Richard Houghton Director JLL Affordable Housing Valuation – North

A year is an awfully long time in politics.

It was back in September 2021 that the UK government sent shockwaves through the affordable housing sector by revealing a new shared ownership model.

Fast-forward 12 months – and three housing secretaries – and housing associations are dealing with myriad pressures. But what’s been the impact of the shared ownership changes? And how can we value properties under this model?

What’s changed

Many of the changes sought to increase accessibility and flexibility for customers, but have also raised questions about the long-term viability of the model.

To recap, the key changes of note are:

• the minimum initial equity share is reduced from 25% to 10%
• there is a 10-year repair warranty during which the shared owner will receive support from their housing provider/landlord to pay for essential repairs
• a new 1% gradual staircasing model will enable shared owners to buy more shares in smaller instalments over the first 15 years
• a reduction in minimum larger share purchase from 10% to 5%
• shared owners will be able to take control of the resales process at an earlier point
• and, finally, a lease must now be granted with a term of 990 years.

What’s the value impact

So how does this new model impact valuations?

First, we need to consider how we value Shared Ownership as a tenure. Typically, we apply a discounted cashflow approach, with the value derived from two sources: the rental income received from lessees on the RP’s retained element; and capital receipts from lessees when staircasing.

The year one rent is taken as the starting point, with real growth applied, less any non-recoverable costs (there are usually some in practice, despite the wording of leases).

The capital receipts are normally modelled to reflect a cautious profile over the cashflow, currently at 25% initial tranche sales to reflect a sensible average and typical transaction. Separate discount rates are applied for rental income and receipts, whilst benchmarking and sense-checking is undertaken against similar valuations and transactional evidence.

The main risks arising from the changes are as follows:

• Minimum initial equity sale decrease from 25% to 10% – Reduced first tranche receipt however higher rents (3% of RP retained equity) Potentially reduced covenant strength, with possible increased arrears/bad debts
• Minimum staircasing tranches reduced from 10% to 1% – Reduced capital receipts and increased admin/ management costs. Potential for a stronger rental profile
• 10 year landlord repair contributions – New added cost with increased admin/management, additional repairing liability

The changes that have been implemented are clearly weighted towards the lessee, which in itself is no bad thing, given that providing quality housing opportunities across a wide range of tenures is a fundamental objective within the sector.

That said, the newly presented risks and the increased administrative and operational costs will create additional pressures for housing providers delivering new shared ownership homes. As a result of the additional repair cost liability, and the potential to reduce the net rental income position, there will be a need to remodel.

Conversely, where first tranche sales are completed on lower equity shares, the income over the length of a lease could be more valuable, certainly in a market where investment appetite for long-dated, index-linked income remains strong. Despite the negative impacts on value, there are some balancing factors which potentially soften reductions.

Getting the message across

From the Registered Providers themselves, the message has been clear – that the potential for reduced capital receipts on initial and ongoing tranches is perceived negatively, as are the additional repair liabilities. This will require an adjustment to delivery models which may impact land appraisals and, ultimately, business plans. The level of downward pressure on viability and values will however be dependent upon the average position adopted for first tranche sales as well as the staircasing assumptions.

And what about investors? Essentially, the shared ownership tenure offers investors income hedged against inflation, albeit the same risks do present themselves under the new model, with the potential for increased arrears and bad debts, capital receipts from tranche sales reduced, and the increase in management and repair costs.

Despite all these factors, the fundamentals for those interested in the tenure remain intact – an alternative asset class with strong ESG credentials, as well as the possibility of inflation-linked returns and exposure to house price growth. Whilst questions have been raised over the changes, these can all be explicitly modelled and, as a result, market sentiment remains strong with investors undeterred.

JLL has been involved in some of the largest portfolio transactions of shared ownership homes over the last 24 months; what has been clear is that pricing remains strong, and, from conversations across our client base and wider residential market, there is currently no evidence of pricing change in the s.106 market as yet. It is this latter area which is likely to see some price adjustment.

Admittedly, tangible evidence of pricing under the new model is a little way off at present, as stock numbers to date are limited. In the immediate term however, a lack of supply will likely continue to drive demand.

Finally, the lenders within the sector will be discussing the same considerations dominating every other boardroom table; changes to facility cover ratios, and reduced shared ownership proportions permitted within security pools, will be something to keep an eye on.

What impact these changes will have upon those considering home ownership remains an unknown quantity. Will we see lower equity sales and smaller staircasing activity?

Based on recent discussions within the sector, consensus certainly pointed towards the potential for that, depending on the market dynamics in any given location; but in a lot of instances, it is felt that activity from both new and existing lessees, will continue a similar pattern as it always has.

There are many different tangents that can be explored whilst discussing Shared Ownership, with affordability and regional variances just two things that spring to mind. But, whilst it forms part of the government’s delivery strategy, it is important to understand fully how the model can be applied to meet some of our housing needs.

There are no end of headwinds facing the sector at present, and to be perfectly honest, this article was written before the latest maelstrom, but from both a valuation and viability perspective, hopefully the new model in isolation can be considered more of a stiff breeze as opposed to a force 8 gale that has development programmes struggling to stay upright.

Bolton Council is the latest local authority to put Locata’s Housing Related Support (HRS) module at the heart of its management of housing support applications.

The system will go live this Friday and will help officers manage a pathway of referrals into accommodation with support or floating support.

