Shared Ownership is an attractive long-term investment proposition, but investors face challenges building portfolios at scale
Whoever acquires the unsold equity in a Shared Ownership scheme can expect to see a steady, secure rental income rising above inflation. It’s the kind of long-term investment you’d expect to see pension funds and institutions taking serious interest in.
To date, private sector involvement in this asset class has been driven by a handful of entrepreneurial investors such as Heylo, Blackstone, and ReSI. Housing associations develop and retain the vast bulk of Shared Ownership homes, using any profits it may generate to cross-subsidise other affordable housing delivery.
As Shared Ownership matures into an established housing tenure, voices across Government, the housing sector and private investors have started calling for a different approach.
Shared Ownership is big money for housing associations (HAs). Shared Ownership sales have added a total of £5.9 billion to HA turnover since 2016.
First tranche Shared Ownership sales delivered over £1.2 billion to HA turnover in 2018 alone.
On top of that, the unsold equity on these Shared Ownership homes delivers a rental income. While the initial yield may appear low at up to 2.75%, it looks more attractive considering this is net income, residents being responsible for any repair and maintenance costs, and that this rent grows at or above RPI.
Evidence from the National Sales Group suggests 39% of staircasing in 2018 was partial, meaning those residents still pay rent on the rest of their property value.
The remaining 61% of staircasing was to full ownership, which means those residents are no longer required to pay rent.
These sources of income come with relatively little risk. The repossession rate for Shared Ownership properties was just 0.02%, less than half the level for general owner occupation at 0.05%, according to UK Finance.
To date, HAs have shown little interest in selling the retained equity in their Shared Ownership homes. But the low-yield, low-risk nature of these income streams may be better suited to long-term income investors, such as pension funds, than HAs with development aspirations: especially if the vendor retains management of the scheme.
There may be an opportunity for HAs to unlock the value of these income streams to enable more affordable housing development.
Shared Ownership supply and staircasing volumes
Source: Savills Research using Homes England SDR and TSA RSR with data before 2008-09 from ’Understanding the second-hand market for shared ownership properties’ by Anna Clarke and Andrew Heywood, 2012, Cambridge Centre for Housing & Planning Research, University of Cambridge
Currently, Government supports the majority of Shared Ownership housing: either through grant funding or imposing Section 106 contributions on developers. This could be set to change.
For years, private investors and developers have been able to hold a long-term interest in Shared Ownership housing. And now Government is assessing the proposals for privately funded Shared Ownership that it called for in the 2018 Budget.
These measures pave the way for private investors to fund the development of Shared Ownership homes and retain the unsold equity, with the associated rental income stream, for the long term.
Descending the staircase
Most discussion of staircasing in Shared Ownership is around households buying more of their home. It’s far less common for registered providers to offer the reverse: buying back shares of the property from the resident.
Currently, this is only allowed for households in financial difficulties who are struggling to meet their mortgage obligations and maintenance costs. However, as the market for Shared Ownership matures, one demographic group in particular looks like it could benefit from downward staircasing: older people.
83,000 households used an equity release loan in 2018, according to the Equity Release Council. This demonstrates the demand from older people to release some of the wealth tied up in their homes.
Registered providers could offer a similar scheme to their older Shared Ownership residents, whether or not they live specifically in Older People’s Shared Ownership. This would help their residents release cash while retaining the homes within the same tenure. And by designing and marketing Shared Ownership homes specifically to older people, providers can help older owner occupiers unlock their housing equity.
Read the other articles within Spotlight: Shared Ownership below