There are few signs of life in the privately run Metro and St Peter’s Way hostels in Hackney, east London, other than boxes of nappies and withered pot plants in the soot-stained windows. But as school pick-up time approaches, a succession of mothers with buggies struggle down the slippery steps of the former Victorian-era hospital and return soon afterwards with older children in tow, babbling about homework and playground squabbles.

Revealed: the private landlords profiting from England’s housing crisis Read more

As a fine autumnal rain begins to fall, these mothers tell their distressing stories. Some have been in the eight-storey hostel for more than three years – others one or two years. Whole families cook, eat and sleep in cramped, sometimes bedbug-infested single rooms. Clothes have to be washed by hand as they lack their own washing machines. Children do their homework on the floor because broken furniture is not replaced. The corridors are frightening no-go zones because they claim they are sharing with people straight out of prison and others with alcohol or drug addiction problems.

They are just some of the 66,910 households stuck in predominantly privately managed temporary accommodation in England. It is a figure that has grown by 64% since 2011 – as more and more low-income families have been driven out of their homes by rent rises and benefit cuts, amid a chronic shortage of social housing. There are 1,779 households in mainly private sector temporary homes in Wales and 4,250 in Scotland.

The Observer has established that their plight is driving a £215m industry in England’s top 50 homeless blackspots, where 156 of the largest private management companies are receiving on average more than £10,000 of public money per booking. Councils have done what they can to hold down ballooning costs by agreeing guideline rates and building up their own property portfolios. But the sheer number of households coming to them for help, which has widened under new homelessness reforms, mean private providers can keep increasing their charges.

These companies are making money out of distress. They have a moral responsibility to treat families with dignity Polly Billington, Hackney councillor

The Observer has used council payment records obtained under freedom of information laws and previously unpublished data collected by London boroughs to lift the lid on an industry that has been accused by the public accounts committee of providing often poor-quality, overpriced accommodation for some of society’s most vulnerable families.

Many of these providers, which typically offer investors a guaranteed one- or five-year return on their properties, have grown from often humble backstreet beginnings to become multimillion-pound companies with swanky headquarters and flashy websites as the nation’s housing crisis has deepened.

The Metro and St Peter’s Way hostels are run by the country’s highest-earning private provider, Finefair Ltd. The east London-based firm collected more than £11.5m from councils in the last financial year – more than any other provider – even though its accommodation led to an above average number of suitability reviews following serious complaints from families. It was also the second largest provider of B&B rooms to homeless households, taking 387 bookings in the capital last year.

Finefair, which operates across London as well as in the Midlands, promises investors it can turn their properties into “high-yielding” multi-occupied homes or hostels with increased “potential for profit”. The company’s CEO, Kamran Naseem, lives in a £2m gated, five-bedroom detached house in Woodford Green, a prosperous London suburb, near Epping Forest.

The mothers in Metro and St Peter’s Way hostels have a somewhat different life. Hassan says Finefair has failed to treat the bedbugs in the single room she shares with her nine-year-old son and one-year-old daughter for more than a year. “My son had a rash all over his body because he was bitten by so many of them … he had to see a doctor,” she says. “They are in the old, ripped mattress they gave us, but they say they cannot replace it.”

Nicolette Dialundama, 39, has just picked up her nine-year-old daughter from school. She has been in the hostel with her son and two daughters for 18 months. “My three children and me sleep on two beds,” she says, shaking her head. Her daughter adds: “We don’t have a table and all the chairs are broken. I have to do my homework on the floor and now my back is hurting me.”

Nicola Smiley, 42, who has been there three years, dreads the coming winter because her daughter has nowhere to play and cannot have friends over. “When I moved in, she was a baby; by the age of three, she needs space. I can’t have a playdate for her because we can’t have visitors.”

Another mother, who has also been in the hostel for three years, says her three-year-old daughter and her seven-year-old son have to stay in their room. “There is a mixture of all sorts here: people who have just come out of prison, drug addicts,” she says. “It’s frightening.”

Yet business is so good that the owner of the hostels, Blue Chip Trading Ltd, has been granted planning permission this month to build an 11-storey 292-room hostel nearby, which local councillors estimate could generate up to £4m a year by charging councils £256 a week for each family.

