Navigating Ethical Dilemmas in the Commercialization of Social Housing

Across various countries, the sector is experiencing significant consolidation with institutional investment becoming a sector norm. 

This ongoing shift toward commercially minded practices is aimed at maintaining financial viability and building more (much needed) social housing, but can breed complex ethical challenges. As housing associations balance the need for profitability with their mission to provide affordable housing, they face tough decisions about how far to engage in commercial activities without compromising their foundational objectives.   

We spoke to ten leaders from across the UK and Australian social housing sectors to explore the ethical implications of the growing focus on for-profit models and the M&A conundrum.  

The rise of the for-profit registered provider

Traditional housing associations operate on a 'profit for purpose' model. However, the emergence of For-Profit Housing Providers (FPRPs) – large corporations with diverse commercial interests – brings a new dynamic to the market. Entrants including Man Group, Blackstone, M&G, and Legal & General have been particularly successful.

This raises a crucial question: What are the implications when the mentality shifts subtly to 'purpose for profit'? 

For-Profit Registered Providers in the UK are becoming more prevalent. By March 2023, 69 FPRPs reported owning 29,272 units of social housing, marking a 40% increase from the previous year. This is part of a broader trend where investor interest in affordable housing is growing due to its potential for inflation-linked returns. But how can the sector ensure this is sustainable, value-additive, and scalable?   

Organizations recognize social housing as a stable and investible asset class that aligns with ESG criteria and drives up new build for social homes. However, FPRPs potentially face vulnerabilities during economic downturns, which might deter continued investment.

This question underscores the tension between achieving financial objectives where there is an expected shareholder return, and fulfilling social responsibilities.  

Some FPRP owners have underestimated the authority of the Regulator of Social Housing (RSH). A chair of one FPRP noted the importance of aligning with the regulator's expectations, but acknowledged the challenge posed by the existence of numerous 'shell' companies, where assets are held elsewhere, which limit the regulator's control.   

These types of circumstances raise concerns about potentially unethical behavior, particularly where regulation is not heeded. Although larger, well-known entities are considered less likely to engage in such practices, there have been instances where organizations have exploited vulnerabilities to expand their influence.  

Are FPRP boards just for show?   

In recent years, the evolution of the quality of boards within FPRPs has reflected a growing respect by owners, for regulatory standards in social housing. Initially, some early FPRP boards seemed to serve merely as superficially credible fronts for major corporations in the eyes of the regulator, wielding little real power. 

However, this is changing. The role and authority of FPRP boards are now expanding within corporate structures. A FPRP Chair we spoke to emphasized the necessity for clear terms of reference to empower these boards adequately, but noted that mere structural power is insufficient; the right organizational culture is essential. 

Despite the allure of positions on these boards, one chair advised caution, stressing the importance of having sufficient authority to act ethically and effectively, encapsulated in the warning that when being hired to be the acceptable face to the regulator "there is a price for your consent."

Ethical leadership and M&A

M&A remains prominent in the social housing sector, with ongoing consolidation trends. Discussions with both former and current CEOs reveal an awareness of the ethical complexities involved in M&A, especially given the absence of shareholder profit motives. Feedback suggests that while there is support for more M&A activity, it should ideally focus on organizations that are geographically adjacent, to capitalize on the benefits of proximity. 

They questioned the incentive for merging if it could jeopardize their position, especially if not nearing retirement. 

This brings up another ethical concern: some CEOs may pursue mergers primarily as a strategy for a graceful exit at career's end. These observations raise a broader question in the sector: Should the timing of a CEO's life influence merger decisions? There is growing debate on whether formal regulations should be introduced to govern M&A in the sector, which could introduce additional complexities. A CEO in the sector commented “are we seeing too much of ‘the big getting bigger'?"

Different regulatory standards

Social housing is of course prevalent in many countries. In Australia, the landscape of social housing presents unique ethical challenges, partly due to its nascent stage compared to other regions. Here, public housing is often managed by local authorities under long-term contracts, with liabilities transferred to registered providers. Regulatory challenges are compounded by state-based regulators, each with their own interpretations of what constitutes 'good' governance, often leaving leaders to navigate a complex regulatory environment. 

This situation may lead to the potential manipulation of facts to meet varied regulatory standards. Additionally, the governance within Australian providers is noted to need further development. A particularly pressing issue is the disproportionately high number of First Nations people in homelessness services, a situation described as "staggeringly uncomfortable" by a sector leader, underscoring the urgent need for targeted social interventions. 

An eye to future leadership

Housing Associations must navigate these waters carefully, with an eye toward ethical integrity and responsible governance. Odgers Berndtson's housing practice appoints leaders who not only fit this profile, but are at the top of their field and capable of navigating the sector’s increasing challenges. 

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