Potential “fundamental failures” in Governance and Financial Viability for Providers Linked with REITs

The Regulator of Social Housing has recently began an investigation into 3 housing associations because of concerns about their compliance with governance and financial viability. The investigation has been motivated by links between each association with private equity funders and real estate investment trusts (REITs). Our compliance consultancy team at Pennington Choices explores this further.

Real Estate Investment Trusts (REITs)

REITs have only recently become part of the social housing market, and within the past 2 years have established themselves by means of purchasing properties and renting them as supported housing units to small housing associations. They are an attractive housing strategy for government because they reduce the government’s financial commitment to social housing and introduce a private finance element of social housing.

The companies that are currently being investigated by the regulator are Trinity Housing Association, Inclusion Housing and First Priority. The investigation into Trinity and Inclusion Housing has been motivated by the violation of First Priority in maintaining an established governance system. As a result, the regulator has written to around 30 associations, of which the names have not yet been disclosed, to seek assurances over their compliance in light of their associations with REITs and private equity funders. The government has a ‘Grading under review’ list, which identifies providers with potential compliance issues with the Governance and Financial Viability Standards.

First Priority Housing Association

First Priority was recently identified as having a “fundamental failure of governance”. The association owns none of its own properties but leases them from organisations such as REITs. The lack of governance procedures in place meant that they were “dependant on the goodwill” of funders to continue operation. As a result, the association received a regulatory notice from the Regulator of Social Housing.

The regulatory notice, issued by the regulator, opened up an investigation into the procedures of associations with similar business models, requesting information on financial details to provide an insight into the viability of such providers.

Inclusion Housing

Inclusion Housing follows a similar business model to First Priority because of its relationship with REITs. The regulator is yet to issue a judgement, but is seeking assurance that their business model is compliant with the Governance and Financial Viability Standards.

Trinity Housing Association

Trinity Housing Association has grown rapidly from 319 homes managed in 2016 to 795 in 2017. 640 of these were owned by external REITs and managed by Trinity. Trinity’s accounts state: “The association’s business is the leasing of properties with multiple individual housing units from a number of different landlords, the sourcing and letting of housing properties to tenants, and the appointment of managing agents and care providers to deliver specific groups of services to tenants.” The regulator has confirmed that it is investigating a matter regarding the providers’ compliance with the Governance and Financial Viability Standard and that the outcome of the investigation will be confirmed in a regulatory notice, once completed.

The regulator hopes to gather assurance on the financial viability and governance of housing associations that have connections with REITs and subsequently hopes to improve the performance of such organisations in the future, to avoid the emergence of circumstances such as that of First Priority.

Pennington Choices provides specialist governance consultancy meaning that our specialist housing consultants can offer advice to ensure that you adhere to all of the governance and financial viability requirements set out by the regulator. Email Jenny Neville to find out how our Governance Health Check can help your organisation.