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Affordable homes and shared ownership

Posted: 17/09/2020


Last week was a busy week for the Ministry of Housing, Communities & Local Government within the housing sector, as well as for registered providers and their advisers, as we sought to understand the implications of the Government’s new national model for shared ownership. To read what is proposed click here - New National Model for Shared Ownership.

First there was the welcome news the Government has made a commitment to a new £11.5 billion overall investment in affordable housing through the Affordable Homes Programme. The intention is for 180,000 new affordable homes to be delivered over five years from 2021-2026.

The Government will attach conditions to this grant. For example, it wants up to 25% of such new homes to be delivered using ‘modern methods of construction’. Additionally, it requires around half of the new homes to be available for affordable homes ownership.

Home ownership, in whatever form, has been a key aim of this Government. In its September 2019 consultation document, it reported that its polling showed almost 90% of people share the British dream of owning their own home. However, the Government also discovered to purchase a £250,000 home, a first time buyer is likely to need a deposit of £50,000 and annual income of £44,000 to service the mortgage. This level of savings and income puts home ownership out of reach for most aspiring home owners.

The Government issued its response to the consultation. The response - A new model for Shared Ownership – reinforces its strong beliefs in the benefits of homeownership, and the intention to use shared ownership as one of the principal means of delivering this to those who would otherwise struggle to buy a home.

Here are the proposals:

Minimal initial stake

The minimum initial stake the home leaseholders can purchase will reduce from 25% to 10%. The Government believes this will widen potential access to home ownership to over 300,000 households.

However, this will be a real concern to registered providers. Members of the G15 group have commented that this will have a real impact upon their ability to use shared ownership receipts to cross subsidise affordable rented homes.

There is also the issue of the registered provider’s costs of sale, and the leaseholders’ acquisitions costs, which will remain the same, while the share being purchased is a modest 10%. Is it likely these costs will be out of proportion to the share being acquired?

It remains to be seen how lenders will react to this. The lending market is very fragile at the moment. Many lenders are withdrawing from the shared ownership market. On open market sales, a number of lenders are requiring increased deposits and insist on 80% loan to value. Therefore, will lenders have any appetite to process mortgage offers, secure valuations etc where the stake being acquired is as low as 10%?

Staircasing in lower increments.

Under the new model, leaseholders will be able to buy 1% each year, with heavily reduced fees for the first 15 years.

Leaseholders under the current regime have told the Government they struggle to staircase by buying 10% at a time. They have complained about the transaction costs which have included lender’s fees, fees of the registered provider as well as costly RICS valuations.

The Government has responded to this. Instead of valuations, the price for each 1% share will be based on an estimated valuation linked to the original purchase price, adjusted upwards or downwards in line with House Price Inflation.

The considerable saving here, says the Government, is the lack of a requirement to obtain a RICS survey each time more shares are acquired. Details have yet to be provided as to how House Price Inflation will be applied. Will this be a national rate or a local rate? What if either the leaseholder or the registered provider loses out because of a spike or dip in the relevant index which is later shown to be inaccurate?

Each acquisition of a 1% share will involve significant registered provider management time plus costs. If the leaseholder on hearing of the amount required decides not to proceed, the registered provider will face costs thrown away. However, the Government has announced that registered providers will only be able to recover ‘heavily reduced fees’ for up to 15 years. So registered providers are looking at a new model of shared ownership which will not be self-sustaining in terms of its costs.

The acquistion of each 1% share is the acquisition of a legal and beneficial ownership in the home, and will need to be recorded, in a legal way, just as much as a 10% acquisition. This will involve costs for both parties, but will the costs incurred prove to be uneconomic?

Leaseholders will still be able to acquire shares of 5% or more using the traditional RICS valuation approach.

Repairs

At present, leaseholders are responsible for all of the maintenance to their home, and are obliged to keep the property in repair.

Government research has suggested this liability and potential exposure to unascertained costs, has been a major obstacle to home ownership. Therefore, under the new model, there will be a new 10 year repair free period, under which it will be the registered provider who will bear the costs of maintenance or repair.

Full details have yet to be provided, but it is a cause for concern, even with new build properties which are covered by New Properties - Building Standards Indemnity Schemes. Such schemes cover defects in new properties, but do not cover items of repair and maintenance.

Will it be the case the leaseholder will carry out the repairs to the property, and recharge to the registered provider – hopefully not? If the registered provider is obliged to repair, it will need all the necessary rights to enter. It will also have to introduce a regular inspection schedule to make sure items of disrepair are identified and remedied quickly. Where access cannot be obtained, registered providers will need to obtain court orders permitting an opportunity to inspect.

While the registered providers are responsible for ‘repair’, we assume this will not extend as far as painting and decorating the property: the leaseholder will want to paint and decorate to their preferred choice.

Since the registered provider will be responsible for repair, greater restrictions will need to be imposed on any alterations to the property which might otherwise jeopardise the state of repair of the property, or increase repairing liabilities in the future.

A responsibility to repair goes hand-in-glove with a liability for disrepair, and registered providers will not welcome claims similar to the disrepair claims in the letting sector being introduced into shared ownership sales.

There are bound to be disputes over who is responsible for ‘fair wear and tear’. Additionally, as an example, what happens when in year 11, an item of disrepair is discovered, but which arose during the 10 year period, but had gone unnoticed? Who will pick up liability for such defects?

Finally, for leasehold flats there will be service charges under which the freeholder will charge the registered provider for the costs of repairs carried out to the structure and exterior of the building in which the flat is situated. Under the traditional shared ownership model, all those costs are passed onto the leaseholder. Under the new model, how much of this service charge will be passed onto the leaseholder? And if only part is to be passed on, how will that part be apportioned, and how will disputes be resolved?

Resales

Finally, there is the crucial subject of resales.

The Government wants to remove the right in favour of a registered provider to the eight week period in which they have the exclusive right to market the property. Registered providers consider this is an essential right of pre-emption designed to ensure shared ownership stock remains available to those in need.

However, following the consultation, the Government has sided with the leaseholder, giving them the right to end the eight week period after four weeks, and then sell the property on the open market. Under the new model, clearly the leaseholder will be in control of the resale process. Registered providers will have the right to acquire these homes outright – but will they wish to do so, and will this be a priority use for the registered providers’ capital funds?

Conclusion

These changes will come into effect from April 2021, and there is a significant amount of detail to be reviewed. The reaction from the social housing sector is one of disappointment with these proposals. However, in response to the initial consultation, the Government reported 186 responses were received, of which only 42 were from housing associations.

The changes are ill-timed because the social housing home ownership sector is still coming to terms with the First Homes consultation; the likely impact of the ending of the Help to Buy scheme; the effects of the changes to the Use Classes Order and extension to permitted development rights, as well as the extensive wide ranging reforms set out in the Government’s White paper - Planning for the Future.

As with previous changes in the shared ownership model, there will be real issues for registered providers whose development roll-outs straddle the introduction of the new model, so they may have to deal with different regimes for their leaseholders within the same block/development.

Nevertheless, these changes are inevitable, and registered providers will need to be prepared. We shall report on the much needed further details as and when they are received.


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