Bolton’s new HRS module assists the officer as they manage the applicant through to a provider who will give them the service they need.

It also monitors the applicant’s progress, recording the outcomes of all steps and stages, automatically providing full reporting and other management information direct to the officer.

HRS has an inbuilt “provider” database including details of the services each provide. There is also a custom login portal for third party providers of housing related support services, allowing local authority partners to accept new clients into their services and report on progress.

The system massively reduces the amount of manual information needed to be entered by officers as data is exported between modules with just one click of a button.

The information required by support providers is very similar to that already gathered as part of the homelessness service, so Locata has ensured that the workflows of the HRS module are aligned with that of our homelessness module, HPA2.

This not only makes the transition between products seamless, but officers already using HPA2 require little training on how to use HRS as it has been built on the same system platform.

Locata has also recently released a new feature which enables officers to export fields and questions between modules. This means that when clients are exported from one module to another the information matches in all the relevant fields.

To find out more about our HRS module and HPA2 please email us at enquiries@locata.org.uk

Developing a Net Zero retrofit strategy without regret.

All straightforward in the world of sound-byte isn’t it. ‘No Regrets’, ‘Fabric First’, ‘Worst First’ and so on.

Then we have the reality of taking a critical view of our housing stock, often with a limited dataset and out-of-date information which is held in multiple locations with duplication and cloning thrown into the mix.

The social housing sector are committed to the notion of hitting a minimum EPC band C by 2030 and then to achieve Net Zero by 2050. This in itself can make a ‘No Regrets’ approach a difficult proposition because the measurement of an EPC band and of carbon impact are fundamentally different.

We need to think about the band C target as a milestone to be reached by 2030 as a part of the longer-term journey towards Net Zero. This will change the way we plan our improvement strategy.

In simple terms, design our retrofit improvement planning for Net Zero and work backwards. This gives us the visibility of where we want our homes to be and what they will look like and will better inform the decisions we make today around improvements.

An example might be that if we were designing a Net Zero home and looking to insulate the loft, we may decide upon installing 450mm of loft insulation, whereas if we were planning to get a property to an EPC band C we might be recommending 250mm of loft insulation. If we know that we will eventually need 450mm, then installing that measure prior to 2030 not only supports our band C targets but also saves future duplication of time, effort, and money further down the line.

Getting hold of the data to inform our decision making.

This is all much easier to plan if we have a quality assured data profile of our whole stock – which, in reality, most housing providers don’t currently hold. The best investment over the next 12 months and beyond is on data acquisition.

There are multiple sources from which we could source a sufficient dataset to return an energy rating and carbon score.

Whether housing providers conduct this work internally with data analysts or work with organisations who provide this expertise, it is time well spent to end up with 100% of stock providing an energy rating. This will allow us to ask questions of that dataset, such as ‘What does a retrofit plan look like for each of these homes and how much will it cost?’

This starts to build confidence in not only what our homes will need to look like but also informs our skills needs internally. If for instance, it looks like we are going to have 3,000 air source heat pumps installed across specific stock over the next 20 years, where are the engineering skills to support this? Do frontline staff need to have appreciation training on some of these technologies, ought we be starting to inform tenants on the future of housing and how heat pumps work? It’s all hugely valuable insight for how we map out the future shape of our organisations.

We are then able to do financial cross checking, such as what would the financial impact be over the next 20 years if I don’t even consider low temperature, low carbon technology for at least the next 10 years? Is this an achievable strategy? Once you start asking these questions of your energy analytics software and internal expertise you can then work towards a Net Zero improvement plan that you can stand by.

Even where we are applying for funding from the Social Housing Decarbonisation Fund and have specific heat demand targets to meet and particular property types to target, it still shouldn’t stop us making sure that we are considering a ‘No Regrets’ approach before we submit the bid. Knowing what we want the property to eventually look like will assist in a stronger bid application and will stand the property in better stead for its next phase of improvement.

A 5 Point Plan to a No Regrets Net Zero Retrofit Strategy

If you are yet to embark on the Net Zero journey, the 5-point-plan below is a good place to start:

1. A dataset for 100% of your stock that returns an energy rating. It’s a tough job but it’s an essential investment. Whether this is an internal project, or you work with a specialist organisation like Sava, it should be the first piece of work you undertake.

2. A single version of the truth. If you use an asset management system, work to integrate your newly cleansed dataset into your asset database. It means that every time you make any property improvement in the future, it will inform your energy data and will recalculate your energy rating accordingly.

3. Net Zero is our target, band C is just part of the journey. Build an improvement strategy that visualises the future of your stock and work back towards an incremental improvement plan that is costed out, achievable and avoids the ‘regrets’ of duplicated effort.

4. Invest in specialist analytics software. Invest in a powerful calculation engine that runs your improvement planning software and helps map out and inform your retrofit journey – such as Sava Intelligent Energy.

5. Knowledge is power. Low carbon technology is inevitable. Speak to manufacturers, attend training sessions, consider having some of your team attend retrofit co-ordinator training. Start to think about how you help educate tenants. They will need to understand this new technology to ensure they do not fear it.

Here at Sava, we provide free technical webinars specifically designed to improve your knowledge of energy analysis and maximise the value you get from your property data. You can view our upcoming webinars here: https://sava.co.uk/software/technical-webinars/.

Please feel free to get in touch with us at technology@sava.co.uk to find out how we can help you to develop your Net Zero retrofit strategy through our software and consultancy solutions.