Shared ownership homes disposals to the for-profit sector – what you need to know

Comment28 Apr 2022Charles Cleal

Why is the market growing, what is the appeal for buyers and sellers and what should be considered before embarking on a disposal programme? JLL’s Charles Cleal explains

Charles Cleal

Charles Cleal is director and head of housing consultancy at JLL

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Shared ownership disposals to the for-profit sector: why is the market growing, what is the appeal for buyers and sellers and what should be considered before embarking on a disposal programme? @JLL Charles Cleal explains #SocialHousingFinance #UKhousing

There have been numerous press articles about a growing number of not-for-profit registered providers disposing of their shared ownership homes to for-profit providers.

These have included disposals by Hyde, MTVH and Orbit. In the past 18 months, JLL has helped its clients with the transfer of nearly 4,000 shared ownership homes and we are seeing growing interest from those considering disposals to raise funds.

What is motivating vendors?

If you are a housing professional working in either finance or assets, it is likely that at some point over the past decade, someone enquiring about purchasing your shared ownership homes has knocked on your door.

Two to three years ago there was limited interest or need to sell, and I suspect those knocking on your door had rather sore knuckles and limited success.

The mood change has, of course, come from the additional costs posed by net zero carbon and building safety.

As a sector, we have to fund these additional costs and the money has to come from somewhere. The sector needs to balance risk and funding these costs through non-social housing activity or sales in a balanced and appropriately diversified way.

This has combined with the recent poorer performance of traditional real estate investment markets, such as retail and offices, which have been affected by behavioural changes and wider economic issues. The combination of all of these factors makes shared ownership particularly attractive for investors.

What prices are being paid?

On the homes JLL has sold, we have seen exceptionally keen yields, on occasion below 3 per cent (net of management costs).

This pricing has been driven both through demand for the asset type and fairly limited supply. We have seen a number of new entrants into this asset class in recent months and are speaking to a number who are close to launching.

With more competition, we expect that pricing could get even keener over the coming months, although we do expect supply in the market to increase.

What type of deal structures are available?

There are many different deal structures offered by investors and there is generally a willingness to be flexible in the terms offered.

There may be the possibility to retain management, either at cost or at an enhanced fee, to create an additional revenue stream, which will of course impact the sale price.

Some investors may look at income strips, although there are potential challenges to these due to the fact that staircasing erodes the level of equity and therefore guaranteed income. There are also forward-funding or forward purchase opportunities to derisk development programmes.

The most common transaction is a full exit from the portfolio, including from management. In this case it is possible to either sell portfolios as a whole in a single transaction, depending on the lot size, or consider multiple lot sales over many years to help with business planning.

What are the key considerations when preparing for a sale?

Complying with the regulatory standards and considering existing tenants are any registered providers’ key considerations when thinking about a disposal.

To ensure adherence to the regulatory standards, a vendor should undertake a rigorous quality assessment process to ensure any purchaser has the ability to manage the properties effectively, provide the tenants with the same level of service and retain tenants’ rights.

Naturally, we take this part of the process very seriously and it is not uncommon for us to involve a small number of tenants in this quality assessment process. An effective consultation process is also vital. Effective engagement with your board to allow them to properly consider the risks and benefits of any potential disposal is essential.

A great deal of pre-marketing due diligence is needed before selling a portfolio of shared ownership homes. This can take many months.

Legal due diligence will include reviewing title restrictions, considering where titles need to be split, such as within multi-tenure blocks, and dealing with restrictive Section 106 agreements.

Indeed, it is unlikely that all of your portfolio will be sellable. You may also have multiple lease terms, which may differ from the model lease.

The view of private investment into the sector and for-profit providers has certainly moved on in the last few years.

Shared ownership disposals represent just one option for accessing this type of investment. Private investment won’t, of course, replace traditional forms of funding, but for some organisations it will complement them and allow those organisations to invest in existing homes and build new ones.

Charles Cleal, director – head of housing consultancy at JLL