The ability to increase housing supply is complex because the system and market is very intricate. This pretty much means that any strategy needs to be sufficiently diverse and flexible over the long term in the aim to adapt to a shifting market demand and supply. There are recent trends where financial risk through development and construction is shared across stakeholders and lies with the most appropriate stakeholder at each stage.
Crucially, funding for the development is secured in advance with a local authority, and AHB, or an investor agreeing to contractually buy the properties. This only happens when paying upon delivery of the completed units. The model for this has been very successful in Ireland, the UK, and all over Europe. In providing volumes of housing, there will not be a deliverance of long-term solutions in the attempt to increase housing stock.
There has also been a merit to the use of the forward funding model, where investors and certain AHBs agree to acquire a completed development at the beginning or early on in the development process. This will provide financial security and remove financial risk for the developer, and in turn stimulate supply on a larger scale. This model has particular advantages in bridging the financing gap when bank lending is harder to come by or when loan-to-value rates are less economically viable to a developer.
Even though the financial risk is abated with forward funding, the development risk lies with the developer. This forward funding model was particularly beneficial when bank lending ceased following the financial crash and recession in Ireland, and it continues to be attractive where the cost of such lending remains a challenge for seasoned investors.
There is a new scheme that sees local authorities lease properties from institutional and private developers on 25-year leases. The local authority then becomes the landlord to the tenant and collects rent from them. The local authority also pays rent back that is up to 95 percent of the current market value. Only properties newly built or due to be built, that have not been leased or rented within the previous 12 months are eligible for this enhanced leasing model. This is set to ensure that the scheme stimulates the supply of new housing, which is the prime goal. It is also important that the property owner remains responsible for ongoing management and maintenance of the property. This is particularly true for long term enhanced leases.
Written by John Spurrier, Mortgage Analyst for Online Application