Shared ownership Right to Buy – a financing perspective

The announcement unleashed the sort of response usually reserved for somewhat ‘on-the-hoof’ policy statements which one can’t help but imagine must be dreamed up late one evening before the conference by special advisors writing ministerial speeches and seeking a punchy headline.

“In return for more leeway on the inclusion of property exposed to staircasing, banks may look to tighten up interest cover covenants and raise asset cover thresholds”

It is also worth noting that the Voluntary Right to Buy scheme explored by the Cameron administration has not really gained traction.

Commentators have highlighted the demand-side weaknesses of the idea, including:

• Why would rational people voluntarily take on full repairs and other leaseholder obligations for the upside of a 10 per cent share in house price appreciation? (See recent cases of leaseholder exposures to fire retrofitting costs.)
• The cost of servicing the 10 per cent mortgage – along with the rent on a shared ownership basis (which could be 2.75 per cent on value) – could easily exceed the 10 per cent saving the resident would make on their (sub-market) rent. How many people is this likely to be relevant to?
• The market for shared ownership mortgages is already relatively thin. Why would lenders bother for just 10 per cent shares versus the usual minimum of 25 per cent? However, it is possible they could come under political pressure to support a government initiative.
• For people who can access and service a shared ownership property, why wouldn’t they just do so in the market?

Putting to one side the question of whether this presents an attractive proposition to housing association residents, it throws up complexities in relation to the debt funding model traditionally used by housing associations. These include:

• Lenders have, to varying degrees, pushed back on the inclusion of material amounts of shared ownership within security portfolios, partly because of uncertainty over underlying security value and the process of realisation under a default, and partly as a result of the administrative burden associated with monitoring and removing from charge as staircasing increases.
• The typical approach taken by bank lenders has been to cap the amount of shared ownership that borrowers can include within a security portfolio for a given loan. Institutional investors have been somewhat more relaxed but have still often sought to limit levels.
• Again, ignoring the question of uptake, which we consider would be limited, in the event of this policy being implemented, all new build property would be subject to shared ownership Right to Buy which lenders would see as being an inherently less stable form of security than traditional social or affordable rented. This would likely lead to greater scrutiny of forecasts and stress tests around different staircasing scenarios (as lenders seek to quantify a new business risk for housing associations) as well as changing the way in which associations might manage interest rate and refinancing risk. If borrowers considered there to be an inherent risk of higher staircasing, then this would likely reduce their appetite for large volumes of long-term fixed-rate debt with expensive spens/modified spens type breakage costs, which appears potentially to be a move towards a riskier funding profile.
• In return for more leeway on the inclusion of property exposed to staircasing, banks may look to tighten up interest cover covenants and raise asset cover thresholds, particularly where shared ownership stock exceeds certain levels, or to shorten tenors on new funding even further.
• Where housing associations sought to enter into voluntary arrangements in respect of existing stock, which was already charged under previously arranged loan agreements, it is possible that this would trigger renegotiation of these loan agreements. Depending upon the commercial terms of these agreements, associations may be exposed to a worsening of economic terms as well as covenants.

In summary, the proposed policy, which we believe to be limited in its appeal to housing association residents, would create a number of uncertainties in relation to the existing debt financing model for associations.

While we don’t believe it to be material in terms of the market’s willingness to extend credit to the housing sector, we do believe that it has the potential to increase actual and perceived risk on the part of lenders and therefore to increase pricing and tighten security and financial covenants, the combination of which could lead to reduced borrowing capacity and output.

This does not mean that there is no merit to any form of the policy, but it does mean that it should be considered carefully and in a way that is sensitive to the range of existing funding bases out there in the market.

Phil Jenkins, managing director, Centrus