HERTSMERE BOROUGH COUNCIL REPORT TO EXECUTIVE

HERTSMERE BOROUGH COUNCIL REPORT TO EXECUTIVE Item no: 7.1 Document Reference No: EX/12/91 Date of Meeting / Decision: 12 December 2012 This is not a key decision call-in on the grounds of urgency Urgency: The proposals are not exempt from AFFORDABLE HOUSING - EQUITY SHARE PORTFOLIO HOLDER - COUNCILLOR SEAMUS QUILTY PORTFOLIO HOLDER - COUNCILLOR DR HARVEY COHEN 1. RECOMMENDED THAT: The Council corporately endorses and approves Equity Share as a legitimate alternative affordable housing tenure type to Shared Ownership. This will enable Equity Share to be negotiated as part of the overall affordable housing mix within a development. 2. INTRODUCTION Background 2.1 Previously there were three affordable housing tenure types which are as follows: Affordable Rent where tenants pay 80% of the private market rental value of a given locality. Tenants can only stay within these properties for up to 5 years. Social Rent where tenants pay target rent set under national guidance and are well below private market rental levels. Shared Ownership is when the property is offered on a part sale, part rent basis. The minimum share that can be purchased is 25% and the maximum is 75%. The remaining percentage share has rent payable. 2.2 A fourth affordable housing tenure type, Equity Share, has been now been introduced by Central Government through the changes to national planning policy under Planning Policy Statement 3 (Housing) and has been unaltered through the adoption of the National Planning Policy Framework. Equity Share is also endorsed by the Homes and Communities Agency (HCA) as a way of promoting more affordable housing within the open market. 1

2.3 Equity Share is defined as housing that can be sold for a proportion of its value to a purchaser but with no rent payable on the remaining element and as such can be seen as a legitimate alternative to Shared Ownership. Moreover, there is no timeframe for the purchaser / occupier to move on within a set period. 2.4 Two key planning and housing objectives are to increase the amount of housing as well as increases the amount of affordable housing within limited resources. One means of achieving this is to build more Equity Share affordable housing covering all land ownership either through direct public sector provision or from house builders delivered via S106 planning obligations. This will be in addition to Affordable Rent, Social Rent and /or as an alternative to Shared Ownership. 2.5 The HCA have stipulated that the affordability costs for Equity Share are less than Shared Ownership and Affordable Rent, and in some circumstances can be similar to Social Rent. Because the purchasers require a mortgage, there is no increase in Housing Benefit. In addition, the amount of mortgage required by purchasers is substantially less than if they were to purchase at full market value, and as such this means that the lack of mortgage availability is less of a problem. 2.6 This report sets out some of the financial structures and many of the benefits that accrue to Hertsmere Borough Council, developers, and the purchasers. An example of how it works 2.7 The Homes and Communities Agency (HCA) have provided Hertsmere Borough Council with an example: The Developer 2.8 The house builder (or developer) meets the capital cost of the build in full but as per the affordable housing scheme would receive a reduced selling price (see 2.18). In this example the capital cost of a 2 bedroom flat is 110k for which the market value in Borehamwood is on average 170k. The Purchaser 2.9 The private purchaser pays 110k for a 2 bedroom flat worth 170k. They will do this via a typical private mortgage and consequently own the property just like any other open market property. The Council 2.10 In this case the Council would hold 35% equity in the property so that if sold at any point in the future the purchaser would realise 65% of the value and the Council 35%. It is important to note that this rate is negotiable and therefore the equity held by the Council could be more or less. For example within West Herts College development currently being considered the equity split is where the Council will hold 50%. The purchaser does have the right, at any stage, to increase the proportion of the homes which they own by purchasing additional equity. This is known as staircasing. 2.11 The private developer or house builder would transfer the equity and freehold title to the Borough Council and then have a building under licence agreement to build the said Equity Share dwellings. A S106 legal agreement would enforce this approach. 2