Hackney councillor Polly Billington, whose ward includes the hostels, says families routinely complain about overcrowding, pest infestations, broken furniture and lack of laundry facilities. “These companies are making money out of distress. They therefore have a moral responsibility to treat families in their accommodation with dignity and respect,” she says. “But too often the standards fall short of what is acceptable.”

Four miles away, in the borough of Newham, about 80 homeless families are preparing for another night in what they claim is a squalid and dangerous tower block, Donald Hunter House. The former BT building is managed by Theori, one of the country’s largest providers of temporary accommodation.

Theori received £6.9m from councils in the last financial year, including taking 384 bookings for studio flats and 173 bookings for B&Bs.

Facebook Twitter Pinterest Sofa Akther lives in Donald Hunter House in Newham with her husband and five children. Photograph: Tom Wall

Many of the flats in Donald Hunter House are infested with cockroaches and some of the shower rooms are covered in dark blooms of mould. Children sleep on broken beds and the heating is so expensive families huddle in the library downstairs to keep warm in the winter. The lifts break down regularly, forcing mothers with health conditions to walk up to seven flights of stairs.

The Observer reported the concerns of the families last year but conditions appear to have deteriorated further. Last week the water supply was cut off for two days, with families, regardless of size, given only a 10-litre bottle of water to last them all day. A mother of two young children, who asked not to be named, said the water usually only stops for a few hours. “This is the first time it has been days,” she says. “It takes five litres to flush the toilet so it goes straightaway. I can’t afford to buy water any more. I feel helpless.”

She has found needles in the back stairwell, where residents say drug users have been shooting up and smoking crack. “They get in because security guards are too busy on video calls or watching movies,” she says, gesturing around the filthy, sick-stained landing. “Every other night I see two or three people sleeping here in the winter. They are weeing and pooing. It is disgusting.”

Sofa Akther, 43, finds cockroaches every time she goes to her kitchen. Her 11-year-old son translates for her: “I see them crawling around. It makes me feel disgusted.” She opens the door to the musty-smelling shower room. “There’s mould all over the ceiling – my dad complains but they don’t come,” explains her son.

Anisa Sheikh, 31, says she cannot afford to buy enough prepaid electricity cards from Theori to heat her flat. “In the winter I spend £20 a day. Most people go to the library in the afternoon to keep warm,” she says.

There was a fire in one of the flats in December. The Ghani family, who were placed in the block two years ago by Newham council, were among the last to get out as they are on the top floor. “I didn’t hear the alarm. I had to carry my children because my wife was out shopping,” says Mohammed Ghani. “I couldn’t see anything because there was so much smoke.”

Email exchanges seen by the Observer show Theori director Tony Theori failed to show up, phone in or send a representative to a meeting with 15 concerned families after the fire. This led the councillor who organised the meeting to warn “trust is withering rapidly” because of his firm’s “shocking response” to complaints by families. Tony Theori – who lives in a £1.8m five-bedroom detached house in the Hadley Wood conservation area in Barnet, north London – says he missed the meeting due to heavy snowfall.

Further south, towards the towers of Canary Wharf, lies Custom House, a rundown estate used as temporary accommodation. Outsourcing giant Mears, which picked up £5m from councils in the last financial year, manages about 280 properties on the estate, which has long been earmarked for development. Residents say they have raised more than 250 cases of disrepair and mismanagement with the company since 2015.

Facebook Twitter Pinterest Sarah Male in the hallway where her ceiling collapsed in Custom House, Newham. Photograph: Tom Wall

Sarah Male points towards the ceiling in the hallway of her Mears-managed flat, where she was placed in 2011 by Newham council. “When I opened the door, the ceiling started falling in. It hit me on my head and I fell down,” she says. “An ambulance took me to Newham University hospital and I was there two days.”

Male, 60, and her family had started complaining about water dripping from the ceiling lights in February 2018, but Mears managed to fix the leak only after she was hospitalised in September 2018. Now she is worried it might happen again as water is seeping through the kitchen ceiling. “I’m scared when I do the washing-up,” she says.

Mears Group said it was sorry to hear about Male’s concerns: “The repair in question was caused by a leak from a council property above, which has now been resolved.”

Theori said it had agreed timescales with local authorities to address any issues that might arise. “We pride ourselves on the service we provide and work with all partners and public bodies to meet all requirements and standards and have an excellent track record in providing a quality service,” it claimed.

