We are hearing Integrated Retirement Community (IRC) and other retirement village operators, and investors, talk about shared ownership as a new opportunity in the sector. It absolutely is in the sense that it can provide a different kind of offer to rental or outright sale. Although it's a form of ownership that has existed for decades, there are nuances to its potential role in the retirement sector.
What is it?
Shared ownership, boiled down, is a long lease sold to a customer (like any other long lease, in an outright sale setting) but which includes provisions stating that the leaseholder is acquiring only part of the equity in the unit, with the operator retaining the balance. The customer, as leaseholder, then pays rent on the share they haven't acquired. As noted above the concept has been around for decades having grown through the social housing sector, and even has a legal definition - the current one is in the Housing & Regeneration Act 2008:
“Shared ownership arrangements” means arrangements under a lease which:
- is granted on payment of a premium calculated by reference to a percentage of either the value of the accommodation or the cost of providing it, and
- provides that the tenant (or the tenant's personal representatives) will or may be entitled to a sum calculated by reference to the value of the accommodation.
This has the obvious benefit of opening up a potentially much wider pool of customers if those customers want to buy, but cannot afford to. Of course there is a rent to pay on the unowned share, and that has to be affordable for the customer too. In mainstream housing, where buyers are typically buying with a mortgage to fund their equity purchase the costs might be similar (mortgage + rent) to the mortgage costs on an outright purchase, but can still open up the market where people can manage the costs but can't get a mortgage for an outright purchase. In the retirement sector, most purchases are funded by the occupier's own capital, rather than a mortgage.
Grant funded shared ownership
The above definition only includes two elements – the sale price is the percentage of the equity value the customer is buying, and the customer will be entitled to that percentage of value when they sell their lease. Because the product evolved in the social housing sector, it is possible for regulated housing associations (Registered Providers or RPs) to secure Homes England or GLA grant funding to deliver it as a form of tenure. Grant funded shared ownership requires compliance with a number of additional specific rules:
- Rents charged must not exceed 3% of the unsold equity (when the lease is initially granted) and then increase by RPI.
- A legally compliant service charge mechanism must be included where appropriate to enable the landlord to recover its service charge costs. Careful consideration is important when operators deploy event fee models, so as to stay within the various requirements relating to service charges, though Homes England does recognise event fees are used in the sector.
- Leases when sold are required to include certain "Fundamental Clauses" which must be included in set form. Various versions of the fundamental clauses exist for different types of shared ownership product, and within those products for houses and for flats. The most likely to apply in the retirement sector are general or mainstream shared ownership, and OPSO (older person's shared ownership). The main difference between these is that in general shared ownership a leaseholder may staircase to i.e. acquire 100% of the equity, at which point their rent reduces to nil and various provisions fall away so that the unit in effect becomes an open market sale product. In OPSO the leaseholder may only staircase to 75% at most, but their rent reduces to nil in those circumstances. The requirements for the fundamental clauses are as follows:
- alienation provisions (assignment and underletting), mainly to allow the landlord to nominate a new leaseholder when the unit is being sold and to control underletting, with a view to ensuring the unit remains occupied appropriately as an affordable housing dwelling;
- pre-emption provisions (allow the landlord to buy back the unit or nominate a purchaser of it in certain circumstances, again with a view to retaining the unit in affordable use)
- mortgagee protection (broadly designed to ensure that a mortgagee exercising a power of sale on a borrower default can limit its exposure by acquiring the unowned share for less than the usual market value payment if it needs to deduct recovery costs, and then selling the "fully staircased" lease). These principles were put in place at the inception of shared ownership as a concept, to make it acceptable to residential lenders
- staircasing provisions (allowing the purchase of additional equity for market value and a commensurate reduction in rent)
- rent review (limits increases in the rent on the unowned equity to annual indexation)
- right to repair (offers certain assistance with repairs that fall to the leaseholder within the first 10 years after a unit has been built and first sold)
As mentioned above, a key difference between the retirement sector and the mainstream housing sector is that buyers are almost always buying outright, not with the assistance of mortgage finance. In principle this opens up more scope for alternative structures to be offered – in the mainstream residential market shared ownership tends to look the same whether grant funded or not, because otherwise buyers cannot secure mortgages.
However, there are still many things to consider, just a few being:
These are long leases, so require as much care and attention as any product offered on those terms.
Should you allow staircasing, or will sales be fixed equity and how can that be "reset" on each resale if the next customer wants something different?
How could an event fee model be structured around the product?
How we can help
If you are considering offering a shared ownership product please let us know. We are experts in this area both in terms of its application to the sector and the affordable housing overlay, having worked with shared ownership products for over 30 years. We can guide you through the available options to fully appraise the possibilities.
