www.insidehousing.co.uk/insight/first-priority-the-inside-story-of-a-housing-association-that-almost-went-bust-58864
It’s March 2018 – fund managers and private equity investors are heading to a crunch meeting with a housing association on the brink of collapse.
At stake are the homes of 759 of the UK’s most vulnerable adults, including many with learning difficulties, brain injuries or physical and mental disabilities. If things go wrong, warns one investor, these people could be “out on their ear”.
How did we get here?
The story of First Priority Housing Association, censured in February by the regulator for “a fundamental failure of governance”, is on one level the story of a small social landlord that got into deep financial trouble.
But it is also a cautionary tale of the potential risks attached to a new kind of social housing investment.
At first glance, this model is disarmingly simple: private equity funds amass large portfolios of supported housing and lease them to housing associations, who then pay a monthly return to the fund, which usually targets a yield of over 5%
But simple doesn’t necessarily mean safe. These funds invariably ask housing associations for lease payments linked to inflation, meaning they are unpredictable and could increase dramatically.
“You take on a lot of future risk,” explains Bruce Moore, chief executive of large supported housing association Housing & Care 21, which has not struck any of these deals. “You lose the flexibility around future rent uncertainty or change of use or funding arrangements.”
To date it has typically been small associations which have used this type of structure.
The homes are usually found by ‘aggregators’, who package them together and sell them to investment funds, usually taking around 1% of the purchase price as their payment.
Once sold in this way, supported housing becomes extremely valuable.
One developer tells Inside Housing he was offered £22m for a portfolio he said was worth £15m purely because the homes had long leases on them.
With investors demanding guaranteed returns, rents tend to be well above average, although they are usually lower than the cost of staying in a care home.
According to a recent data release from the Regulator of Social Housing (RSH), First Priority charges an average tenant £190.15 a week, more than double the English average for supported housing of £93.08. While these are extremely high, defenders of the model note that they are inflated due to the fact that the homes receive no public subsidy.
According to Guildford Council, one of the 88 authorities in which First Priority operated, First Priority received advice from a financial advisory firm to set its rents.
These rents, of course, are paid by local authorities through housing benefit. Solihull Council, another place First Priority operated in, tells Inside Housing: “When organisations charge high rents to those living in supported housing and they subsequently need to claim housing benefit from the council, this can place significant financial pressure on the authority.”
To understand how the housing association got involved in these deals, and how it eventually backfired, we have to rewind to 2011, when the entrepreneur Omar Al-Hasso created First Priority.
He tells Inside Housing: “We set up First Priority in 2011 to become a specialist provider of supported housing services, utilising leased accommodation.”
Fast-forward to 13 July 2012, and Omar and his brother Ryan Al-Hasso are founding Henley Healthcare Investments (HHI).
The company does not call itself an aggregator, but does package supported housing units with leases and then sells them to investment funds. Many of the leases on the properties Henley sourced were with First Priority. A year after founding HHI, Omar Al-Hasso officially joined the board of First Priority, staying there for two years.
So did Mr Al-Hasso create First Priority specifically to create investment opportunities for HHI? And if so, does this represent a conflict of interest?
Andy Brandon, managing director of HHI, says not.
“I’m pretty sure that even before he came to Henley, Omar had created First Priority with this idea in mind that the long-lease model might exist,” he tells Inside Housing.
“Although with retrospect, you can look back and say ‘conflict of interest’, another way of looking at it – probably the right way of looking at it – is that this is how you need to make it work. Because you’re not likely to get to any completely third-party housing association and say, ‘Do this model’. We had to create something, and I think Omar was instrumental in creating the model in the first place.”
Mr Al-Hasso recalls: “In January 2014 we set up an independent board at First Priority to help ensure First Priority’s decision processes were independently considered and in the best interest of First Priority. Every member of the board was fully aware of my involvement with Henley, everything was disclosed at all times.”
Mr Brandon says that Mr Al-Hasso left First Priority’s board “very quickly” after HHI started trading with the housing association, although another investor tells Inside Housing that he retained ‘observer status’ on the board, meaning he could not vote but still attended meetings and discussed decisions.
John Higgins, chief executive of First Priority, also insists: “Where the leases involved Henley, Mr Al-Hasso was not involved in the decision-making to avoid a conflict of interest.
Although Mr Higgins and Mr Al-Hasso deny that he was involved in decision-making, Mr Al-Hasso admits he “discussed the advantages and disadvantages of entering into different proposed leased schemes, both Henley-leases and non-Henley-leases”.
more in the link.