Maintenance 2.12 The private purchaser has the sole responsibility for maintaining the condition of the property. As part of their mortgage requirements they will be required to get buildings insurance just like Shared Ownership or any other open market property. They will be obliged to arrange for repairs to be carried out whenever required and cover the costs of maintenance. The S106 legal agreement will also require submission and agreement of the deeds, which would be checked by the Estates Department to avoid any hidden obligations on the Council. In addition, for low cost home ownership properties in blocks of flats of which a management company has to be in place, insurance policies will cover the maintenance of the exteriors of the properties just like Shared Ownership or any other open market property. To conclude there is no requirement for the Council to manage or maintain the Equity Share properties as all maintenance responsibilities lie with the private purchaser. This tenure type is no different to Shared Ownership in this respect. How will this work 2.13 It should be possible to deliver this form of tenure and affordability in any part of the country where house sale values are above 150sqft. The higher the sales values, the greater amount of equity that can be held by the Council, and the affordability level, relative to full market costs, improves in those areas. For example, an identical 2 bed flat in Radlett, could be valued at 300k, but could still be sold as Equity Share for 110k. Hence, the purchaser would have a 37% interest and the Council would hold the other 63% interest. Whose land? 2.14 This can be applied to land held by the Council, or other agencies and private developers S106 land. In the case of the private developer, the house builder would transfer the freehold title to the local authority and then have a building under licence agreement to build the said equity share dwellings. A S106 legal agreement would enforce this. Nomination rights 2.15 The Council s Housing Team would have 100% nomination rights based on a local connection and this right could be protected on a long term basis subject to S106 discussions and mortgage availability. Once the properties are complete the Council s Housing Team would be given a period of 2 (or more) years to nominate potential occupiers. If the Council s Housing Team fails to nominate within this time period then the developer can either dispose of the dwelling and realise the prevailing value, or roll over the equity for another purchaser not nominated by the Council. A S106 Legal Agreement would bind this in the mechanics of the wording. Shared Ownership Vs Equity Share 2.16 Shared Ownership schemes are mostly managed by registered housing providers. Under shared ownership, private purchasers acquire a share of the property, and then pay Social Rent, pro rata, to the registered housing provider for the proportion of the property which they do not own. Shared Ownership, unlike Equity Share, involves paying both mortgage and rent. Consequently it is recognised that Shared Ownership is suitable for households for similar or slightly higher incomes but who 3

are still unable to afford to purchase a home on the open market. Also, given the higher costs of Shared Ownership banks are reluctant to provide mortgages. Equity Share, which requires a household to purchase a proportion of the property (usually a minimum of 50%), is suitable for households seeking Shared Ownership who are still unable to afford to purchase a home on the open market. The distinct advantage of Equity Share is the lack of obligation to pay rent as well as mortgage, therefore making it more affordable. Also, as Equity Share involves no registered providers, mortgage availability is easy. 2.17 Under this proposed Equity Share scheme, equity would be transferred to the Council, not the Housing Association as would be the case under Shared Ownership. Comparisons 2.18 The HCA have looked at the affordability impact of different tenures for occupiers. The HCA have provided the following assumed values illustrating how Equity Share compares on a cost per week basis for a 2 bed flat: This demonstrates that Equity Share compares favourably against all the other tenures. This might not always be the case with Social Rent and is also dependent on the negotiated tenure split under S106 legal agreement discussions. 2.19 Households should not experience particular problems with the availability of mortgage for Equity Share schemes. Low cost home ownership schemes have continued to operate fairly well even during the worst of the recession. Mortgage lenders often views councils and registered providers as providing additional security for their investment in this type of purchase. 2.20 The following details from the HCA illustrate the impact on developers income from the sale of each tenure type based on a two bedroom flat. 1. 170K Private Sale 2. 110K Equity Share 3. 95K Shared Ownership 4. 75K Affordable Rent 5. 50K Social Rent Other revenue benefits to the Council 2.21 In addition to receiving free equity the dwellings would be sold as leasehold; the freehold being held by the Council where it is their land or a privately owned site through a S106 agreements. As such it will be possible to charge a ground rent of 100pa for a 999 year lease. This should not pose a problem with regard to resale, as lenders are usually willing to lend on leasehold properties provided there is at least 80 years left on the lease. Arguments against Equity Share 2.22 These are as follows: 4

