This guide was last updated in August 2011.

Since the introduction of the right to buy council housing in the 1980s affordable rented housing stock has been in increasing demand and declining supply. With house prices rising exponentially at times over the last few decades there is a shortage of low-cost home provision in the UK. As it becomes increasingly difficult to borrow money to purchase a house, new solutions need to be found to address this.

Types of tenancy

Housing tenancies can be broadly divided into the following categories:

  • secure tenancies or 'council housing' – council tenants occupy houses under secure tenancies, which are governed by the 1985 Housing Act as amended by subsequent Housing Acts. A secure tenant can only be evicted from his home if the landlord obtains a court order on appropriate grounds, including disrepair, rent arrears and nuisance. To be a secure tenancy, the following must apply:
  • the property must be let as a separate dwelling for residential purposes;
  • the landlord must be a local authority or other designated public body;
  • the tenant must be an individual and occupy the property as his principal or only home. If there are joint tenants, the same must apply to at least one of them.
  • introductory tenancies – effectively this is a one year 'testing out' period for local authority landlords before granting a full secure tenancy to their tenants;
  • assured tenancies – an assured tenant can only be evicted from his home if the landlord obtains a court order and the landlord has appropriate grounds for possession. To be an assured tenancy, the following must apply:
  • the property must be let as a dwelling;
  • the tenant must be an individual;
  • the property must be occupied as his only or principle residence.
  • assured shorthold tenancy – this is broadly similar to an assured tenancy, and the same criteria must exist. However, it is much easier for the landlord to gain possession - he can give two months' notice after an initial term of typically six months. This type of tenancy is therefore very commonly used in private residential lettings.

Intermediate tenures

The above types of tenancy do not create a position where an occupier can ultimately own the property. To address this issue the following new types of intermediate tenure have been developed:

  • shared ownership lease - this is commonly aimed at those who wish to buy their own home but cannot afford it. Tenants will buy a share in the property using a mortgage, then rent the other part from the landlord. Typically the landlord will be a housing association or 'registered provider', and it is common to see tenants buying 50% of the property. Tenants can increase their ownership in the property up to 100% over time, thus decreasing the rented proportion, in a process called 'staircasing';
  • shared equity – this type of ownership is only available to first time buyers, key workers and others who fulfil strict criteria. Here the buyer will typically only have a 5% deposit. As mortgages are generally only available up to 75% of the value of the property, a housing association will provide a low or no-cost loan to the buyer bridging the gap between the deposit and mortgage. So the only owner is the buyer himself - he has simply taken out two loans. Both will need to be repaid when the home is sold.

Addressing lack of market demand for private sale homes

There is both a lack of affordable housing available for lower income households and increasingly difficulty in obtaining mortgages. This has the unfortunate effect that many housebuilders are put off from building new residential schemes as they find it difficult to predict the level of demand for them.

Many providers are therefore now looking at a private rental fund model. This will typically involve a housebuilder engaging with a registered provider. The registered provider will take a lease of both the affordable and the private sale homes and will manage the estate, paying a rent to the housebuilder which reflects the void risk that the registered provider is taking. It will then let out all the homes - either under its own policies in the case of the affordable homes, or in accordance with a marketing strategy agreed with the housebuilder in the case of the private homes.

Local housing companies – the HCA model

The Homes and Communities Agency (HCA) is the Government's agency charged with addressing housing market difficulties in England and Wales. The HCA created a type of joint venture model aimed at increasing the supply of affordable housing. Here, the public and private sector form a partnership to deliver housing within a local area.

In this model a local authority and a housebuilder or a consortium of housebuilders will form a joint venture typically on a 50:50 basis. The local authority will 'sell' its land to this joint venture and the value of that land, or part of the value if it is in a high value area, is matched by the private sector partner with cash. The joint venture therefore holds land plus cash enabling it to carry out development works.

The private sector partner's contracting arm will be awarded the contract to build on the land, and the local authority will require a substantial amount of affordable and intermediate housing to be built. Income yielded by sales, rent and staircasing can be recycled into the joint venture and invested in future projects or, if sufficient working capital is left, distributed to the partners as profit.

Due to similarities in the inputs required from the private sector, this model is of great interest to those construction companies who were historically involved in Private Finance Initiative (PFI) projects. This is only an example of how the private sector is engaging with the public sector to deliver residential schemes - this model is being flexed and adapted to suit different locations and requirements throughout the country.

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