Impact of the 7% voluntary rent cap on valuations of Shared Ownership portfolios

As part of our work to support members, we have commissioned legal advice from Anthony Collins Solicitors, and worked with JLL and Savills to help housing associations understand the complexities around implementing the voluntary rent cap. This article was written by Andy Smith, Director – Housing Valuation at Savills, Catherine Wilson, Director – Housing Valuation, and Richard Petty, Valuation Advisory – Head of UK Living at JLL.

Unlike rented housing, Shared Ownership is not subject to the Rent Standard, and so there is no mandatory mechanism for limiting rent increases. Shared Ownership rent increases are determined by the provisions in the individual leases, which vary between leases and providers, particularly with older leases.

In order to limit the financial impact on their Shared Ownership leaseholders, housing associations can implement a voluntary rent cap for their Shared Ownership properties of up to 7% when rents are next increased in 2023. This will inevitably reduce the amount of rent collected, and also affect the base level for future rent increases beyond 2023. This note is to reassure members on the impact of the voluntary cap on valuations.

The value of Shared Ownership properties involves an assessment of the amount, timing and security of the future income streams, which come from two sources – the rent, and any receipts from staircasing. Rent is easy to predict, being set out explicitly in the lease, whereas staircasing receipts are more variable, driven by the inclination and ability of shared owners to buy further tranches of equity at a time and price that is viable for them. It is generally the case that rental income is the more important component of value, and therefore the level of rent and the rate of increase are the principal drivers of our valuations.

Valuations assess the present value of the future income from rents by adopting a discount rate which reflects the secure nature of that income from shared owners, and the fact that it is index-linked (normally to RPI). The staircasing element of the valuation will reflect expectations of house price growth and the lack of certainty on when staircasing events occur – because this is less certain or secure, the discount rate adopted will be higher.

Recent Shared Ownership portfolio transactions have shown that the market understands these nuances and consistent pricing has been seen, with initial yields in the range of 3.0% to 3.5% being achieved. There has been some slight, upward movement in these yields as a result of recent economic and financial market turbulence, but nothing like as much as we have seen in other property asset classes. Shared Ownership is regarded by investors as stable and resilient, and we have the market evidence to show that remains the case.

In valuation terms, it is vital to remember that the voluntary rent cap is not a cut – the rents will still go up year-on-year, albeit by less than they would have done without the voluntary cap, and they will have no impact on the staircasing income, which is driven by house prices. Values should therefore not fall as a result only of the cap being adopted, and should still rise in 2023, albeit there may be other headwinds arising from the housing market which may impinge on that growth.

Housing associations should take care to consider each portfolio of Shared Ownership on its merits and characteristics, including the housing market within which properties are located, and take appropriate, professional advice on the impact of voluntary cap.

Read Anthony Collins Solicitors’ piece on what legalities housing associations must consider under the shared ownership commitment on rent increases.