Housing is now near the top of the political agenda, and in a market where investors are searching hard for good returns, it is increasingly in the sights of funds and institutions, which wouldn’t have looked at it in the past.
But the mix of market issues, complex demand and unpredictable political involvement can make it a tough prospect to read accurately
“On its face, housing should be a good investment,” says Ian Graham, head of Housing and Regeneration at Trowers & Hamlins. “There is a huge amount of demand, a willingness to get things done at government and local authority level, and public subsidy available in a number of different schemes. But investors and developers need to look at the whole picture.”
Graham sees a shift in the market towards Shared Ownership schemes, prompted by last year’s Autumn Statement announcements of major Government investment in this area. “I think the focus of policy is changing with new ministers appearing to be more flexible in their approach to housing and less single minded about promoting home ownership,” he says. “That said, I don’t see a complete reversal of last year’s announcements and so shared ownership will still be important. The Help to Buy equity loan scheme for first time buyers is to continue and has been very popular, but it doesn’t help everyone. There are still those for whom shared ownership is a more attractive and accessible proposition.
“Trying to create new products as an alternative to, or a variant on, shared ownership is very difficult. If the scheme involves access to mortgage finance for the purchaser (not all schemes do) then you run into problems because mortgage lenders are unlikely to want to change their systems to adapt to the new scheme. There simply isn’t the volume of business to justify it... Shared ownership is an established product and one lenders understand. It is also a good route into solid, if perhaps a little unexciting, income for investors.”
The principle is tried-and-tested: the occupier buys a stake, usually 25%, on a mortgage basis (needing only a modest deposit) and then pays rent equivalent, typically, of up to 2.75% of the capital value of the remainder to the landlord investor. The investor gets a reliable index linked income-stream and benefits from any capital uplift in the property.
“A key advantage to the landlord investor over PRS (private rented sector),” explains Graham, “is that there are no voids, you’re getting 100% occupancy with Shared Ownership. There is also no cost to the landlord investor for repairs/insurance. These are covered by the shared owner unlike a PRS scheme. There is a risk that the shared owner might buy out your equity at any point (this is called staircasing) and that will bring the rental stream to an end. That’s not what a long term investor wants but the problem can be mitigated by reinvesting the proceeds generated in another shared ownership unit.”
"The unpredictability of staircasing does complicate things when it comes to the secondary market,” he adds. “If you have a portfolio of properties each of which, at any time, might see the occupiers buy you out, it complicates valuations, and of course any securities based on that book.”
“But in general terms, if you’re a big institution and looking for a long-term, stable return on your asset, and you can get your head around the valuations on a sizeable book, Shared Ownership is a great idea.”
Suzanne Benson, partner and housing expert in Trowers’ Manchester office, says the key thing investors need is understanding of Shared Ownership. “They may understand PRS, but this is different,” she says. “Some investors may not even realise they can do it, legally, given that it’s traditionally always been associated with housing associations”.
Benson puts Shared Ownership firmly in the context of the broader plan of the Homes & Communities Agency (HCA) – responsible for housing everywhere outside London – that is trying to create a level playing field between housing associations and private developers.
The HCA’s Prospectus outlines a five-year shared and affordable homes strategy with £4.7bn of government money behind it.
“We’re waiting to see further details on the response of the market to the Prospectus – initial signs are that very cautious bids have been submitted so far” she says. “The HCA isn’t looking to allocate the full pot immediately, but the first tranche will be very telling in terms of who wants to invest in what kind of scheme, and which developers will be involved.”
“It’s very important that none of the actors in this area think that one size fits all,” says Benson. “Shared ownership can tend to work better in some markets and may struggle in others. Areas with particularly high or low values have historically struggled to maintain the product. Current market commentators however claim the success of shared ownership is better considered on a site by site basis.”
In considering new entrants to the market, Graham points to some enterprising local authorities which are setting up housing companies funded by their ability to borrow cheaply from the Public Works Board. “It’s great for them because they can get hold of the money to build quite cheaply, and then get a reliable income stream from PRS, social or Shared Ownership homes, and address local housing need.”
"Some don’t have the skills to do this, having lost them when social housing was taken out of their hands in the 1980s and 1990s, but just as important is the courage to try some of these things.”
Graham points to Cherwell District Council, which has launched a project called ‘Build!’ at Graven Hill near Bicester, a popular commuter town in Oxfordshire. This selfbuild project aims to create 1,900 homes over a ten-year period on old Ministry of Defence land.
“Self-build isn’t going to be for everyone,” says Graham, “but it’s part of the kind of diverse strategy that housing in the UK really needs. The days of one-size-fits-all housing policy are long gone, or should be. It is that kind of thinking which has been holding back housing provision.”
“Local authorities certainly understand they can do things like this,” says Suzanne Benson, “but many of them lack the confidence to do it.”
Graham agrees, adding that government needs to give local authorities a more stable commercial framework in which to operate. “There was a big settlement when we moved to ring-fenced Housing Revenue Accounts for each local authority,” he explains. “That did create a bit of headroom for councils, but then a few years later the government imposed a four-year 1% rent cut on them. All the business plans which had been based on the original settlement had to be torn up.”
"It is a tough environment, for local authorities, managing within that straitjacket, but if they can get the right advisers on board and the right skills in-house, there is still some room for manoeuvre and an increasing number of big investors looking more carefully at the potential offered by housing.”