Yesterday I went into a scheme appraisal discussion which was the most contentious I’ve been in…ever.
The build quality was high, the contractor was reputable and has provided recent schemes on time and to budget.
The sales team successfully assured us that the sales risk was minimal as the location – next to the Thames – was highly desirable.
I could go on with the list of positives…but you know there is a “BUT” coming.
BUT, these units had a market value of between 450 and 600k for 1 and 2 bed only apartments. They came with a concierge service and the associated £200 a month service charge bill. We calculated that to be a 1st time buyer with a 10% deposit, you’d need to be earning in excess of £150k per annum to afford the top unit. To put that into context…no one within the housing association earnt that much, including the chief exec.
However, I strongly argued for snapping up these units. The scheme had been so hindered by the well meaning affordability caps (within the borough) that we could only offer a 54.5% cost to value ratio…and we came back as the highest bidder.
Social housing value had obviously hindered all housing associations.
So let’s think what this means logically.
The housing association gets a scheme it can afford, and theoretically a scheme it’s shared ownership target market can afford. The Tennant benefits from living in the area, further benefits from living in such plush accommodation and is exposed to capital gains. They theoretically also continue with their career and increase their earnings potential. So fingers crossed it allows them to staircase out at some point in the future. However, these units are so expensive, and with mortgage rates likely to only go one way in the near future it can be argued that they may struggle to ever staircase and indeed even paying their mortgage and rent in the future may be tight.
This then relies on our astute sales colleagues to market to people at the affordability cap, but be vociferous in pointing out the risks and equally make use of any powers to market to wealthier customers should the affordability not be met.
This then neatly brings us back to…is this a social product. Well clinically yes. As ever, until fully staircased the unit is in the hands of a charity, it should not go forgotten that the low cost to value ratio locks “family silver” into the balance sheet.
At some point in the future, staircasing will take place and the value will be unlocked, returning it for social needs including a healthy surplus. We can safely assume some customers will have partners move in, receive inheritance, and there is always a backstop with staircasing. In 25 years a customers mortgage will be paid off and they can purchase their 2nd tranche, easily covered within a 40 year business plan.
The low cost to value relationship also mechanically decreases the I&E deficit needed which is fantastic! On average we’d seen both shared ownership, affordable rent and even market rent needing subsidy for the first 8 to 13 years in order to cover the interest payments on the scheme.
I don’t believe in the portfolio theory, it’s a quick way to being average and in the longer term being taken over. Therefore we support housing associations bidding for these high value schemes with a minimum cost to value relationship.
If you’d like any of the above explained or schemes modelled then we’d love to help.
Next week…A scheme containing a £1.2 million pound flat on affordable rent!
Head of Business Planning and Development Finance
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