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Lease-based housing provider Falcon Housing Association has been deemed non-compliant by the English regulator as it raised concerns over the landlord’s financial viability and deals it has struck with third parties.
In a regulatory notice published today, the Regulator of Social Housing (RSH) deemed Falcon to be non-compliant with its Governance and Financial Viability Standard as well as the Rent Standard.
Falcon is predominantly a lease-based provider, which means it enters into index-linked lease arrangements with private sector companies which acquire homes that are then used for specialist supported housing (SSH).
Falcon, which currently provides 952 units of social housing, is one of the largest partners of real estate investment trust (REIT) Civitas Social Housing, which has invested roughly £825m in the SSH sector.
On governance and compliance, the regulator said Falcon failed to demonstrate it managed its affairs with “an appropriate degree of skill, independence, diligence, effectiveness, prudence and foresight”.
The RSH added that the association also failed to ensure it had a robust and prudent business planning and risk framework and was unable to demonstrate it had managed its resources to ensure its viability was maintained.
As part of the lease-based structure, Falcon takes on the leases on “full repairing and insurance terms”, which means income collection, maintenance and repair and operating cost risks are transferred to them when it agrees a deal.
The RSH discovered that these deals had no break clauses and said there was a concentration risk that comes from having these long-term low-margin inflation-linked leases.
It said that after looking at the association, it lacked assurance that Falcon had taken a suitably long-term view on “assessing, managing and, where appropriate, addressing risks associated with this lease-based strategy”, to ensure its long-term viability, including making sure social housing assets are protected.
The regulator added that it had not seen evidence that Falcon was able to manage reasonable risks associated with the economic and policy cycle, as well as other adverse changes over the life of these deals.
The RSH has been consistently critical of the lease-based model being adopted in SSH over the past three years, with several providers being deemed non-compliant.
The regulator also identified issues around the deals Falcon had entered into with third parties, stating that some involved companies which were at the time linked to directors and shareholders of Falcon.
It said although these were disclosed to the board, it lacked assurance that, before entering into them, Falcon’s board adequately considered the implications. It added that these left Falcon open to reputational damage and criticism because of individuals involved, with influence and connections to both parties.
The regulator also lacked assurance that Falcon was compliant with its Rent Standard.
To provide SSH and be exempt from normal housing benefit caps, providers must meet certain requirements.
The RSH said: “We lack assurance on how the board has satisfied itself that it is meeting the required outcomes of the Rent Standard and the associated rent-setting requirements.”
It added that Falcon had committed to working with it to address the issues outlined above.
Due to it managing fewer than 1,000 homes, Falcon is deemed a small provider and as a result is exempt from the in-depth assessments and the governance and financial viability gradings that providers with more than 1,000 properties are subject to.
Falcon is one of 17 housing providers working with Civitas and is currently responsible for managing the highest number of Civitas homes, with Falcon properties accounting for 19.9% of its rent roll.
In 2018, Civitas transferred 44 of its properties from First Priority Housing to Falcon after the RSH uncovered significant governance failures at the landlord.
Responding to the regulatory notice today, Civitas said it would continue to support Falcon and all other counter-parties with the shared objective of further enhancing standards across the sector and encouraging providers to demonstrate their independence and self-reliance.
It added: “In respect of the judgement specifically, CSH [Civitas] notes the comments made by the RSH in respect of transactions linked to ‘directors and shareholders’ of Falcon and the observation that such transactions were disclosed to the board of Falcon.
“For clarity, all transactions undertaken between [CSH] and Falcon have been on a fully independent and arm’s-length basis with no connection between CSH, or its investment manager and Falcon, its directors, or shareholders other than in relation to the property transactions themselves.”
Falcon has also leased properties from another REIT named Triple Point. According to Triple Point, it currently leases 65 assets with an aggregate value of £61.8m to Falcon, which represents 10.8% of the REIT’s rent roll.
Triple Point said in a statement to the stock market: "The Group’s investment manager, Triple Point Investment Management LLP (the "Manager") has an established relationship with Falcon and is in regular dialogue with the housing association, particularly with regard to the regulatory review.
"The company notes that the board of Falcon has ongoing engagement with the Regulator and is currently taking active steps to address the regulator’s concerns.
"The manager, has liaised with the Group’s independent valuer, Jones Lang LaSalle Limited, who has confirmed that there should be no material impact on the value of the Group’s property portfolio as a result of the Regulatory Notice."
Inside Housing has contacted Falcon for comment.
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