The Notting Hill Housing Group has been a pioneer, adopting the entrepreneurial flair of the private residential developer to stretch scarce grant resources into additional homes. Its flagship scheme is the Isokon Building in Camden, bought two years ago from Camden council for an undisclosed sum. Once refurbished, 25 flats will be bought on a shared ownership basis by teachers nominated by Camden council, and 11 sold on the open market as cross-subsidy for the project.
In the past year, NHG has sold about 100 shared-ownership homes, delivered without public subsidy, and another 900 enjoyed grant funding. In Barnet, it bought a site then brought housebuilder Bellway into the deal under a profit-share arrangement. "You've got to be willing to take the risks that the private developer does," says deputy chief executive Steve Coleman. NHG's 6000-strong waiting list for shared ownership must be a powerful incentive to take those risks.
John Bryant, policy officer at the National Housing Federation, believes that proposed changes to Housing Corporation rules (HT 7 November, page 7), which would make private sales legally simpler for registered social landlords, will encourage more to follow NHG down this route. However, leading a double life as a not-for-profit housing provider and hard-headed private developer will only suit RSLs with financial strength, development expertise and the nerve to navigate a volatile housing market.
But at least two niche organisations are working on less risky alternative means of building without grant subsidy, which rely on converting the planning gain of a section 106 agreement. Winchester-based Merlion Housing Group and Affordable Homes UK of Poole both believe they have found the right alchemy for a grant-free solution.
Since Merlion was launched in 1991, it has delivered the keys to 700 shared ownership flats and starter homes, and has plans for 250 properties in 2003 and 400 in 2004. Its strategic partners have included Beacon, Kelsey, Midsummer and Spa Housing Associations. But chief executive Alistair Baker acknowledges that its output is a drop in the ocean of demand. "We've got to get private money into the affordable housing sector; there's no way the government alone can meet the demand," he says.
Unlike a conventional grant-funded scheme, split 50:50 between rent and equity, Merlion buyers take out loans for 75% of the property's market value with no rent to pay on the rest. "From the affordability point of view, it's a better model for the 300,000 to 400,000 key skills workers in the economy," argues Baker. "We're not aiming at a narrow definition of key workers, but at people who don't feel in need [of public sector support] but can't afford to buy on the open market."
The company acts as a middleman between the housebuilder and the local authority and/or RSL, buying the housebuilder's standard units at a discount of 30-35% to market value. "These are identical houses, with the same specification and same elevations as the rest of the scheme. Buyers prefer it and it allows us to embrace the government policy of pepper-potting," says Baker.
Merlion sells to local authority or other nominees, then transfers the freehold to Merlion Housing Association or an RSL partner, which charges an annual management fee fixed by the Housing Corporation. When the shared owner decides to sell, they take the benefit of equity growth on a 75% rather than a 50% share. The remaining 25% released by the sale goes to Merlion and/or its RSL partner to re-invest in other schemes, or it is made available to a second-hand shared ownership buyer.
We’re not aiming at a narrow definition of key workers but at people who don’t feel in need of public support but can’t afford to buy on the open market
Alistair Baker
At housing consultant Hacas Chapman Hendy, managing director Derek Joseph has undertaken a study of delivery methods for shared ownership. During his research, he found "a number of housing associations doing individual schemes, but Merlion is doing it on a national basis, with a scheme that was replicable from place to place".
Joseph points out that Merlion buyers have similar outgoings to non-grant schemes, but are sweetened by more equity growth. He also lists the attractions to RSLs: they take on management only once the homes are sold, do not have to finance the up-front purchase and can expect a 12.5% equity share. "But the RSL has to watch out: management can become intense if there is a default or a marriage break-up. It's a straightforward, laid-back role until things go wrong."
Whereas Merlion works with a range of housebuilders, Affordable Homes UK has spent its first 18 months on pilot schemes with just one developer – sheltered housing specialist McCarthy & Stone. The two firms have formed a 50:50 joint venture, Affordable Housing UK, to help turn McCarthy & Stone's planning gain contribution and long-term finance from the Nationwide Building Society into key-worker rented and shared ownership homes without the need for a grant.
