The Regulator of Social Housing (RSH) has given a fresh warning to specialised supported housing (SSH) providers operating a lease-based model that they may not be able to return to compliance unless their counterparties are willing to take a financial hit.
Speaking to Social Housing after the regulator downgraded Prospect Housing to G4 for governance – the lowest possible rating – Jonathan Walters, deputy chief executive at the RSH, said: “In too many cases these organisations have effectively ceded control to third parties who are more powerful and commercially aware than the providers.
“That is often a Rubicon for us because if the boards are dependent on the goodwill of counterparties then that is a failure of good governance and risk management.”
He added: “It is possible that ultimately the freeholders and other counterparties are going to have to take some pain and accept a lower return or different lease conditions.”
Prospect was downgraded last month (October), becoming the second lease-based operator to be rated G4 following Westmoreland Supported Housing in September 2019.
Mr Walters’ comments came in the wake of the regulator last month issuing its first regulatory notices to lease-based providers for breaches of its new Rent Standard. Westmoreland and Trinity Housing Association were both found to be in breach of the standard after insufficient evidence was found that they were charging appropriate rent.
“One of the things we’re now talking to them about is rent levels,” Mr Walters confirmed, explaining how the Rent Standard was a new tool for the regulator to try to bring providers up to a compliant standard.
He continued: “[We’re asking] how does the board know it’s entitled to claim the exemptions on the housing benefit? But when we were asking that question of organisations, we found that some of them are really struggling to demonstrate how they’re meeting those standards.
“I think this is reasonably serious. So, at the moment we’ve said you haven’t been able to give assurance, and we need you to go and find that assurance. They may be able to demonstrate assurance.
“But, if they can’t find that assurance, if they can’t confirm why they’re charging those rent levels, then local authorities may have questions about exemption claims.
“And if you shouldn’t be charging those rent levels for some of your stock, what then should you be charging and is it a financially viable model?”
Rents charged by providers that operate a lease-based model may need to remain high so that they are able to meet the lease payments demanded by their financial counterparties, which typically are also the freeholders
on the homes.
A growing number of SSH providers operating this model are rated non-compliant for governance by the regulator. And Mr Walters suggested that leases may have to be renegotiated before they return to a compliant rating.
“There are clearly no easy solutions to these problems, as they are taking so long to resolve,” he said. “It is probably going to need counterparties to the RPs doing something to help so the providers can be put onto a viable footing or for there to be a change in the way this accommodation is provided in the long term.”
He also repeated previous warnings from the regulator that the small coterie of organisations operating this model still need to improve their risk management capability.
“In some cases the boards of some of these organisations have not had the skills and resources to manage the risks they face,” he added.
“We don’t think that governance is good enough in this area; they are often too dependent on their counterparties, they’re not financially viable without third-party support, and none of that has fundamentally changed.
“That is the depressing Groundhog Day part of it.”