Supported housing REIT issues new draft clauses aimed at fixing non-compliant provider gradings

News12.05.221.00 PM by Jack Simpson

One of the sector’s biggest supported housing real estate investment trusts (REITs) has revealed that it is to issue new draft lease clauses, in a bid to improve compliance issues at a number of housing associations it leases properties to.

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One of the sector’s biggest supported housing REITs has revealed that it is to issue new draft lease clauses, in a bid to improve compliance issues at a number of housing associations it leases properties to #UKhousing

In a stock market announcement today, Civitas revealed that it had come up with the new draft terms after engagement with shareholders, lending banks, valuers and the Regulator of Social Housing (RSH), as well as in-depth discussions with several of its housing association partners.

The new draft clauses will come into play initially on a limited number of cases, and will apply in scenarios where one of Civitas’ partner providers has a shortfall between the housing subsidy it is receiving and the lease payments it owes to the REIT.

In these cases, if the shortfall is not corrected after three months, the REIT will cover that shortfall for the period until the discrepancy is fixed.

It is hoped that this will split the risk more evenly between Civitas and its providers and give the Regulator of Social Housing reassurances around the financial viability of lease-based providers.

Civitas, which was launched in 2016, is one of several funds set up in recent years that acquires properties and then leases them to small housing associations for use as specialist supported housing or exempt accommodation. These leases are often index-linked and can last for periods of up to 20 years.

The fund was set up to fill a gap in specialist supported housing provision across the country. In 2018, research by charity Mencap estimated that the shortfall could be up to 33,500 properties in 2021-22. As of September 2021, it had invested £825m in 648 properties, providing homes for up to 4,391 people.

However, the RSH has publicly criticised the lease-based model in the past. Its chief executive Fiona MacGregor said that it was “hard to see” how housing associations adopting this model could comply.

Several of Civitas’ biggest partners have been deemed non-compliant, with the RSH highlighting the thin capitalisation of some of these providers and the concentration of risk that comes from long-term, low-margin, inflation-linked leases as issues.

It is hoped that the new draft clauses will be more attractive to the regulator because they will ensure a greater balance between a provider’s income and its lease obligations going out to the REIT, because shortfalls will be contractually covered.

However, Civitas has said that the leases would not make it fully responsible for obligations owed by other bodies the provider deals with, such as void cover commitments from care providers.

The clause also contains a provision that would ensure it is reimbursed if the rental income is subsequently recovered.

According to Civitas, this would be better for associations as it would ensure there was greater alignment between income receipts and lease liabilities.

It believes it will also set achievable capital solvency requirements against lease obligations, as well as providing greater risk-sharing between a provider and Civitas.

Civitas believes it will benefit from having counterparties better able to achieve compliance, and clauses that give them enhanced information of leases and step-in rights.

Civitas has obtained written confirmation from valuers that the inclusion of the clause in new and existing leases will not lessen the value of those leases or assets. Due to the limited number of properties it will be applicable to, it will not have a material impact on its rent roll, the company said.

These clauses will now be incorporated into just a limited number of existing leases initially and operate on a “retrospective basis”. If following this the providers agree with these terms, they will be rolled out more widely on new and existing leases.

However, Civitas stressed that these clauses are currently in draft form and are subject to further discussions and refinement with the boards of its housing association partners, who would be assisted by sector lawyers.