Known as shared equity deals, they are the housebuilders' latest weapon in the battle to win sales. For housebuilders and home buyers, a major issue is the size of deposits now demanded by mortgage lenders. Typically, buyers must stump up at least 20 per cent of the property price, giving lenders a margin for error if house prices fall further. On new build apartments, which are seen as more of a risk, the minimum deposit is often 25 per cent.
Desperate to shift standing stock, the housebuilders have responded by taking a share of the equity themselves, offering home buyers a ten-year interest-free loan of up to 25 per cent of the purchase price on certain properties, secured by way of a second charge. The names of the promotions vary from builder to builder; Barratt boasts one called Head Start, Bovis offers Jumpstart, Redrow has Easi:buy, and Taylor Wimpey calls it Easystart. However, the terms of these special offers are remarkably similar.
Crucially, the loan amount is a floating percentage of the property value, not a fixed sum. "The repayment sum will reflect up to 25 per cent of the market value of the property at the time it is sold or remortgaged," is the typical small print. This exposes housebuilders to falling house prices, though most are betting that they will eventually benefit as prices rise. For consumers, the stakes are much higher. Taking out what is arguably a 100 per cent mortgage in all but name, to buy into a falling market could land them in negative equity from day one.
LOANS FOR HOMES
Despite concerns, the practice has gained huge credence as a sales tool, generating the cash flow that's vital to reduce gearing levels and repair battered balance sheets. For builders with December year-ends, increased levels of shared equity assistance are already reflected in the 2008 full-year figures - providing you know where to look.
"Shared equity is a very murky area, and you need to be an accountant to understand it," says Les Kent, real estate analyst at Finn Cap. Housebuilders contacted by the Investors Chronicle were happy to supply figures; most write off a portion upfront, then treat the remaining equity stakes as an asset to be revalued every year going forwards.
At its year-end, Barratt held £68m on its balance sheet in respect of shared equity deals. The gross figure advanced was £115m - equivalent to nearly 10 per cent of its 2008 turnover - with 40 per cent of exposure written off at the onset of the offer.
Persimmon notched up gross shared equity receipts of £35.8m in 2008, and after discounting £9.8m, the amount carried on its balance sheet is £26m.
Taylor Wimpey's January trading statement indicated net exposure of £16m to shared equity incentives (a gross figure was unavailable). Redrow reported a gross figure of £9m, carried on the balance sheet at £5.4m after a 40 per cent discount, and Bovis reported a gross figure of £8m, reduced to £6m on its balance sheet after taking a 27.5 per cent provision.
NO LEG TO STAND ON
Blue Oar real estate analyst Ian Wild likens the practice to having a limb caught in wreckage following a road accident and "cutting off your leg to save your life".
"For the housebuilders, task number one is do anything you can to keep the banks from the door," he says. "It doesn't matter that shared equity is a bit risky. They have to shift the stock they came into the downturn with. If we haven't got a better housing market five to 10 years out, then it doesn't really matter - it will all be over."
"The most important thing from the housebuilder's point of view is that there is no impact on margins," adds Finn Cap's Mr Kent. "It will also help reduce discounting used to maintain sales." Taking his theory a step further, it is possible to argue that shared equity deals are sustaining artificially high prices on new build properties.
| HOW SHARED EQUITY DEALS COULD BECOME A PROBLEM |
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Let's assume a new built flat is sold for £100,000, with the housebuilder providing £25,000 equity The purchaser secures a mortgage for £75,000. Without this incentive, one could argue that the re-sale value is closer to £90,000 Factor in a further 15 per cent drop in house prices over the next two years. That takes the re-sale value down to £76,500 After the costs of sale, the purchaser can just about pay off the mortgage However, he/she also owes the housebuilder the 25% equity stake, which is now £19,125 Will they be able to afford to repay the housebuilder? |
The big housebuilders' exposure to shared equity schemes will rise in 2009 with the introduction of the government's HomeBuy Direct scheme, which began in earnest this month. Designed to help up to 18,000 first time buyers who are struggling to find a deposit, the scheme provides an equity loan of up to 30 per cent of the purchase price split between the government and the housebuilder. This is interest-free for five years, after which index-linked fees apply.
It has proved a hit with housebuilders - Barratt is offering HomeBuy on 3,000 separate properties, Persimmon on 2,800 properties, Redrow on 630 properties, and Bellway across 93 separate sites.
In common with shared equity schemes available from the builders, these deals are only offered on selected plots. Evidence gleaned from browsing marketing websites shows properties in northern England, the Midlands and Wales are most likely to be featured. Deals on flats appear to be more common than houses, echoing lenders' demands for higher deposits.
CLIMBING THE LADDER
"Shared equity is one of the few ways first time buyers without a cash deposit can get on the housing ladder," argues Bovis chief executive David Ritchie, in defence of the schemes. "Inevitably, we will get some defaults, but we are hopeful house prices will rise. We haven't seen a 10-year period in history in which house prices haven't risen."
Mr Ritchie anticipates buyers will be able to remortgage and pay back the portion as the market rises. "Being first time buyers, these people are at the start of their careers. Over 10 years, they will be able to access increased finance through increased earnings."
This is all very well if the buyer stays in the property for 10 years. But repayment of all the big housebuilders' shared equity schemes are triggered upon sale or remortgage, which seems far more likely. As our illustrative example shows, housebuilders will be exposed to falling house prices for several years - and the type of properties being off-loaded through shared equity deals are likely to lag the wider market further still.
There are two historical precedents to bear in mind when assessing the future impact of shared equity promotions. In the property crash of the early 1990s, builders including Regalian and Rosehaugh offered discounts of 50 per cent on similar terms in a last ditch effort to sell homes. The outcome? Rosehaugh went bust and Regalian never recovered.
By the mid-1990s, people who couldn't afford a mortgage were offered 'shared appreciation mortgages' to buy a home. These offered low or no-interest loans to buy a home - providing buyers surrendered a significant stake of the future uplift of their property value. Years later, as the market boomed, people took their banks to court claiming that the mortgage deals were mis-sold, as it had not been made clear to them that they would have to pay back so great a sum.
But the desire to shift standing stock is greater than the overwhelming sense of deja vu.