It does not deliver Social Rent. It can increase the supply of existing social rented homes if the Council decides to target existing tenants who then vacate a social rented home. It will reduce the level of negotiated social rent units. Equity Share is not a replacement of Social Rent. Equity Share is a useful low cost home ownership alternative to Shared Ownership. It does not target households with the highest level of housing need, unlike Social or Affordable Rent. However, while catering to the highest levels of housing need is important, it is also crucial to adopt an equitable approach of addressing general housing need by offering a range of housing options to Hertsmere residents across a wide social spectrum. Affordable housing is not protected in perpetuity given the right to buy. Equity Share is also not protected in perpetuity as an affordable housing tenure type because it has the potential to pass wholly into private ownership if the private purchaser progressively acquires 100% of the property. Given the potential to increase returns for developers it does offer more scope to negotiate more affordable housing than might otherwise be achieved, and does allow households on a moderate income to purchase a home at a lower rate than the full market rate. The overall benefits 2.23 For the Council these are as follows: Increase in affordable housing output. Providing free capital value to the Council to be used and ring fenced for more affordable housing and or tackling the homelessness. Revenue income in perpetuity for the Council from the freehold ground rent. Range of tenures and types providing choices thereby addressing different housing needs for different groups. 100% nomination rights for the Housing Department. Innovative approach. 2.24 For the Developer these are as follows: Increased land values. Improved returns for house builder in a difficult market place where affordable housing grants have ceased and affordable housing provision is affecting viability. 2.25 For the Occupier these are as follows: A more affordable and desirable alternative to Shared Ownership. First time buyers purchasing at less than target rent levels. Shared Ownership is suitable for households who are in receipt of slightly higher incomes because these households are normally required to purchase, and acquire a mortgage as well as paying rent. Equity Share tends to be suitable for households who are in receipt of lower incomes and wish to purchase a share of their home. 2.26 Wider points are as follows: Can be applied to public and private sector land. Encouraging and supporting more house building. 5

No increase in public capital costs. The schemes may allow local people in receipt of moderate incomes to continue to live in the area near their support networks and/or places of work. This might reduce commuting over long distances. Supply within the private rented sector might be freed up. Over the past ten years households on moderate incomes who might previously been able to buy a homes have had to revert to renting a home in the private rented sector, reducing the level of access to the sector for households with higher levels of housing need. Innovative approach. The need for low cost home ownership products in Hertsmere, including Equity Share 2.27 Hertsmere s Housing Strategy team monitors housing needs and aspirations in Hertsmere. Although low cost home ownership products, including equity share, meet the needs of only certain sections of the population, and rented accommodation is the only viable tenure option for most households on very low incomes, there is undoubtedly sufficient demand for a large expansion of low cost home ownership in the borough. This includes Equity Share. Proof of need and aspiration for low cost home ownership, including equity share, has been gathered from the following sources: i) Lea Valley Homes housing register Lea Valley Homes is a housing organisation which is a subsidiary of Aldwyck Housing Association. Lea Valley administers the marketing and sale of homes built for low cost home ownership across Hertsmere. Lea Valley maintains a housing register of households from each local authority area whose application to purchase a home through low cost home ownership has been approved. Whenever a scheme becomes available it will be marketed to households on this register. In November 2011 a total of 251 households living in Hertsmere had been placed on Lea Valley s housing register (please see Annex 1). ii) Hertsmere s Housing Register Hertsmere Borough Council maintains a housing register of households seeking affordable housing. The housing register includes information on each household s income. This permits identification of households who may have sufficient financial resources to purchase a home through low cost home ownership. In September 2011 there was an approximate total of 85 households on the housing register whose annual income was between 15,000 and 19,999, and an approximate total of 101 household on the housing register whose annual income was 20,000 or higher (please see Annex One). This information is currently being updated to include employed households who joined the register between June 2011 and April 2012. A large number of households on Hertsmere s housing register are earning an annual income of 15,000 or above are currently renting their home in the private rented sector. These households are often seeking a tenure which they to be more secure that renting privately. The cost of Equity Share may often be less than paying a full weekly market rate. iii) Interviews with Hertsmere estate agents on housing demand Between September and March 2012 research was carried into the operation of the Hertsmere housing market. Interviews were carried out with twenty one estate agents in the borough s towns. Estate agents in Borehamwood, 6

