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Regulator raises governance concerns over leases at housing association
The Regulator of Social Housing has told a specialist supported housing association to improve its governance arrangements after revealing it did not fully understand some of its lease conditions.
Reside, which provides housing to people with learning difficulties, mental health problems or acquired brain injuries, leases the majority of its properties but owns some of its own.
The regulator also criticised a lack of awareness of the 1,230-home organisation’s "responsibilities under health and safety legislation".
This is a similar model to the specialist housing associations connected to private equity funds that the regulator has been investigating in recent months.
One of these, First Priority, was censured by the regulator in February for a “fundamental failure of governance”, and three others – Trinity, Westmoreland and Inclusion – are currently the subject of investigation by the regulator.
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Inside Housing, however, is not aware of any funds or real estate investment trusts (REITs) that have leased properties to Reside, which does not list its creditors anywhere.
When asked if Reside was in a similar category to organisations such as First Priority, the regulator said it “does not comment on individual cases” but added that Reside “does use lease-based finance”.
The Regulator of Social Housing gave Reside a G2 rating, which means it is still compliant with regulatory standards but needs to improve its governance arrangements.
This was the association’s first assessment as it has only recently grown to lease or own more than 1,000 properties. According to the regulator, it leases or owns around 1,230 units across 100 housing benefit areas.
The regulator’s judgement said: “Reside has not demonstrated at all times a complete understanding of the extent of its responsibilities under health and safety legislation, nor an awareness of certain terms attached to a proportion of its lease arrangements.
“We have also concluded that the stress testing Reside has applied to its latest business plan could be improved in order to provide the board with a more rounded understanding of the plan’s resilience.”
Diane French, chief executive of Reside, said: “Reside has been an organisation in transition for the last 12 months. As a relatively new executive team, we are making a step change in our internal systems and processes which will enable us to build on Reside’s strong values base.”
A Reside spokesperson also told Inside Housing that the association is “not exposed to REITs and private equity funds in the same way as First Priority”.
They also pointed out that Reside the first association whose business model is based on leases to receive a compliant rating from the regulator. The only other such association to receive a rating is First Priority, which was judged to be non-compliant.
Reside’s board includes Neil McCall, chief executive of Clarion Housing Association, the largest housing association entity in Clarion Group, which is the biggest social landlord in the country.
According to its accounts, Reside is obliged to pay £5.8m in lease payments to creditors before the end of the year, and £17m in the next five years.
The regulator also released a judgement on 11,500-home housing association First Choice Homes Oldham (FCHO). This association, according to the regulator, does not need to improve its governance or financial arrangements.
The regulator, however, did note in its judgement: “FCHO continues to have material financial risks to manage. It intends to significantly increase the scale of its development programme.
“The programme will be funded by a substantial increase in debt and FCHO needs to manage the associated risks and exposures to ensure continued compliance.”
Reside and FCHO have been contacted for comment.
Update: at 10.37 on 17.10.18 This story was updated to include comments from Reside.
Regulatory judgements in England explained
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.
