The Government is consulting on a new model for shared ownership that should make home ownership more achievable, affordable and more flexible for prospective buyers; on the flip side, it will impose more onerous responsibilities – and costs – on landlords.
In its five year £12.2 billion Affordable Homes Project announced earlier this year, the Government is insisting that all shared ownership homes built using the fund must adhere to the model. It is also going to insist that shared ownership homes delivered via s106 agreements also meet the new standard.
The new model is proposed to apply to all shared ownership homes receiving planning permission from April 2021 and will likely be secured through Written Ministerial Statement.
Developers will certainly need to be thinking about the new model when preparing their planning applications, and affordable housing providers will need to take particular note given the potentially significant financial and administrative burdens presented by the new model. Transitional arrangements are proposed for the development of homes already in the planning process before April 2021.
So how are things changing?
Currently shared owners can buy between 25% and 75% of the property and pay rent on the balance. Shared ownership is available households earning no more than £80,000 a year (£90,000 in London) and where one of the following applies:
- they are a first-time buyer;
- they used to own a home, but cannot afford to buy one now;
- they are an existing shared owner.
The same criteria apply under the proposed new regime but there are significant differences:
1. Initial minimum share of 10%
The minimum initial share is set to reduce to 10% of the property, requiring a lower deposit and hopefully resulting in lower combined rent and mortgage costs.
This may open up access to the scheme, but will lenders be willing to lend against such low equity, particularly given the recent Covid-driven trend that demands much higher cash deposits? There is also concern for the affordable housing provider itself, whose cashflow will be impacted significantly by selling a much smaller initial share and raising rent on a much larger balance.
2. Ability to purchase smaller additional shares through gradual staircasing
Buying more of a shared ownership property in increments is known as ‘staircasing’. Shared owners wishing to staircase currently have to buy a minimum increment of 10% which can be challenging for many not only because they may have to obtain additional funding, but also because of the burden of legal, administrative and valuation fees they may incur.
The new model will reduce the minimum additional share from 10% to just 5%, and introduce an new option of ‘gradual staircasing’ to enable shared owners to staircase an additional 1% share per year for a minimum of 15 years. Gradual staircasing will not require a new formal RICS valuation; the valuation will be based on the application of the House Price Index to the original RICS valuation at the time of the initial purchase. It will be the responsibility of the landlord to produce and provide a gradual staircasing valuation to interested shared owners at least annually, and they will be prohibited from charging administration fees throughout this process.
Whilst gradual staircasing sounds like a more affordable option, shared owners will still be subject to payment of their own legal costs and lender’s fees if applicable (and, potentially, SDLT), so the idea of buying a larger amount less frequently might remain more attractive – and more cost efficient.
The landlord will also be absorbing their legal and administrative costs of additional sales, as well as carrying out additional administrative tasks such as publicising the availability of gradual staircasing, undertaking the valuation and subsequently adjusting the remaining rent.
3. 10 years of essential repairs support
The biggest impact on landlords is likely to come from the introduction of a 10-year, repair-free period, during which time (unless a property is staircased to 100%), shared owners will receive support from their landlord to pay for essential repairs including to the external fabric of the building and internal structural repairs not covered by a new build guarantee.
When it comes to other essential internal repairs or replacement of installations in the home (water, electricity or gas installations, pipes and drainage but excluding works due to improper use), shared owners will be entitled to reclaim costs of up to £500 pa for 10 years, with any unused expenditure rolled over into the following year (to a maximum of £500). Landlords are expected to set up a sinking fund to cover costs following the expiry of the 10-year period.
How the landlord’s repairing responsibility will work in practice isn’t clear. There’s no suggestion currently as to how notification of faults by owners should work, whether approved contractors will be required, or whether costs have to be reclaimed by shared owners without the certainty of being reimbursed. Similarly, landlords would expect to be notified of works in time to determine whether they were essential or at the fault of the tenant. Household insurance or product guarantees may cover the works in some cases, but without the detail it’s easy to imagine that the system could be at risk of abuse or fraud.
Given that the repairing obligations on the landlord expire on 100% staircasing, there would be little incentive for shared owners to take advantage of increasing their ownership which would be another blow to the landlord’s financial position.
4. Right to shared ownership
It is also proposed for grant funded social and affordable rented dwellings to be eligible to a ‘right to shared ownership’. This is similar to the ‘Right to Buy’ although there will be no discount on the purchase price offered. There are eligibility criteria of course, and certain homes will be excluded.
The main exclusion which landlords may be interested in would be the so-called ‘cost/floor rule’ which seeks to ensure that the right cannot be exercised where the current market valuation is below the total amount spent on building or acquiring the property, including the grant.
Overall, the proposal seems to be a positive step for tenants looking to achieve home ownership. Landlords may also welcome the prospect of gaining new shared ownership tenants, although the proposal raises obvious concerns about loss of social housing and the ability for the property to be ultimately sold on as open market housing.
Developers will now need to be taking care in their s106 agreements to ensure that the affordable housing obligations allow such flexibility in the change of tenure.
The high profile concept of shared ownership has come in for significant criticism in the media in recent months, with shared owners complaining of escalating costs and building defects leading to huge debts (see link below). Clearly the system does need to change and some of the new proposals have merit, but the impact on landlords still needs consideration.
Affordable housing is a key element in obtaining planning approval and it can sometimes be a struggle for developers to find affordable housing providers interested in small schemes; will affordable housing providers be interested in taking on large volumes of new homes under the new scheme? Landlords will be keeping a close eye on the proposals over the next few months.
The current concern for developers will be to ensure that their s106 agreements over the next few months reflect the new model, in case their scheme is not caught by the transitional arrangements.
The current consultation concludes on 17 December, and the new model is expected to be implemented for new homes obtaining planning permission from April 2021. Follow this link if you would like to contribute to the consultation:
https://www.gov.uk/government/consultations/new-model-for-shared ownership-technical-consultation/new-model-for-shared ownership-technical-consultation
The Home I Can’t Afford: https://www.bbc.co.uk/programmes/m000pk2b