Bushey, Potters Bar, Shenley and Radlett have all reported high demand for low cost home ownership, with a large number of enquiries about forthcoming schemes in their area. 3. FINANCIAL AND BENEFIT FRAMEWORK IMPLICATIONS 3.1 This particular tenure will offer two streams of financial gain for the Council. The first stream is through the retained capital value in the property. The second stream is through the possibility of charging ground rent annually given that the Council will have the freehold. In addition, the freehold title has monetary value. 3.2 The Housing Services will need to set aside resources to monitor the existing housing registers as noted under paragraph 2.27 to fulfil the nomination process of Equity Share. In addition, the Housing Services would need to monitor marketing strategies to ensure the relevant parties (i.e. Lea Valley Homes) adopt and target the relevant and appropriate individuals as part of this process. The marketing material would be provided by the developer for Housing Services to use. Initially, the implications will not be significant given that a pre-cautionary approach will be adopted when negotiating Equity Share but if proven successful then the numbers of Equity Share could be increased which would have resource implications. This can be partly recovered through S106 negotiations by ensuring the applicants undertake the marketing strategy on behalf of the Council and certainly could be fully recovered under the legislative requirements of the Community Infrastructure Levy. 4. LEGAL POWERS RELIED ON AND ANY LEGAL IMPLICATIONS 4.1 S106 of the Town and Country Planning Act 1990 (as amended). 5. EFFICIENCY GAINS AND VALUE FOR MONEY 5.1 Already covered in the report. 6. RISK MANAGEMENT IMPLICATIONS 6.1 None arising from this report. 7. PERSONNEL IMPLICATIONS 7.1 The introduction of Equity Share will have personnel implications to Housing Services, Estates Management and Legal Services. 7.2 The Estates Management will need to set aside resources for administrations purposes of processing the freehold titles. However, revenue can be generated from the leaseholds. 7.3 The Legal Agreement will of course be dealing with the mechanics of the S106 legal agreement to ensure the delivery of the negotiated Equity Share. The Legal Department will be able to recover all costs through the legal fees of preparing S106 legal agreements. 7

8. CORPORATE PLAN & POLICY FRAMEWORK IMPLICATIONS 8.1 The approach would help to meet one of the objectives of the Hertsmere Corporate Plan to provide Decent Homes within Hertsmere. 8.2 The Scheme supports and is consistent with the strategic objectives of Hertsmere Together Community Strategy. It will support the strategic objectives for providing better living conditions for residents, reduce the poverty gap, and help reduce homelessness. 8.3 Equity share is also included as a potential tenure type within the Draft Revised Affordable Housing SPD. Paragraph 3.6 allows for Equity Share to be delivered on schemes within the planning framework, and contribute to the requirement to provide 35% affordable housing on development schemes of 10 or more units or above 0.3 hectares. The draft SPD will be published early 2013 for adoption following the Core Strategy examination. 8.4 National guidance in NPPF allows for Equity Share as a tenure of affordable housing as it meets the definition of Intermediate Affordable Housing within Annex 2. 8.5 It is recommended that the Executive endorse Equity Share as a potential tenure, because it will provide an additional alternative product to meet Housing Need of Hertsmere. 9. APPENDICES 9.1 Appendix 1: Demand for low cost home ownership. 9.2 Appendix 2: Example of an Equity Share scheme in Brentwood. 10. BACKGROUND PAPERS USED IN PREPARATION OF THIS REPORT 10.1 None. 11. AUTHOR 11.1 Brett Leahy, Ext: 5810 CONSULTATION ON DRAFT REPORT I have sent a copy of the draft of this report to the following: Directors Head of Finance and Business Services Acting Head of Legal Services and Democratic Services Manager Housing Services Manager Estates Unit Planning Policy Unit 8