Reform in the Affordable Housing sector is by no means a new phenomenon. However, the latter part of 2020 saw a flurry of new proposals, consultations and policies which are set to change the trajectory of social housing for the future.

The first blog in this series will be delivered in two parts:

  • Part one will outline the key changes proposed to the Shared Ownership tenure under the Affordable Homes Programme 2021 to 2026
  • Part two will provide a follow up on initial thoughts and reactions to the conclusions of the technical consultation on the implementation of the new model, which are due imminently

On 8 September 2020, Housing Secretary Robert Jenrick announced a £12.2 billion investment into Affordable Housing, which includes £11.5 billion invested through the Affordable Homes Programme spanning five years from April 2021. This new fund is available for the provision of new Affordable Housing only, split 50:50 between ‘Homes for Rent’ and ‘Homes for Sale’, and sets out to deliver 180,000 new homes throughout the course of the Programme.

Critically, any Shared Ownership units delivered through the Programme will be subject to the New Shared Ownership Model.

What do we mean by the term Shared Ownership?

In essence, Shared Ownership is one of the most common part-buy, part-rented affordable tenure types, giving occupiers the opportunity to purchase an initial share in their property, paying rent on the remaining equity. The purchaser only needs a mortgage to cover the share they are acquiring, therefore making the amount required for a deposit more affordable than if the property is bought outright. The intention is for the occupier to then purchase additional shares overtime through a process known as ‘staircasing’, with the long-term objective of owning 100% of their property.

Shared Ownership has been in existence for over 40 years, and whilst considered to support those who are unable to afford owning their home outright, rising house prices and increasing affordability barriers still render Shared Ownership properties unattainable to some people. As a result, the government launched a consultation into the reform of Shared Ownership in 2019 with the intention of making the product more affordable, fairer and bound by less restrictions – it is the outcome of this consultation which has formed the shape of the New Shared Ownership Model.

What are the key changes?

The table below summarises some of the key attributes of existing Shared Ownership, and outlines how these are set to differ for properties which will be subject to the New Shared Ownership Model:

 

Existing Shared Ownership

New Shared Ownership

Minimum First Tranche Sale*

25% share of property

10% share of property

Minimum Staircasing

10% per annum

1% per annum

Repairing Obligations

Fully repairing and insuring lease

10-year Landlord repair responsibility

Selling a Shared Ownership Property

8-week exclusivity for Landlord to sell property

Option to end exclusivity at 4-weeks

* The initial percentage of the full Market Value of a property that the Shared Owner purchases.

What does this mean for Shared Owners and Affordable Housing providers?

Initial reactions are that the New Shared Ownership Model works in the favour of potential occupiers more than Affordable Housing providers. Reducing the initial first tranche sale to 10% will make Shared Ownership properties more accessible, on the basis that the deposit required to purchase a Shared Ownership property will be lower. On the other hand however, the potential effect this will have on providers’ cash flows could be significant, with many relying on the initial cash injection from the sale of the first tranches in their business models. For the occupier, concern has been raised in the latest consultation that the pool of current mortgage lenders for Shared Ownership units could diminish further, with less favourable mortgage terms and/or unsecured lending being realised.

Similar to the reduction in the First Tranche Sale percentage, the New Model also proposes to reduce the minimum staircasing amount to 1% from 10%, with heavily reduced fees. This, again, aims to make staircasing more accessible and affordable to Shared Owners with the price of each share being based on HPI increase and the landlord absorbing the administrative cost of calculating this annually – under the current Shared Ownership model, the occupier is responsible for paying for a valuation to establish how much the additional shares are worth. Whilst under the New Model, staircasing is capped at 1% per annum, occupiers are able to purchaser greater shares by opting to revert to the existing Shared Ownership staircasing process, with all costs incurred for a valuation being the responsibility of the occupier.

Perhaps the most anticipated outcome of the latest consultation is the detail behind the 10-year Landlord repair responsibility. Existing Shared Owners occupy their properties on an FRI (fully repairing and insuring) lease, meaning that they are responsible for all repairs and maintenance to their property from day one. Under the New Model, Landlords will have to absorb the costs of repairs falling outside of warranty for a 10-year period up to a proposed maximum of £500 per annum. Whilst the intention of this change is to lessen the risk of new Shared Owners being responsible for the cost of unexpected repairs and maintenance, (allowing for a focus on saving) the scope of liability on the Landlord remains somewhat unclear and the outcome is likely to have a fundamental effect on the cashflow and budgets of Affordable Housing providers.

Finally, the New Model seeks to improve the selling experience of a Shared Owner by giving them more control over the process. Currently, Landlords have an eight-week period during which they have a right to first refusal to market the property. This has attracted criticism from Shared Owners who have noted that it slows the sales process and can in turn have a delaying effect on their onward purchase, limiting their flexibility to progress in the housing market. Whilst in some instances Landlords benefit from having access to databases with details of interested parties, under the New Model, Shared Owners will be given the opportunity to end this period of exclusivity at the four week mark to give them more option and influence over their onward sale.

What is the impact on value for Affordable Housing providers?

At CBRE, we are often asked by clients what the effect of this change to Shared Ownership will have on value, and understandably, it is becoming an increasing concern with the Affordable Homes Programme due to commence next month. Evidently, as a result of the additional repair obligations, there is going to be an increased cost liability to the Landlord, thus reducing net income, which will have a negative impact on value. However, we also know that the rental income received from the Shared Ownership units might be, in some instances, more valuable to Affordable Housing providers over the lifetime of a cashflow than the proceeds from the initial First Tranche Sale. With limited information, and no conclusions published from the latest technical consultation, scenario testing has been challenging and the true impact to value of Shared Ownership subject to the New Model is yet to be truly realised.

Part two will provide a follow up to this blog once final conclusions from the latest technical consultation have been published. The outcome is likely to shed further light on how the New Model will be implemented, and also promises to provide a standard lease on which the units can be let – this information will make our analysis of the New Model more accurate and the true impact on value to Affordable Housing providers clearer. We anticipate these conclusions will be published in early Spring 2021.