Financing of new housing supply

Written submission from the Gentoo Group

1.0 INTRODUCTION

1.1 Gentoo welcomes the opportunity to respond to the CLG consultation paper on Financing of New Housing Supply. The following response represents the views of Gentoo Group, which includes the following companies:

· Gentoo Group

· Gentoo Sunderland

· Gentoo Homes

· Gentoo Construction

· Gentoo Green

· Gentoo Genie

This response will primarily come from the point of view of the contribution that the Genie product could make to the financing of new housing supply.

2.0 SPECIFIC RESPONSES

2.1 How long term private finance, especially from large financial institutions, could be brought into the private and social rented sectors, and what the barriers are to that happening

Gentoo is well aware of the context of the current housing market. Even with a slow down in house price inflation, many potential buyers are effectively excluded from access to home ownership due to their inability to meet mortgage requirements – notably deposit levels that are often proving prohibitive without family or support from friends. It is difficult to foresee a short term remedy to this problem as banks continue to adjust their lending profiles within the context of deficit reduction and a struggling economy.

The problem of mismatch between supply and demand remains however and this is a latent problem that is building year on year. It is within that context that Gentoo has looked to develop innovative solutions that can look to address two concurrent problems: how to allow access on the part of the consumer to an otherwise prohibitive home ownership market and how to increase investment into the housing sector that is both viable and scalable.

The development of the Genie product addresses both of these issues.

The Genie is a new home ownership product with the accessibility of rental but the security of a mortgage purchase. It is based on a long term structured payment plan that allows the consumer to acquire a share of the property by paying a monthly residency fee.

This financial arrangement allows consumers to acquire shares in their home over time without the need for a mortgage or deposit. The target audience for the Genie is first time buyers and long term renters but as long as the customer meets the eligibility criteria, no one is excluded.

A simple worked example of how the Genie works is shown below:

Property sales value £125,000

Initial monthly residency fee £642

Annual % increase in residency fee 3%

Term of plan (months) 300

Administration fee (exc VAT) £600

Base terms excluding effect of optional contributions which may be made during the plan term
Contract periods:		Annual rate of increase in Genie payments	Genie interest rate	Share of property acquired each year	Total share acquired in the period
From Year	To Year
1	5	3.0%	6.0%	3.5%	17.5%
6	10	3.0%	6.0%	3.7%	18.5%
11	15	3.0%	6.0%	4.0%	20.0%
16	20	3.0%	6.0%	4.5%	22.5%
21	25	3.0%	6.0%	5.1%	21.5%
Total projected share at end of term					100.0%

(for illustrative purposes only)

On the basis of this example, first time buyers can then make an informed choice which is not based on access to either a deposit or a mortgage.

The Genie was launched in October 2011 following registration with the FSA. Since then we have generated the following interest:

· Portfolio now at 85 properties across the North East of England

· 373 personal financial information statements issued since launch on 17th October

· 76 applications received

· 73% accepted at affordability in principle stage

· 48% accepted at full application stage

· 14 properties reserved

· 10 properties completed and moved in before Christmas

· 3 bed linked and semi-detached properties are proving most popular with customers

· 2 bed properties are also popular

· These properties demonstrate a greater yield and hence facilitate higher levels of ownership by the end of the term

Applicant statistics:

· 87% are joint applications

· 60% of all applicants are aged 20-29

· 96% of applicants are employed

· 91% of applicants have no existing mortgage

As well as providing a much needed innovative access solution for consumers, the Genie also has significant potential to develop as an investment vehicle to attract large financial institutions. There are a number of advantages on offer:

Investment in the Genie Fund will have characteristics similar to investment in market rented housing but will essentially be more secure and stable because of the long term nature of the occupancy agreement and the increasing personal financial interest in the property of the occupier.

The Genie Fund will acquire housing at its market rent investment value, but will not carry the same liability for long term maintenance that would normally be associated with a market rent investment.

Whilst the fund will acquire property assets at their rental investment value (say 85% of the open market sales value) it progressively sells its interest to the occupier at full open market value on a pre-agreed basis, thereby increasing its investment return without reliance on opportunistic sales on the open market normally associated with market rent investment appraisals.

The residency payment is at a premium above market rent, however it is more secure because the occupier accrues an equity interest which they may not be able to recover if they are in arrears or default under the residency agreement.

The residency fee increases annually over the full term of the agreement by a pre-agreed percentage (currently 3% per annum) which results in a payment that might broadly track long term inflation

In terms of barriers to this type of product developing, the real issue is to secure buy in to what is a new vehicle. Inevitably this will take a degree of explanation and persuasion but we have already done a lot of the leg work in terms of developing a viable product that meets the necessary regulatory i.e. FSA criteria. The real task now is to demonstrate the range of applications of this type of vehicle and its attractiveness against other investment models.

2.2 How housing associations, and potentially, ALMOs might be enabled to increase the amount of private finance going into housing supply

The application of Genie has further advantaged for housing associations and ALMOs who are looking for alternative routes to attract private finance for housing supply. These include:

· Purchase of existing stock units to free up capital

· Purchase of social housing voids from RSLs looking to diversify their stock and generate cash

· Purchase of units in stalled developments to de-risk build-out

· Commitment to purchase off-plan property

The distribution of these advantages would accrue as the Genie investment fund develops. Thus, investors benefit from the long term surety of the sector but providers can also effectively look to the Genie investment fund as a source of future finance for the development of future homes that can be accessed through Genie. Early indications show that there is significant interest in the Genie product from housing associations who are looking to add to their portfolio of access and investment options.

Ultimately the major benefit to the sector and the increase in supply overall is that an investment fund is created that is scalable and viable. The aim is to attract large scale institutional investment which can then be used to increase housing supply on the basis of the inherent investment value within housing and the Genie model. The model would not be reliant on public funding nor would it require the management and maintenance infrastructure normally associated with affordable rented housing.

In short it is a private sector solution to a fundamental housing supply problem.

January 2012