Introduction

Shared ownership is one of the Government’s key policy interventions aimed at reversing the decline in home ownership. The Autumn Statement promised £4.1bn funding for 135,000 additional shared ownership units over the course of this parliament. At a rate of over £30,000 per home, this is the highest level of funding shared ownership has ever seen and represents a new opportunity for developers, housing associations and investors.

Shared Ownership schemes were first introduced in the 1980s and there are now approximately 175,000 households owned with shared ownership products in England, representing 0.8% of all housing. The proposed expansion aims to increase the number of homes by 77% over the course of this parliament. Starting in 2016, this will require delivery of approximately 35,000 additional shared ownership units each year until 2020, a quintupling of recent delivery rates.

Supply and demand

Past delivery of shared ownership has been supply constrained. The greatest concentrations of shared ownership stock are located in places where there has been a high level of housing delivery over the last 10 to 15 years, including Milton Keynes, South Cambridgeshire, Tower Hamlets and Southwark. This stock has been largely delivered through Section 106.

The indications are that this supply has fallen well short of demand. According to evidence given by the National Housing Federation to the Lyons Review, Housing Associations approve around 85,000 applications for shared ownership each year, but development averaged only 8,000 per annum over the three years to March 2015.

Market capacity

The reduced turnover in the housing market since the credit crunch, as a consequence of reduced mortgage availability and tighter regulation around affordability, has left many people unable to buy their own home. Across England and excluding Help to Buy, there were approximately 360,000 fewer transactions per annum in 2014 and 2015 compared to the five years leading up to 2007.

Over the last two years, shared ownership has delivered additional housing for nearly 3% of the demand not met by the unassisted for-sale market. Help to Buy has filled a further 8% of the gap. The extent to which the gap has been filled by shared ownership does vary widely across the country, reaching over 35% in markets as diverse as Tower Hamlets in London and Wychavon in Worcestershire.

A clear target for the expansion of shared ownership is to unlock this potential demand through a greater availability of home ownership at levels of affordability not currently seen in the market. To date, shared ownership has satisfied more of this potential demand in places where affordability is the biggest barrier to accessing home ownership. This includes Hackney, Horsham and Cambridge, where more than 30% of the gap has been filled.

In more affordable markets, the evidence of take-up is much lower: up to 15% in parts of Leicestershire and only 5% in parts of Nottinghamshire, Staffordshire and areas of the north. These reference points suggest that there is potential capacity to absorb at least 60,000 additional shared ownership units per annum in current market conditions.

Whilst there is some level of demand for shared ownership everywhere, demand for the greatest volume of new units is in markets where affordability is most stretched and demand is highest, as shown in the map. This is largely in the South of England, although it is difficult to make shared ownership affordable to people below the income caps in many high value parts of London without selling very small initial shares and reducing the rent on the remainder below the standard 2.75%. This makes it difficult to deliver financially viable shared ownership homes in the very highest value markets.

^{Source: Savills Research using DCLG data}

Mortgages

One limiting factor for take-up of shared ownership may be mortgage availability for prospective purchasers. To date, lenders have had little reason to develop attractive products for this small, niche market.

As with all lending on new homes and particularly flats, most lenders are reluctant to lend at more than 75% loan to value. However, at or below this level, there is a small pool of lenders charging mortgage interest rates that are similar to those available for standard house purchase.

For higher loan to value products (85% to 90%), the few banks that will lend charge significantly higher interest rates, with margins reaching 4.5% over base rate, compared to only 2.6% for the average first-time buyer.

Who will build?

Shared Ownership will in the future effectively be the only tenure for which Homes and Communities Agency (HCA) grant funding will be available. Private developers will be able to apply for the grant, although the Office for Budget Responsibility has said that it expects housing associations to receive 90% of the available funding.

The diversity of subsidised home ownership products that will be available (Help to Buy, Starter Homes, shared ownership) means that there is a challenge for developers to differentiate the products from one another. Done badly, the target markets for each product could overlap, reducing the overall pool of buyers for the new homes being delivered across the whole site, slowing total delivery. This potentially creates an incentive for the developer of a large site to retain control of shared ownership sales to ensure that different products are effectively differentiated from one another.

If housebuilders and developers retain control of first tranche sales, they will both want to pass on the management responsibility and secure a capital return for the unsold equity. Whilst housing associations are likely to remain best placed to take on management of new shared ownership units, the unsold equity will go to the highest bidder, which may be a housing association or a private sector investor.

Investment

The return from investment in shared ownership comes in two forms: rental income and capital repayments on staircasing. The standard rental income is set at a 2.75% yield on the unsold equity and is inflation linked. The initial yield is often reduced in an effort to make shared ownership affordable to households below the income caps in the highest value parts of the country. Whilst the initial yield is low, this is a net yield with no costs or voids to deduct.

The lack of data on staircasing and the absence of definitive information on delinquency (occupier default on rent or mortgage payments) means that investment decisions have to be made with an imperfect understanding of the performance of the asset. Anecdotal evidence of the experiences of housing associations in managing shared ownership stock suggest that delinquency rates are very low.

Whilst there is data from the HCA on 100% staircasing, there is no comprehensive data on partial staircasing. A survey of housing associations carried out by the Cambridge Centre for Housing and Planning Research (CCHPR) in 2012, found that only 14% of all instances of staircasing were partial (i.e. to less than 100%). This is likely to stem from the costs involved and administrative requirements, with staircasing tending to be ‘back to back’ with a house sale.

The fact the income from shared ownership has rarely been sold by housing associations is testament to the quality of the asset. The HCA Global Accounts for 2014 show the sector received income of £146m from staircasing activity and £775m from first tranche sales. Heylo Housing is one of the few private sector investors seeking opportunities to increase exposure to this asset class, but the growing opportunity as development volumes increase is likely to attract new entrants.

^{Source: Savills using HCA SDR and TSA RSR with data before 2008-09 from ‘Understanding the second-hand market for shared ownership properties’ by Anna Clarke and Andrew Heywood, 2012, Cambridge Centre for Housing & Planning Research, University of Cambridge}

Finance

The lack of clarity around the performance of shared ownership as an asset class also hampers the extent to which housing associations can gear against their stock. Banks are prepared to lend up to 80% of the market value of social housing, but the proportion of shared ownership stock that they are willing to accept as security is limited. Staircasing means that the shared ownership pool is a wasting asset and therefore lenders rarely accept more than 10-15% shared ownership within a portfolio as part of new lending.

The increasing amount of shared ownership within housing associations’ portfolio of assets will therefore not be proportionately matched by an increase in borrowing capacity, but clarity around the performance of the asset may help. The attractiveness of the unsold equity as an investment will also be limited without greater transparency.

Find out more about how shared ownership can work for you