Under the shared ownership option, the portion of equity to be sold is fixed at between 50% and 80% after consultation with local employers on key workers' ability to pay. As with Merlion, no rent is payable on the remaining portion. The AHUK joint venture negotiates the section 106, sells the property, holds the freehold and contracts out property management to Peverel Management Services. Finally, it handles the resale to ensure the new buyer qualifies on earnings and employment criteria.
Director John Cottingham anticipates working with RSLs on large, multi-tenure sites but does not plan a split-responsibility, profit-share relationship akin to Merlion's. "We're acting as an RSL in all but name," he says. "We're a stand-alone organisation." The AHUK joint venture's pilot scheme was for nine one-bed flats in Southampton. It is about to deliver four three-bed shared-ownership family houses in Bridport, Dorset, and is awaiting planning permission on nine two-bed homes in Romily, Stockport.
Both schemes work best in parts of the country with relatively high land and property values – those locations where there are likely to be struggling key workers. "It works in more affluent areas. We're working nationally, from Warrington to Southampton," says Merlion's Baker. However, a crucial ingredient of success is a local authority committed to mixed-tenure housing, since many place a higher priority on building rented stock. Baker has found this is the stumbling block in the area where demand is most acute – inner London. "We find there is an insistence from the authorities on rented stock."
Also, London property values are so high that a 25% discount may not be enough to close the affordability gap for key workers, as NHG's Steve Coleman points out. In the capital, he believes that grant funding and public subsidy are essential. "Our tenants need teachers and nurses and social workers – we need to get subsidy into the intermediate market. In the overall scheme of provision, non-grant-funded will always play a small part. We couldn't access the quantity of land we'd need for cross-selling."
Polishing a gem
In 1934, the Isokon Building in Camden was at the cutting edge of modernism. It was radical in its sleek, unfussy design, and revolutionary in its ambition to forge a new style of community living for the artists, architects and Hampstead intellectuals it attracted. Agatha Christie, Henry Moore and Bauhaus architect Walter Gropius were among the tenants who sipped cocktails in the communal Isobar. By 2004, the Isokon building will once again forge new territory, as a pioneer of key worker housing. When the dilapidated building was put up for sale by Camden council in 2000, Notting Hill Housing Group’s plans for sympathetic conversion and sale as “affordable homes” to key workers won an open tender that included competition from a hotel operator and a private member’s club. “To a degree, we were keeping the original ethos of the building. Our proposals were judged the most beneficial for the Isokon and Camden,” says NHG business director John Hughes. NHG declines to discuss its bid price but reconstruction costs alone amount to £2m. In 2001, NHG secured a starter homes initiative grant for 25 of the one-bedroom and studio flats but it will use the market sale of 11 flats to make the homes more affordable and cover its acquisition costs. Consultations and the need for English Heritage approval have delayed planning permission, which NHG hopes to secure in December. Work would start on site in January, with marketing launched next spring. “We would have liked it to be faster, but we’re keen to ensure the building gets the treatment it deserves,” says Hughes.Merlion magic
At Downham Market in Norfolk,Merlion will partner Midsummer Housing Association on a Stamford Homes site of two-, three- and four-bedroom homes. Twenty-four three-bed homes with a typical open market valuation of £72,500 are included in the scheme. Merlion will buy Stamford’s “off the shelf” homes at a 30-35% discount to market value, then sell them to key workers at 75% of their market value – that is, about £54,375. This is possible because the housebuilder benefits from an early, guaranteed purchaser and improved cash flow. Also, the housebuilder can sell its standard product type, with no obligation to build the homes to Housing Corporation specifications. Merlion sells the property to buyers nominated by the local authority and/or Midsummer. The freehold and a charge over the 25% balance of the equity is held by Midsummer, which also charges the shared owners a management fee fixed by the Housing Corporation – about £150 a year. The shared owner stays in the property for two years and sees its market value rise to £100,000. When the property is sold, the owner-occupier gets £75,000, redeeming the original £54,375 mortgage and taking a profit of £20,625 towards their next house purchase. The remaining £25,000 is split 50:50 between Merlion and Midsummer, to be invested in another project or be used to help a second-hand buyer.Source
Housing Today
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