Civitas has introduced ‘protocols’ for housing association partners and expanded its advisory team “to ensure [the] right resource is available”, as shareholders request quarterly net asset value (NAV) updates.
Social housing real estate investment trust (REIT) Civitas has introduced a raft of changes to its business approach – including engagement with its registered provider partners – as a result of First Priority Housing Association’s financial difficulties.
Following questions from shareholders about the “lessons” it can take from the First Priority situation, Civitas Housing Advisors (CHA) has introduced its Best Practice Protocol for providers, enhanced its due diligence processes and set out requirements for its registered provider partners, including independent verification of rents, an ‘indexation reserve fund’, sinking funds and rent protection funds.
In an interview to appear in Social Housing’s June edition, Andrew Dawber and Paul Bridge, directors at CHA, said the move was largely formalising existing approaches.
Mr Dawber said they stand by their index-linked lease structure, however, adding that there is “nothing wrong with the business model”.
He said: “What we found when we looked at all properties was that rents were at the right sort of level; [they were] agreed with local authorities, and indexation – as these were on relatively new leases – was not an issue as most properties were at their base rent.”
First Priority, which managed 44 supported housing properties for the REIT, was issued with a regulatory notice by the Regulator of Social Housing (RSH) in February 2018 amid concerns over its financial position and governance.
Civitas has since transferred the leases to another small provider, Falcon Housing Association. Social Housing revealed that the RSH has since written to around 30 specialist providers – including Falcon and other Civitas partners – asking for information on finances, lease and governance arrangements.
This week, Inclusion Housing, another partner to two social housing REITs, was placed under review by the regulator in relation to a reported governance issue.
Civitas – which has raised more than £600m of equity from investors to date – said in its manager’s update that the new protocol contains 10 core principals relating to matters such as financial prudence, resolving any possible conflicts of interest, management and control interaction with regulators.
CHA – the investment advisor to Civitas Social Housing (CSH) – has also expanded its executive team, and agreed to publish more frequent NAV updates in response to requests from shareholders and analysts.
It said: “Following First Priority’s reported difficulties, additional measures have been put in place to enhance the due diligence process, particularly as it relates to housing associations.
“We are in discussion to implement these with as many of our existing and future partners as possible.”
It added: “As with all sectors and industries, particularly those that are evolving, there will always be improvements and changes that can be made, and we will endeavour to be at the forefront of this acting in the best interests of all our stakeholders.
“We are also engaging in the sector to encourage our partners to adopt the protocol for all transactions that are undertaken – not just with CSH – to bring about greater consistency and certainty.”
Civitas – which has completed more than £400m of acquisitions of supported housing to date and seen a 10.7 per cent total return – intends to implement all aspects of the protocol on each new transaction and to “retrofit certain aspects within the portfolio to the extent that they are not already in place (many aspects have been standard since IPO), and to the extent that we are able to do so by agreement”.
It said that as a sign of its “determination”, it has already declined to work with certain property vendors and housing associations it considers unwilling “to engage fully with the protocol”, and will continue to take this approach in future.
The organisation added: “We also continue to decline property transactions that do not meet our due diligence standards, with the total value of such declined properties being more than £300m.”
As reported by Social Housing, First Priority’s latest financial statements – published at the end of April – stated that there is a question over the future of the organisation as a going concern. In its manager’s update, CHA said the transfer to Falcon demonstrates no loss of lease income, saying this “this highlights the quality of due diligence in relation to the properties as a whole, as well as the strength of our relationships within the sector”.
Civitas said to support its continued growth, it is also “undertaking detailed due diligence of several new potential housing association partners” as part of plans to “further diversify the portfolio and reduce the level of concentration attaching to any single housing association”.
It said: “Our aim is to have meaningful interaction with each one of them, including quarterly site visits, while ensuring that the number of housing associations is sufficient to enhance diversification and reduce concentration risk.”
It added that “following feedback from shareholders and analysts, both [net asset value] measures will be published quarterly going forward providing the maximum level of information and disclosure for shareholders”.
CHA has now recruited a new chief financial officer and a senior real estate investment director to provide additional resource.
It confirmed it is also in “early discussions” with local authorities about expanding from specialist supported housing into lease-based arrangements on general needs, which Civitas originally said would make up part of its portfolio when it floated on the stock market at the end of 2016.
Enhanced due diligence
Best practice protocol
The protocol requires detailed requirements for the onboarding of new properties.