Southern Housing downgraded to G2 after inconsistent oversight and reporting

News17 Apr 2020Sarah Williams

Southern Housing Group’s governance rating has been downgraded in relation to stress-testing, reporting, and communication with the regulator.

Picture: Getty

Sharelines

Southern Housing downgraded for governance to G2 after RSH finds improvements are required in areas including stress-testing, reporting of the delivery of its plans and communication with the regulator #ukhousing #socialhousingfinance

Regulator of Social Housing @RSHEngland downgrades @SHGroupUK to G2 for governance following weaknesses in oversight, reporting and stress-testing #ukhousing #socialhousingfinance

The group, which owns and/or manages more than 28,000 homes in London and the South East, was downgraded to compliant G2, from G1. It was also regraded to V2 for viability, from V1.

Today’s regulatory judgement referred to the G15 member’s “clear strategic commitment to the development of homes for shared ownership and outright sale”, which mean that its ability to generate liquidity is “subject to the volatility of the housing market”.

At G2/V2 the group remains compliant with both elements of the regulator’s Governance and Financial Viability Standard.

Citing its reasons for the governance downgrade following an in-depth assessment (IDA), the regulator said: “The group has not evidenced that it has effective systems to monitor and accurately report on delivery of its plans. A limited range of targets in both internal and external reporting restricts the ability of the board and other stakeholders to assess [Southern’s] strategic and operational performance, including its record on delivering value for money.

“[Southern’s] audit and risk committee has not consistently ensured adequate oversight of the implementation of internal and external audit recommendations. The board needs to strengthen its assurance framework and ensure that its committees’ terms of reference are operating effectively in practice.”

Work carried out in the IDA had also concluded that Southern needs to improve communication with the regulator in line with co-regulation.

The judgement acknowledges that Southern’s board has “recognised these issues and is starting to strengthen its overall control, compliance and reporting systems”.

The regulator also stated that Southern needs to improve aspects of its stress-testing, with further work required to develop mitigation strategies and to complete the group’s assets and liabilities records.

Southern’s regrade to V2 comes as recent analysis by Social Housing on housing association sales proceeds for April’s special report found that Southern topped the league in terms of margin on for-sale properties in the last financial year. It generated £16.96m in surplus from £35.41m of sales – a 48 per cent margin, up from 30 per cent in the preceding 2018 financial year.

Referring to the group’s financial viability score, and its need to manage material financial risks relating to its reliance on sales, the regulator said: “The scale of this reliance is reflected in key financial metrics which indicate that the group has limited capacity to service its debt from margins generated solely from social housing letting activity. The group’s financial performance will also be impacted by significant investment in existing stock including fire safety works.”

However it said that Southern has an adequately funded business plan, sufficient security and is forecast to continue meeting its financial covenants.

Southern ‘disappointed to move from G1’

Responding to the regulatory judgement in a statement, Southern Housing Group said that while it continues to be compliant, it was “disappointed to have moved from G1”.

It added: “The group is grateful to the regulator for working closely with it to identify additional areas in its governance framework where it can improve. Since Alan Townshend took over as chief executive, the group has been restructuring its board and committees and improving its governance framework, focusing on increasing resident involvement and strengthening oversight and internal controls.

“The new structure went live in September 2019. The group has considered the areas where the regulator has said that it needed a more robust approach. Much has already been achieved through the new governance framework which had only been in place for three months when the IDA took place, and the group has already set in motion a series of additional measures designed to address the regulator’s concerns.

“The group is pleased to see that the regulator acknowledged that this improvement is already underway in its judgement. The board and executive will continue to work closely with the regulator to ensure that the group regains a G1 rating as soon as possible.”

It said that the V2 rating was in line with expectations “given that, in common with all providers, the financial landscape means that rising building safety costs and historical downward pressure on income necessarily affect the sector’s outlook”.

It added: “Notwithstanding the current public health emergency, the group has an ambitious growth strategy. As such there is always a balance to be managed between growth activity and core business. The group’s sales strategy has been carefully positioned to allow it to manage sales risk effectively and flexibly.”

Alan Townshend said: “We have been making some adjustments in our governance approach to recognise the increased focus and priority on building safety and customer involvement.

“Although it is disappointing to see this downgrade, I agree with the regulator that there is more we can do to build on the existing improvements.

“Our new board and committee structure is bedding in and we’re working with the board to put in place further improvements which I was pleased to see the regulator has acknowledged.”