Slow burn strategy
Low rental yields on affordable housing offer little incentive to private investors. But a longer-term return on the capital value of their investment might tempt them into the market, argues Ian Graham
Housing is not among the ring-fenced areas protected from public spending cuts. Yet the demand for affordable homes is only going to increase. We can’t keep pace with demand and if we build fewer homes the problem is going to get worse. We therefore need to look for new ways of attracting finance to build more homes and explore how we can do more with less as government subsidy becomes less available.
Our current approach to the development of affordable rented housing is to build homes intended to remain affordable in perpetuity. Funding raised is repaid from surplus rental income. What we don’t do is tap into the capital growth locked up in the property. It stays there because the dwelling remains a rented dwelling.
We talk of trying to draw investors into the affordable housing market, but we know that rented housing, let at the rent levels it is, will not generate a return that will interest an investor unless, of course, you can attract more subsidy and so increase the available rent surplus. That, I suspect, is not going to happen.
If you can’t generate a return from the rent, what about the capital appreciation that will accrue over a long term, say 25 years? If that could be realised, would the resulting return look more attractive?
Assuming that the numbers look like they might work then we need a structure that allows for the use of the property as affordable housing for 25 years (if that is the sensible term) but provides for an event at the end of the term that will generate cash. The obvious route is a lease from investor to affordable housing provider.
Under such an arrangement the investor would receive a rent which, for the reasons outlined above, will not represent a significant return. At the end of the term, one of a number of things could happen: the provider could buy the property for continued affordable housing use; the provider could return it vacant to the investor who could realise its second-hand value or redevelop; or a new lease could be granted to the provider.
This sort of structure also has the potential to allow the subsidy put into the project to be treated more like an investment. It could be released at the end of the lease term, or reinvested in the purchase by the provider of the property, or held over if the lease is extended.
Management of the property would need to be looked at rather differently from conventional affordable housing. The provider would have to be able to deliver vacant possession at the end of the term unless it opts to buy the property from the investor. The first tenancies granted could perhaps be ones in which the long-term security of tenure is offered given that the tenant is unlikely to remain in the property for more than 25 years; however, as the lease term ticks away, granting security of tenure would be risky since the provider must be able to hand over the property after 25 years.
Providers of affordable housing would need to accept in this model that they are not necessarily guaranteed long-term ownership of the property, which is not a completely novel idea - it is part and parcel of housing private finance initiative. It is also something providers have accepted when taking on management of housing for local authorities and a feature of many key worker and student public private partnership schemes.
Ian Graham is partner and head of the housing projects department at Trowers & Hamlins
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Readers' comments (2)
howie | 22/03/2010 9:35 am
All very interesting but the key phrase in this article is the following
"Assuming that the numbers look like they might work". Unfortunately they dont. Schemes like this have been looked at for many years and unfortunatley it turns out that it is a zero sum game. Over a period of 20- 25 years the capital gain would need to be very large to compensate the investor for the low yield. If it is large enough the cost of replacing the affordable housing lost to enable the investor to realise its capital gain will be proportionatley larger.
If the maths work this solution would have been done many years ago. The solution is not in legal structures but in realistic economic and financial analysis. This leads to the invevitable conclusion that to deliver sub-market housing capital subsidy or rental subsidy is an essential ingredient.
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Alistair Queen | 22/03/2010 12:34 pm
I very much welcome the opportunity to discuss the ideas set out by Ian Gaham to give investors the opportunity to improve investment gain from capital appreciation. We need to look not just at how risks and rewards can improve the climate for private investors in housing for rent, but also at how tenancy terms can be attractive to tenants and housing providers as well, many of whom have a reduced capacity due to the credit crunch to invest resources in new homes. And, we need to look at creating models that could work with and without public subsidy, especially for many older owner occupiers asset-rich but income poor, and in need of more suitable accommodation, who could benefit from releasing their own capital investment.
As Ian points out there are already many examples where tenancies have been granted with limited tenure terms e.g. 20 year leaseback deals, short-life leases, NHS Staff accommodation schemes, and BES schemes, as well as assured shorthold tenancies. Whilst these schemes initially provided much needed homes, unwinding them in many cases caused insecurity and distress to residents and their households who faced moving on difficulties, and considerable problems for housing service providers in rehousing tenants and re-financing schemes.
What we need is a model that will give security of tenure for life and homes built that enable this to be the case! So how do we do this? Investors are given an annual rent income on new homes commensurate with alternative investment opportunities plus an element for risk. The model should also allow the property to be sold to to the tenant, realising capital gain or, after a given minimum number of years, when vacated to be sold on the open market.
Tenants should be given the right to acquire shares in the property after, say, 7 years at the prevailing open marklet value but not less than the apportioned original development cost, which should be set out in the tenancy agreement.
Tenants should be given bi-annual estimates of the value of their homes and where able to afford to buy should be incentivised by being given a discount of a % of any increase in the capital value over the original cost, pro-rata for each year of tenancy, capped at say a 25% maximum discount, with a matching share to the housing provider and a minimum 50% balance to the investor, less disposal costs.
So the offer for investors is a risk adjusted annual income plus the prospect of higher returns from sales of homes, with tenants and service providers incentivised to stay with the project long-term. The offer to tenants is a secure tenancy and a right to acquire.
What we need is some housing providers to work through some schemes.
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