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Louise Drew is partner and head of building communities at Shakespeare Martineau
Shared ownership changes merit serious consideration by housing associations
The impact of the government’s plans to reform shared ownership demands close monitoring from housing associations, writes Louise Drew
Coming as part of a consultation launched last year, the government’s new shared ownership model for Section 106 homes requires careful consideration by housing associations in order to avoid any negative impact on the achievement of their charitable objectives.
As well as the need to handle the new rules with care when entering into commercial contracts, adjustments to an existing development’s tenure mix may be required in order to make them financially viable.
Due to come into force in April, the new shared ownership rules for Section 106 homes aim to allow buyers to purchase smaller initial stakes in properties and staircase in 1% chunks.
The model also protects new shared owners from significant repair bills for their first 10 years of ownership by transferring the cost of maintenance and repairs to the landlord.
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While on the face of things these new measures may appear to be a positive development for shared owners, it could be argued that they pose a solution to a particularly London-centric problem.
For example, in the capital, where a one-bedroom flat might cost as much as £500,000, a 10% deposit would amount to a considerably higher sum than is required in other parts of the UK where shared owners will more than likely be buying a house for half the price.
With shared ownership buyers in UK regions outside the capital typically purchasing a 40% to 50% stake in their properties, it could be said that the existing product already works for the majority of people. As such, whether there will be much appetite for the new model outside of London remains to be seen.
It’s likely that the government’s decision to reform the shared ownership model for Section 106 homes has been partly motivated by the significant amount of negative press around leasehold products in recent years.
This includes the unscrupulous activities of private developers that have charged huge sums for purchasing freehold titles following the sale of leasehold houses, as well as charging astronomical levels of ground rent.
However, it’s important to distinguish such cases from Section 106 shared ownership properties, which naturally constitute a leasehold purchase as buyers are not buying the property outright.
The new model could also have unforeseen implications for consumers when it comes to accessing finance. For example, in regions outside of London where consumers may only need to borrow small amounts to purchase an initial stake in a property, traditional high street lenders may view shared ownership properties as being too high risk due to the increased potential for negative equity.
There are already only a small number of lenders prepared to lend on shared ownership homes. For providers, it’s vital to note that the government’s new rules transform the playing field.
If they have purchased land for affordable housing developments under different assumptions, the new costs for maintaining and repairing properties will require them to go back to the drawing board in order to ensure that any ongoing developments remain financially viable.
This is because associations that have already entered into a contract with a land developer to provide a particular number of shared ownership units could find that the cost of delivery and maintenance of those units will increase significantly.
“Effective communication with councils is essential to ensure they understand the impact of the changes on housing delivery by housing associations”
For developers and housing associations that have already prepared planning applications, the consultation proposes a transitional arrangement, providing local authorities with the ability to accept alternative tenure mixes and consider whether First Homes could be easily substituted for another tenure.
As such, housing associations should carefully consider the potential to adjust the tenure mix of affordable rent and shared ownership properties across all of their active developments.
Effective communication with councils is essential to ensure they understand the impact of the changes on housing delivery by housing associations and, if needed, persuade the councils to vary the Section 106 tenure mix.
An important point to bear in mind is that in a drive to secure more autonomy, many forward-thinking housing associations are beginning to move away from purchasing affordable housing stock under Section 106 stipulations altogether.
Cutting out the ‘middle-man’ by developing in-house skills to deliver units themselves allows them to save money to reinvest into delivering more affordable housing stock.
While the government’s new approach to Section 106 shared ownership housing makes sense as a potential solution for would-be London homeowners, it could be argued that it fails to account for regional differences in property prices and affordability variations.
Nevertheless, by carefully considering the commercial viability of current developments and seeking advice when entering into new contracts, housing associations can minimise any negative impact of the new rules on the delivery of their charitable objectives.
Louise Drew, partner, Shakespeare Martineau
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