Almost one year into the new funding round for English affordable housing, we consider how the new Homes England shared ownership lease may affect living sector stakeholders.
What’s happened to shared ownership leases?
April 2021 heralded a major change to shared ownership (‘SO’) leases in England. Following a consultation process, Homes England released a new suite of model SO leases. The new leases cover ‘traditional’ (unrestricted staircasing) leases, rural exception and designated protected areas leases and other lettings. They are now the required base documents for English grant funded properties delivered outside of Greater London Authority control, including units funded from Voluntary Right to Buy proceeds.
2022 will see these leases rolled out in significant numbers as delivery under the new 2021-2026 Shared Ownership and Affordable Housing Programme (‘AHP 2021’) gathers pace. Importantly, they include many changes to what tenants can do, and landlords must do. There are significant revisions - AHP 2021 represents a sea change in how Registered Providers (‘RPs’), and other sector stakeholders, may approach the acquisition, delivery, and management of SO stock.
How have shared ownership leases changed?
SO leases have evolved considerably in recent years. AHP 2021 introduces more of a revolution than an evolution of SO leases, driving more ‘ownership’ and less ‘rental’ into the SO model, and shifting costs towards RP landlords.
These changes fall mainly into two areas, both concerning money:
Share purchase rules have changed significantly. Under AHP 2021, tenants may purchase a smaller initial share (10% of market value, reduced from 25%), and can staircase up in smaller tranches (5% minimum value, reduced from 10%), potentially reducing capital receipts on first sale for RP landlords. Initial sale requirements also include the provision of more extensive information about the premises and the tenancy, which must be given to purchasers at the point of reservation, increasing the preparation and paperwork required for the first sale process.
Tenants can also acquire up to 1% value per annum for each of the first 15 years of ownership. That right resets on each lease assignment to new owners. This new process is valued differently (using Land Registry House Price Indices, rather than RICS valuer’s reports, except following valuation disputes), and RPs must serve a valuation notice on their SO tenants each year prior to their annual rent review date. This staircasing process can be triggered by tenants at any time each year, and on repeated occasions on a three-monthly basis, without compulsion on tenants to buy a further share, and without costs sanction against tenants who do not proceed.
These changes are likely to be more acutely felt than the staircasing changes. For a 10-year ‘Initial Repair Period’ from build completion, landlords will be responsible for (a) essential repair works to the building’s structure and external fabric, and (b) an annual contribution to tenants of up to £500 for qualifying general repair and maintenance expenses (if demanded). Unlike pre-AHP 2021 stock, where repair and maintenance is the tenant’s responsibility, these changes create ongoing financial liability for RPs, which may not all or always be covered by property warranties.
What does this mean for sector participants?
This article highlights some major changes to shared ownership leases, which remain a work in progress for many RPs to implement, particularly alongside existing portfolios of ‘old’ SO leases. This will involve development, asset management, sales and treasury teams in maintaining portfolio records to segment properties and processes between pre- and post-AHP 2021 SO stock.
It is too soon to say how the changes will impact affordable housing provision, though implementation costs will create a drag on surpluses, becoming part of Registered Providers’ operating costs, much as the rent reduction regime was absorbed into ‘business as usual’.
Many buyers acquire more than the minimum percentage at first purchase, and tend to staircase to 100% ownership on resale rather than buying intermediate tranches, so staircasing changes may have little effect. Time will tell whether the changes induce tenants to overreach themselves to buy small additional shares, and whether volume lenders will maintain a market for small increments. We may see initial enthusiasm for “enhanced ownership” which dwindles over time – though the processes will still have to be supported by all RPs with AHP 2021 grant funded stock.
More problematic will be the 10 year repair and maintenance obligations. From a development and asset management perspective, this may create even more focus on specification, collateral warranty provision and whole life construction costing, to mitigate exposure to repair and maintenance costs. Sinking funds will also see greater attention, to segregate longer-term structural maintenance reserves from permitted expenditure in the first 10 years.
Sales and treasury teams will also face new burdens, in collating and issuing additional documentation at first sale reservation, ensuring that the right documents are used on mixed-funded schemes, and in maintaining detailed records for forecasting and funding future liabilities, as well as for portfolio charging. How this will affect portfolio funding is unclear – there are many ‘old’ SO leases under charge for RPs, and it will take some time before their effects on portfolios are diluted by new form leases coming into charge – nevertheless, asset composition is important, and how the new form leases play out with valuers will remain a closely followed topic for the sector.
Overall, the impact of the changes is pervasive, and shared ownership may become much less of a ‘fire and forget’ tenure for affordable sale. It may prove less administratively onerous to grant all new SO leases on one standard (AHP 2021) platform, aligning processes around one document suite, even if this creates additional financial (potential) liability for the first 10 years plus ongoing costs of administering annual valuation notifications across the portfolio – creating one set of management processes to follow. Time will evolve, define and refine the sales, asset management and funding of these new leases, which are a step change to shared ownership provision. Presently, there are many immediate challenges, operational and strategic, for the sector to accommodate to ensure that the new form leases are rolled out properly and profitably.