or county council. Westmoreland continued to provide housing management and support to the tenants with contributions from other local service providers.”

In a witness statement submitted to Gloucestershire Coroner’s Court, a Dr Khalid from the Gloucester-based Aspen Medical Practice said that Mr Daniels had “a long history of mental health problems”, including alcohol abuse, “suicidal ideations” and depression.

The doctor added: “In March 2018, it seemed that he was drinking again and he was worried about this and that drinking a large amount of alcohol might get him into trouble.”

According to the council and Mr Maitland, however, Mr Daniels did not receive the care and support he was entitled to between the time he started drinking again and the time of his death.

There is no suggestion that Westmoreland or Henley are in any way responsible for Mr Daniels’ death.

“I went back on the drink and tried to take my life. [My care worker] tried to see me. He banged the door down and got the ambulance. If he hadn’t been there, I wouldn’t be here”

People with addictions of various kinds are common in SSH. Inside Housing spoke to another SSH resident with a history of alcohol abuse, who reveals how important care and support can be.

He told Inside Housing: “I went back on the drink and tried to take my life. [My care worker] tried to see me. He banged the door down and got the ambulance. If he hadn’t been there, I wouldn’t be here.”

Unexpected deaths and serious injuries in the SSH sector as a whole have grown over the past few years. Figures obtained from the Care Quality Commission by BBC Breakfast and shared with Inside Housing reveal that unexpected deaths rose from 56 in 2010 to 378 in 2018. Serious injuries, meanwhile, went from 29 to 808.

Because we don’t have figures for the number of homes in this sub-sector, it’s difficult to tell whether these deaths and injuries have grown proportionately to the growth in the number of homes or not.

Richard Graham, MP for Gloucester, tells Inside Housing: “The tenants, almost by definition, of supported housing, are not the people best equipped to look into what providers are supposed to provide and monitor it and complain.”

Mr Graham, who was involved in the investigation, explains that through various different routes, the council was able to determine that the agreed level of care was not being provided.

He adds: “What you’ve got is a system where one side of the operations is buying up cheapish property as quickly as possible, turfing out the tenants and then bidding for supported housing contracts, which hugely enhances their yield without doing a great deal to provide that support.”

Gloucester City Council only investigated Westmoreland’s care provision after a resident tip-off. Accusations of care not being sufficiently provided are not unique to the equity-linked sub-sector – but there are aspects of the model that mean it is particularly vulnerable to it.

One expert tells Inside Housing that cutting back on care costs is “inevitable” when these associations are under so much pressure to pay investors.

According to Mr Thorneycroft, this was never an option for First Priority. “If we’d cut back elsewhere, we could have [continued to pay investors] but we never considered not providing care and support,” he says.

Investors don’t appear to have paid much mind to the regulator’s concerns.

Mr Thorneycroft explains why he thinks the associations do not appear to have slowed down either: “It was just the [aggregators], I think. It was just business for them. They thought First Priority could take it, I assume. But that was it. The properties just kept coming. In the end, we were saying, ‘We don’t want any more properties.’

“They agreed in the end to stop. But it was a bit like stopping an oil tanker.”

Like many of the lease-based housing associations, Westmoreland has grown incredibly quickly in recent times

Also illuminating are the comments of a social housing professional brought in temporarily as a consultant to review Westmoreland’s business, long before the regulator was aware of any problems.

They tell Inside Housing: “The post would come and you’d get a bundle of leases. You’d get an email saying ‘this property’s been handed over’, but no one’s been involved in the handing-over process. People didn’t know the property was coming. There were all these leases in [the chief executive’s] office and he was going through them one by one.

“I was going to ask, ‘Have you ever looked at a lease and said, I’m not paying that, that’s out of order? Or, I don’t like those terms, and sent it back?’ I suspect the answer would have been ‘no’.”

Westmoreland says that the chief executive at that time – John Finney – is no longer “involved in the running” of the organisation and that it is “not able to comment on perceptions of [his] actions”.

Mr Finney himself adds: “My involvement in WSHA ended almost two years ago and I am no longer involved with WSHA and stepped down from the board on my retirement.

“I firmly believe it is important to allow the new board and regulator to work together without the distraction of commenting on speculation.”

Like many of the lease-based housing associations, Westmoreland has grown incredibly quickly in recent times. Until investors began to take interest, it was a family-run business with a handful of properties. Today, it manages 1,379 homes in 107 local authorities.

Another expert comments: “These are organisations that don’t have the governance or the staffing structures or the financial strength in depth. They are simply relying on lease-based income and I think it’s irresponsible to be pushing organisations to grow at that speed.”

The chair of Westmoreland’s board, John Russell, was also the chair of Fairhome, an aggregator that arranged deals between the housing association and investment funds.

In its judgement on Westmoreland, the Regulator of Social Housing described this as an “inherent conflict of interest”.

Indeed, concerns about conflicts of interest between aggregators and housing associations are a repeated theme.

First Priority, as Inside Housing previously revealed, was set up by Omar Al-Hasso, who also founded the aggregator HSI.

On cases like these, Mr Walters notes: “The board would need to be really clear that the aggregator wasn’t trying to exercise control over it.”

