The First Homes scheme, one of the flagship housing schemes announced by the government last year as Boris Johnson finally tried to put his stamp on property, is set to kick off in earnest next year.
The scheme, like any new initative, has divided opinion, with some questioning its effectiveness and what makes it different to the current range of housing schemes on the market.
But next year should finally see the scheme, which was launched earlier this year, kick into motion - although significant question marks remain. From December 28 2021, housing developments will be required to provide First Homes as part of any affordable housing contribution
Richard Lundy, senior surveyor at Carter Jonas (London), said: "These will be the government’s preferred discounted market tenure and should make up at least 25% of all affordable housing units delivered on qualifying schemes. They will be sold with a minimum discount of 30% below full market value, although Local Planning Authorities (LPAs) will have flexibility in setting a greater discount. These discounts will be secured into perpetuity through Section 106 Agreements."
Despite the imminent introduction of this new tenure, there has been little detailed guidance on its implementation. Crucially, with the LPA able to set the discount level, there is considerable uncertainty on what these will actually be.
"One of the few pieces of guidance, other than by the government, has been from the Greater London Authority (GLA) which issued a Practice Note in July 2021," Lundy added.
"There appears some friction between the government’s intentions and those of the GLA, with the latter stating that affordable housing needs at a local and strategic level should take precedence in decisions. Within London, the priority from the Mayor and the GLA has been to provide low-cost rented housing with 47% of new homes required as such, compared to just 18% needed as intermediate tenures."
He went on: "The GLA’s preference is for Social Rent and London Affordable Rent. The mandatory introduction of an additional intermediate tenure type would result in fewer of these being provided. This conflicting guidance between the two only serves to create further uncertainty which may delay housing delivery."
What is particularly relevant to the London market, Lundy says, is the cap of £420,000 once the discount has been applied. He said the GLA’s Practice Note expressed concern that First Homes in the capital are likely to be smaller or in lower value locations, and that they would only be accessible to a limited number of households approaching the upper eligible income range of £90,000.
"In terms of how the introduction of First Homes affects the development process, there will inevitably be some teething problems as LPAs, developers and their advisors get to grips with this new tenure type. The market for this sort of property is, as yet, untested but we would expect that there should be relatively high demand given the significant discounts. Furthermore, it should be expected that an understanding will quickly build up given it will be a requirement for every development providing affordable housing."
He added: "With values likely to be set at between 50-70% of market value, the amount of revenue generated for developers will be comparable to the package price that Registered Providers pay for shared ownership homes. If the discount is similar to the price that would have been received for the shared ownership homes, our modelling suggests that the effects on gross development value, developer’s profit and land value will be small."
"However, if the discount to market values differs significantly, there will inevitably be a greater effect on these outputs. What is clear is that until there is more clarity from LPAs on what discount levels they will be expecting, there will be uncertainty on how First Homes will affect the viability and deliverability of new homes."
Lundy continued: "Nevertheless, what is clear is that there will be a significant effect on cash flow. The major difference to developers between shared ownership and First Homes is how they are sold. Shared ownership homes will normally be bought in bulk by Registered Providers who will generally pay for the units over the construction period. However, First Homes will be sold individually once construction is complete."
Lundy says that, although developers may seek to offset this with higher profit requirements, the revenue from these sales will still not be received until construction is complete. The result of this is that more borrowing may be required to fund construction with peak debt increasing by perhaps 5-10% based on Carter Jonas's initial modelling. The outcome of this may be that smaller developers struggle to find lenders willing to provide them with funding for projects.
"While First Homes go some way in addressing affordability issues for first time buyers, the current uncertainty that their introduction is creating has potential to delay development and reduce the number of homes being delivered. With delivery already below the government’s own target, a measure designed to address one aspect of the housing crisis may unwittingly only serve to exacerbate another. Every silver lining has a cloud," Lundy concluded.