The Government wants to see a five-fold increase in the supply of shared ownership homes as part of its drive to reverse the decline in home ownership and has committed the most significant ever funding to support this ambition.
A £4.1 billion budget has been announced to deliver a total of 135,000 additional shared ownership homes, equivalent to funding of £30,000 per home. Significantly, private developers will now be able to bid for grant funding alongside housing associations. This opens up new opportunities for development and investment into a historically undersupplied market, according to real estate adviser Savills.
In its latest analysis, Savills estimates that there is market capacity to absorb at least 60,000 additional shared ownership homes per year.
There is excess demand across the country, but the greatest volume is in markets where affordability is most stretched and therefore demand is highest, notably in the south of England (see map below).
Build volumes averaged less than 8,000 per annum in the three years to March 2015, suggesting a huge mismatch between supply and demand.
“The Government’s policy and financial commitment to this form of home ownership could be a real game changer,” says Colin Wilkins, head of Savills South Coast Development team. “Investment activity in the sector has so far been limited, but there is now a clear opportunity for new investment vehicles that will not only accelerate the delivery of much-needed shared ownership homes but also create stable returns to the investor.”
The diversity of subsidised home ownership schemes (Starter Homes, Help to Buy and shared ownership) now available means demand for each may overlap, reducing the potential rate of delivery across a site. Developers of large sites therefore have a real incentive to retain control of sales to ensure that different products are effectively differentiated. There is also a need for the properties to be insured adequately (more info at propertytoinsure.co.uk).
“We could see developers retaining the first tranche sales of shared ownership homes, but they will then wish to pass on the management responsibility and secure a capital return for the unsold equity,” continues Colin.
“Housing associations are likely to remain best placed to take on the management of the new units, while the unsold equity creates a new investment asset which would go to the highest bidder. The net result could be a speeding up of delivery.”
Investor returns come in two forms: rental income at a standard 2.75 per cent, index-linked yield, and capital repayments on staircasing, though performance data is to date largely anecdotal. However, evidence suggests that delinquency rates (occupier default on rent or mortgage payments) are very low, while the fact that the income from shared ownership has rarely been sold by housing associations is a testament to the quality of the asset.
The opportunity is concentrated in high value markets where affordability is most stretched. This is largely the south of England, although in many parts of London it will be difficult to deliver viable shared ownership below the income caps, except by selling very small initial shares and reducing the rent on the remainder below the standard 2.75 per cent.