Although these specific problems are common, the fundamental issues with the model are more worrying.

The Regulator of Social Housing publishes regulatory judgements for all providers owning 1,000 or more social housing homes.

These judgements set out whether the provider is complying with the regulator’s governance and financial viability standards.

The regulator carries out an assessment either through a scheduled in-depth assessment, or reactive engagement (in which the regulator acts following information about a provider).

It then awards the provider a rating from one to four for financial viability (V) and a separate rating from one to four for governance (G).

Providers must score two or higher in both categories to be judged as complying with the standards.

As providers have increasingly taken on more risk to cross-subsidise social and affordable housing delivery through market-facing activity, the regulator has changed a number of associations’ viability ratings from V1 to V2.

The regulator often categorises this kind of regulatory action as ‘regrades’ rather than downgrades. Click here to read more.

Key to ratings:

V1/G1: Compliant

V2/G2: Compliant

V3/G3: Non-compliant and intensive regulatory engagement needed

V4/G4: Non-complaint, serious failures, leading to either intensive regulatory engagement or the use of enforcement powers

Rating straplines in full:

Governance ratings:

G1: The provider meets our governance requirements.

G2: The provider meets our governance requirements but needs to improve some aspects of its governance arrangements to support continued compliance.

G3: The provider does not meet our governance requirements. There are issues of serious regulatory concern and in agreement with us the provider is working to improve its position.

G4: The provider does not meet our governance requirements. There are issues of serious regulatory concern and the provider is subject to regulatory intervention or enforcement action.

Financial viability ratings:

V1: The provider meets our viability requirements and has the financial capacity to deal with a wide range of adverse scenarios.

V2: The provider meets our viability requirements. It has the financial capacity to deal with a reasonable range of adverse scenarios but needs to manage material risks to ensure continued compliance.

V3: The provider does not meet our viability requirements. There are issues of serious regulatory concern and, in agreement with us, the provider is working to improve its position.

V4: The provider does not meet our viability requirements. There are issues of serious regulatory concern and the provider is subject to regulatory intervention or enforcement action.

The regulator’s judgement on Inclusion was a watershed moment. Rather than picking up on individual problems at the organisation, it attacked the business model itself, targeting a housing association seen by many as the best-run in this sub-sector.

It revealed the worst-case scenario if rents are too high, saying the association was relying on being able to renegotiate lease deals with investors if the market turned against it. If this fails, it said, it risked insolvency.

The judgement added: “This could result in the potential loss of the homes from the regulated sector, with inadequate consideration of the rehousing needs of the vulnerable client group housed.”

Paul Bridge, chief executive of Civitas, responds: “When structured to meet fundamental need this represents stable housing that should remain within the social housing sector in the long term.”

Mr Walters comments: “If a traditional housing association were to do leases, which a lot of them do, that’s not particularly a problem. When it’s your only source of financing, it’s all you’ve got and you haven’t got much cash on your balance sheet and the lease costs are going up for 20 or 30 years linked to inflation then that’s when it raises questions on the extent to which it is sustainable as a model.”

“You want a sector that doesn’t rely on these arrangements? Get some public money into them. Where’s the grant funding?”

One expert puts it in stark terms: “The lease payments are index-linked and the income isn’t. If you look at a longer timescale, it is likely, indeed probably pretty much certain, that the gap between income and expenditure will widen, so that at some point it will become not viable.”

Asked about what would happen if a housing association was no longer able to meet its lease commitments, a source at one fund stressed that the government currently pays 100% of the rents and if that were ever not the case a renegotiation would be possible.

Housing benefit agreements are five years long but these lease deals are generally between 25 and 30 years, meaning renegotiations with the local authorities are on the horizon.

The investment advisor who said the offer was initially attractive asks: “What is the risk that one day the government realises it’s effectively paying inflation-linked income to public or private equity-backed vehicles and therefore, as the public purse is ever-stretched, that becomes politically the wrong thing to do and there has to be a negotiation?”

As for alternatives, Phil Shanks, chief executive of supported housing association Partners Foundation, tells Inside Housing: “You want a sector that doesn’t rely on these arrangements? Get some public money into them. Where’s the grant funding?

“If the regulator is so concerned about sustainability of the supported living sector, get £1bn out of the affordable homes budget and buy the houses! Take the risk out of it.”

Even Henley’s Mr Brandon accepts that the cost to the taxpayer would be lower if the government were to grant fund this housing directly, rather than continuing to allow housing benefit to take the strain.

Whatever the solution is, the risk of disruption to people’s care is all too obvious and the regulator has already warned that SSH homes could be lost to the sector if housing associations are not more cautious.

While debates are ongoing, the sub-sector continues to grow. If something is going to change, it needs to change soon.

Update at 3pm on 26.3.2019

The original story carried a reference to John Russell being chair of Westmoreland and Fairhome "during this entire period". In fact, Mr Russell was only chair of both organisations from 8 June 2017 to 29 January 2019.

Fairhome has also disputed the accuracy of a statement attributed to Neil Thorneycroft which claimed it had sought to put a board member on the First Priority board. Fairhome firmly denied this and the statement has been removed.