Community Land Trust Fund

Delivering Affordable Sustainable Housing
Context setting:

Tenure and affordability options

Many people confuse tenure with affordability.  Homes for sale are not necessarily sold at market value.  Renting is not necessarily always at social rent or affordable rent levels – the proportion of the housing stock that is privately rented at market rents has increased dramatically over the last 10 years, and now exceeds affordable rented.

Homes for sale may be at full market value, or at a deliberately discounted price.   The full market value of a new home for sale is dictated largely by values of similar properties in that location.  There may be a premium to reflect the fact that the house is new and to higher standards, but the security valuation for mortgage lending purposes is unlikely to reflect that fully.

Where the price is discounted, it is normal practice to ensure that that discount is not solely for the benefit of the first purchaser.  That is normally achieved by selling on a shared equity basis, where the discount from full market value is represented as a charge on the property.  For instance, if the market value is £200k and the home is sold for £150k (i.e. 75% of market value), then that discounted value would be secured by means of a second charge on the property after the mortgage.  The effect of this would be that the owner would have to repay the 25% discount based on the new selling price when they sell the property.  The charge can be expressed in such a way that the CLT could then receive that cash and use it on another development at that time in the future, or (more usually) it then agrees to provide that same equity stake to the second eligible purchaser, and so on.  That latter option means that the property will always trade at 75% of its full market value, and thus the benefit of that initial discount will continue in perpetuity.  Whilst a simple and effective way of improving affordability, many mortgage lenders find this approach difficult to accept.

There has been a rapid growth in the provision of market rented housing over the last decade, following almost a century of steady decline.  The private rented sector accounted for 9% of total stock in 1990/91, but has increased to 19% now.  This was largely driven by the Buy to Let boom, and there are now 1.5m such landlords, the large majority of whom own only one property.  Although Buy to Let activity declined sharply after the credit crunch, activity has revived, particularly following the relaxation of pension annuity regulations.  This has increased pressure on first time buyer purchasers.

Generally speaking, private rented homes are let on Assured Shorthold tenancies, at whatever rent can be achieved in relation to local comparables.  Yields fluctuate dramatically, both because of volatility in local rent levels and trends in house prices.  It is a high risk sector, where much of the profit is made by selling on the property at the optimum time, rather than because of the underlying nett yield generated by the rental income.

Social rent has been the default form of rented affordable housing to date.  This comprises homes owned and managed by Registered Providers, where rent levels have been determined by reference to the National Rent Regime.  However, the government abolished the National Rent Regime from 2014.

Homes are let on an Assured Tenancy basis, where the tenant has security of tenure for an indefinite period.  Most Registered Providers are local authorities (known as Public Registered Providers) or housing associations and CLTs (known as Private Registered Providers).

The National Rent Regime is based on a formula that generates target rents, with reference to local house prices and local earnings.  The objective is for those target rents to be affordable for people in low paid employment or dependent entirely on state benefits.  Target rents normally increase at no more than CPI +1% per annum thereafter; however, for financial years 2016/17 to 2019/20, rents on properties let by Registered Providers must reduce by 1% per annum.  This is a significant constraint on RPs’ ability to compensate for revenue deficits or unexpected expenditure, which represents an area of risk.  On the other hand, supply of social rented housing usually falls so far below need that there is very little danger of properties not being readily lettable.

Homes for affordable rent are also owned and managed by RPs, but rent levels are determined with reference to local market rents rather than the National Rent Regime at the date of first letting.  Thereafter, they can increase at CPI+1% per annum, although for stock owned by Registered Providers, rents will reduce by 1% per annum for financial years 2016/17 to 2019/20.  They are let on an assured tenancy basis, although the provisions of the Localism Bill allow RPs to let those tenancies on a fixed term basis.  As such, such fixed term tenancies are likely to be useful to households at an earlier stage in their “housing career”, i.e. typically newly forming households who expect to move house relatively frequently in response to job opportunities or as their housing needs change.

Shared ownership, which is also known as HomeBuy, is a way of buying a stake in a property where a resident cannot afford to buy it outright.  There are a number of variants of HomeBuy.  See, but New Build HomeBuy is relevant to CLTs.

The capital premium on the lease can be anything from 25-75% of the market value.  The rent varies in inverse proportion to the stake purchased and is usually based on a gross yield of around 2.75-3.0% of the value.  Subsidy is paid to the Registered Provider to enable them to charge this “sub market” rent.  The shared owner can “staircase” to a higher stake at any stage during the term of their lease.  Conversely, there is no requirement for them to increase their stake at any stage.  Again, this is a product which is valuable to first time buyers and other newly forming households who want or need to stay in a particular location. Because of rent and mortgage combined costs, this product can be unaffordable in areas of high house values.