Financing of new housing supply

Written submission from Assettrust

1. Summary

1.1 The purpose of this submission is to describe how substantial value could be released from the social housing sector to fund new housing supply through the voluntary purchase of social housing homes by the occupying tenants, using an affordable shared ownership product. The headline outcomes would be:

· Satisfying tenants’ ownership aspirations, using the incentive of a 25% discount of market value to ensure affordability to a large population of social tenants while preserving sufficient sales receipts to re-stock the social housing pool.

· Releasing more than double the current EUV-SH valuation of Social Rented properties.

· Generating capital at a competitive and viable cost of borrowing, typically less than 5%.

· Retaining transacted properties within the social housing sector.

· Delivering significant capital to deliver new affordable housing in volume, typically allowing for replacement, on a one-for-one basis, of the existing Social Rented homes bought by customers.

1.2 Our submission responds to the current review of Right-to-Buy being undertaken by Government.

2. Assettrust Housing Ltd (AHL)

2.1 Founded in 2003, AHL is an affordable housing provider and property manager of social rented housing and Shared Ownership housing (where the tenant owns a portion of the property through a long lease and pays rent to the owner of the remainder).

2.2 Using our experience, operating model and focusing on shared ownership assets (with no void, no maintenance and low management costs) we will provide institutions with an investment opportunity in long dated RPI linked appreciating property assets to release significant volumes of capital from RP balance sheets to drive new supply.

2.3 Our 5 year business plan is to acquire and manage c.£2bn of shared ownership assets via 3 routes:

· Buying existing assets from Registered Providers (RPs) via our unique approval under s.172 of the Housing Act.

· Buying assets from RPs that have been newly created using our exclusive OwnYourHome (OYH) programme that helps social rent tenants become shared owners.

· Buying assets from house builders that have been newly created to satisfy s106 planning requirements.

2.4 RP’s manage our assets under contract and guarantee 96% of the rent. We manage their performance.

2.5 Our existing portfolio has 755 social housing assets (570 shared ownership and 185 social rented). We are in contract to buy 886 shared ownership assets from RPs and have a pipeline of over 1,500.

3. Submission

3.1 The Government’s deficit reduction programme has halved social housing capital grant rates and the availability of bank funding at higher margins has led to RPs having reduced funds to deliver new affordable housing. Regardless of these factors the demand for affordable housing continues to outstrip supply and the aspiration for home ownership remains strong. In a YouGov survey of September 2010 carried out on behalf of the Council of Mortgage Lenders (CML), 85% of respondents chose home ownership as their tenure of choice in 10 years time.

3.2 The Government’s new Affordable Rent model seeks to increase borrowing capacity and new supply in the housing sector by allowing social housing providers to charge rents on new tenancies at up to 80% of market value.

3.3 We believe that additional, much needed future housing supply could be funded through the unlocking of historically accumulated public grant and capital value in social housing stock.

3.4 How?

· By incentivising and enabling social housing tenants, who want to and can afford to buy a share in their home, to do so using a shared ownership product and good quality, accessible mortgage.

· By accessing the difference between the current sector valuation of Social Rented housing, circa £140bn and its open market value of circa £440bn. The current EUV-SH valuation of the average Social Rented property with a rent of £80.00 per week is £35,000 compared with an open market value of £125,000. The tenant buyer and AHL/investors can combine to access and release some of this value difference via shared ownership sales. A 30% sale via the AHL, investor funded OwnYourhome shared ownership model will release more than double the EUV-SH value to social housing providers. We estimate the average sale proceed would be £85,000.

· If 90,000 customers proceeded, this would deliver £7.65bn of potential re-investment into the social housing sector. Given historical Right-to-Buy trends, we believe this level of conversion is feasible.

3.5 Why?

· This form of programme will transfer precious subsidy from less needy households already in social housing to more vulnerable households on waiting lists.

· Up to 900,000 of existing social housing tenants could afford to buy a home and evidence suggests a high percentage would like to become homeowners.

· Meeting the individual home ownership aspirations of existing social tenants through a shared ownership model supports the economic diversity and prosperity of social housing communities.

· We believe there is growing support in the social housing sector for an asset management programme that effectively maximises value from existing assets. In addition we see latent and emerging opposition to pushing tenant affordability and security through reform of tenure and rent regimes.

· There is growing acceptance among providers and policy makers that a revised Right-to-Buy offer that re-stocks rather than depletes the existing social housing portfolio is a feasible and preferred option.

3.6 A full description of our product proposal and further analysis is provided in Attachments 1and 2. A summary of our product is set out below:

· The social housing provider (which could be a Registered Provider or Local Authority) offers the Social Rented home for sale to the current customer on a shared ownership basis at a 25% discount to the RICS open market value.

· This 25% discount acts as the tenants deposit supporting a full 100% loan to cost mortgage, allowing occupants to buy between 30% and 60% of their home using a conventional Shared Ownership mortgage product from a high street bank without the need to find or save for their deposit.

· The customers lease the part they do not buy from the social housing Provider at a low rent and have an option to buy more of their home in the future at a 25% discount to the RICS open market value at the time.

· Assettrust enables a further capital release from the Provider lease interests, resulting in total potential Provider receipts of up to 75% of the current RICS open market value of their portfolios.

3.7 In light of Government announcements and consultation on RTB we promoted the scheme to over 200 RPs and LAs. Detailed discussions have taken place with over 40 and a number are at various stages of tenant consultation, executive approval and pilot programme roll out.

4. Feedback and support

4.1 From feedback we have had to date Government may be able to improve the marketability and appeal of our product and other capital release programmes for social housing providers by:

4.2 Allowing RP’s greater freedom in the use of capital sales receipts beyond investment in new build housing and new build Affordable Rent tenures. For example, allow investment in the reburbishment of homes or estates in need of regeneration or empty homes.

4.3 Allowing a reasonable proportion of like-for-like replacement of Social Rented homes so that their profile of lower debt per unit and higher grant helps to sustain financial strength.

4.4 Reviewing the treatment of Social Housing Grant when it is released from asset sales and placed into the Disposal Proceeds Fund (DPF) or Re-Cycled Capital Grant Fund (RCGF), enabling it to continue to act as equity in support asset cover/gearing calculations. Otherwise, the current accounting treatment of DPF and RCGF could thwart the ability of RPs to fund future housing supply growth through asset management of existing stock.

4.5 Lengthening the current three year repayment period of DPF and RCGF by RPs to the Homes and Communities Agency and supporting greater freedom of spend of the funds beyond the Local Authority it was generated in to support longer term housing re-investment plans.

4.6 Allowing RP’s to use released grant to fund the purchase of existing satisfactory open market homes or offer grants for customers to buy them directly on a shared ownership basis. This would allow providers to:

· Offer a choice of new build or second hand homes to potential shared owner or renting customer.

· Match the supply of existing homes closely to prepared demand, thereby blending lower risk with the higher sales and lettings risk associated with investment in new housing supply, where future demand at the end of a typically two to three the build and sales cycle is harder to forecast.

· Deliver demand to stagnating local housing chains and introduce stable, residential occupiers to areas with high rates of temporary rented tenancies.

4.7 Facilitating the evolution of the market for good quality housing management and the efficient rationalization of management footprints by allowing Registered Providers and other regulated agents, such as Local Authorities to undertake services to each other and private landlords on the same exempt VAT terms as when they supply services directly to residential customers.

4.8 Increasing the motivation and benefits to Local Authorities of participating in Right-to-Buy style asset management programmes, by allowing them to retain a higher proportion of the receipts in support of their own housing investment strategies, as opposed to the current 75% transfer to The Treasury.

January 2012