New government funding to help significantly boost the supply of new shared ownership homes across the UK looks set to open up new opportunities for development and investment into this undersupplied sector of the market, according to Savills.
A £4.1bn budget has been announced to deliver a total of 135,000 additional shared ownership homes, equivalent to funding of £30,000 per home, as part of the government’s aim to deliver a five-fold increase in the supply of shared ownership homes across the country.
The property consultancy estimates 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. 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 homeownership could be a real game changer,” said Mervyn Jones, director, Savills housing consultancy. “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 homeownership schemes, including 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.
“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,” said Piers de Winton, director in residential investment at Savills.
“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,” added de Winton.
Investor returns come in two forms: rental income at a standard 2.75%, 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%.