Finefair said it was aware of a previous outbreak of bedbugs in the hostels and had taken measures, including changing beds and frequent treatments. It said there were some single people staying in the hostels and a system was in place to deal with any antisocial behaviour. It added that not all suitability reviews were successful. “Finefair has been actively working with the council to look at how we can improve the quality of the accommodation and the satisfaction level of residents,” its statement said.

The mayor of Hackney, Philip Glanville, said firms such as Finefair were able to operate only because of the government’s failure to address the root causes of the homelessness crisis. “Given the scale of the problem, we have no choice but to work with private providers like Finefair, and we monitor them closely to ensure that they meet the standards we expect and that any concerns from residents are properly dealt with,” he said.

Newham council said it was increasingly reliant on private firms such as Theori as the number of homeless applicants far exceeded available properties. “We are aware of issues with Donald Hunter House and are working closely with Theori to ensure they are resolved as quickly as possible,” said a spokesperson.

The authority said it was looking at “alternative management solutions” for Mears residents on the Custom House estate, adding “we will follow up … this leak and ensure urgent action is taken”.

Blue Chip Trading Ltd did not respond to a request for comment. The Observer was unable to contact the owner of Donald Hunter House, Stratos Holdings Ltd.

The situation is not likely to get any easier for councils in the near future – or for the people who find themselves in need of temporary housing. Councillor Billington says spiralling rents and a shortage of social homes mean the new hostel in her borough will soon fill up with homeless mothers and children. “If Hackney had better homes to put them in we would,” she says. “It is absolutely heartbreaking to find ourselves in this position.”

A mother’s story

Jamie-Leigh McCarthy paces the narrow room she shares with her teething baby daughter in Terminus House, which was turned into more than 200 flats last year. “From my front door to my window is 14 steps. The width is eight steps,” she says. “Everything is in one room. My kitchen. My bed. Her cot. Her highchair and toybox. There’s no room for a wardrobe and I have to eat my dinner off my bed.”

Facebook Twitter Pinterest Jamie-Leigh McCarthy and her 16-month-old daughter in their room at Terminus House, Harlow. Photograph: Andy Hall/The Observer

McCarthy, 26, who was placed in the 14-storey block by Epping Forest council, says it is a scary place to live. “There are people in the corridor taking drugs and I’ve had to call the police because I’ve had people off their face banging on my door and trying to come in,” she says. “There shouldn’t be any kids living in this building. It isn’t safe.”

Terminus House is owned by Caridon, which received £1.2m from councils including Broxbourne and Croydon in the last financial year. It has led the way in converting former offices into what critics have described as “shoe-box” and “rabbit hutch” homes since planning rules were relaxed in 2013 by the coalition government.

There has been a rash of conversions in Harlow, with the council identifying 13 blocks that have been converted into 1,000 flats. Almost 40% are owned and managed by Caridon. A report by the Children’s Commissioner has warned that many of the flats in converted offices do not meet space standards and that – like B&Bs – families find themselves living next to vulnerable adults.

Harlow’s Conservative MP, Robert Halfon, who is helping McCarthy, wants office conversions such as Terminus House shut down. “These landlords are profiting out of human misery. We were supposed to have got rid of this kind of thing in Victorian times,” he says.

He adds that removing planning constraints on office conversions had been an unmitigated disaster. “It has created modern ghettos for the most vulnerable people and led to social cleansing by London councils, who see it as an easy way to ship problems out of their boroughs. The law needs to change urgently.”

Caridon is run by millionaire property developer, Mario Carrozzo, who reportedly drives a £164,000 Ferrari and lives in a £6m mansion in Surrey, with a tennis court, indoor swimming pool and home cinema.

McCarthy, who has been in Terminus House for 15 months, claims the building is not properly managed by Caridon. “Someone got beaten up in the lift about six months ago. They left all the blood in there for three days,” she says. “They can’t control this place. It is getting worse.”

Caridon said: “Terminus House has helped house many people who would have otherwise struggled to secure accommodation, or worse, faced street homelessness.” It said the building had 24-hour on-site security along with CCTV and the firm took a “zero-tolerance approach to criminal and antisocial activity”. It added: “All of our apartments meet the relevant and applicable space standards for permitted developments.”