KEY LEARNING POINTS
- Some landowners are prepared to offer land at a discount if it is going to be used to deliver affordable building plots for local people so they can continue to work or live in the area. Landowners are especially attracted if the affordability of the home can be secured in perpetuity
- It is important to provide support and guidance to households on low incomes if they are trying to build a home for themselves. In the Highlands advice is provided on realistic construction budgets, and how to secure a mortgage. As a result the majority build them build without cost overruns
- When selling plots consider deferring payment for the land until the project is complete. This helps people on modest incomes as they don't have to raise finance early on in the process; only when their home is complete (at which point they can secure a mortgage)
- Providing plots with planning permission in place de-risks the process for households. It is also far more attractive to lenders
The provision of serviced self-build plots to low-income households in rural areas forms a key part of the Highlands Small Communities Housing Trust’s (HSCHT) wider affordable housing initiatives. The Trust secures land at a discount from landowners who want to ensure there is a local supply of affordable housing (such as private estates or community trusts), or have an obligation to do so (for example, developers), services it and then sells the plots to eligible households.
The HSCHT also protects the discounted cost of the land in perpetuity by attaching a Rural Housing Burden to the title of the property; this enables the Trust to retain some equity in the completed home.
Plots come with detailed planning permission and eligible households are set a build budget that reflects construction rates locally – if they can build the home for less using their own labour and contacts, they can find themselves in positive equity. Most households come in below budget. However, if they take longer, or over-spend on a higher specification, some have found themselves in negative equity.
The Trust also has first-refusal on any future sale of the home, allowing it to act as long-term steward of affordable housing. The Rural Housing Burden serves as a guarantee to landowners – who sell land to the HSCHT at a discount – that their goodwill is protected into the future.
The Trust is a registered charity set up in 1998 to help rural communities secure long term solutions to their local housing needs. It receives funding from a number of sources including the Scottish Government and various charitable trusts and foundations. It also generates its own basic income from housing development work and other fee-earning business activities.
WORKED EXAMPLE - BEAULY, INVERNESS
The HSCHT delivered ten serviced self build plots in Beauly, near Inverness as part of a larger development of 100 homes led by Scottish developer, Scotia Homes.
The Section 75 agreement relating to the site (equivalent of the Section 106 agreement in England and Wales) stipulated that a minimum of 25 per cent of the homes had to be affordable. This was possible through a number of routes including self build plots and rent-to-buy.
The HSCHT conducted an Affordable Housing Needs Survey with the local community, which revealed a demand for self build plots.
The Trust initially purchased a development phase (with outline permission for eight homes) from Scotia Homes as a tranche of un-serviced land. Further analysis showed that the project didn’t stack up with only eight dwellings, so the Trust subsequently applied for a variation to the planning permission on viability grounds, increasing the number of plots to ten. It also sought permission from the original landowner (who sold the land at a discount on the understanding that it was for affordable housing) in order to protect the credibility of the Rural Housing Burden.
HSCHT spent around £100,000 on the land purchase and around £200,000 on servicing. The plots were mainly 17.5m x 30m (525 sq m), although a few were slightly bigger.
The market rate for serviced plots in this part of Scotland was around £80-90,000. The Trust sold most of the plots at around £30,000 each, so they were well below market rates.
The development at Beauly features ten self-built affordable homes enabled by the Highlands Small Communities Housing Trust (HSCHT). The Trust has, for many years, provided serviced self-build plots to low-income households in rural areas across the North of Scotland.
Initiator: Housing Provider
Site: Rural and Suburban
Affordability: Low Cost
Built Form: Detached
No. Units: 10
For the purposes of this Toolkit we have made the following definitions:
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Encourage landowners to provide discounted land
Some landowners – for example private estates, the church, local employers and charitable trusts – are willing to provide land at a discount, if it provides opportunities for local people on lower incomes to build their own affordable homes. They are particularly supportive if the homes can be secured as affordable properties in perpetuity
Rural Housing Burden
To protect this discount in perpetuity, HSCHT applied a Rural Housing Burden – a title condition attached to all homes or plots the Trust sells. The Burden comprises two elements – an equity share and a right of pre-emption.
The equity share protects the discount given to the initial purchaser by suppressing the selling price in the event of a resale; the right of pre-emption means the Trust has the first right to buy back the property when offered for sale – this enables it to potentially secure another eligible local purchaser.
The Rural Housing Burden incentivises landowners to sell land to the Trust cheaply as it provides comfort that any discount will be protected in perpetuity, and it gives the local community comfort that purchasers of the plots cannot unduly profit from their sale of their new homes.
The HSCHT is a Rural Housing Body under Scottish law, which allows it to attach the Rural Housing Burden to property. Further information can be found on the HSCHT website. A recent study on the effectiveness of Rural Housing Burdens is available here - http://www.carnegieuktrust.org.uk/publications/2011/the-effectivesness-of-rural-housing-burdens
Setting the Equity Share
In setting the equity share, HSCHT takes account of a number of factors, including the open market value of the completed home (as assessed by an independent valuer), typical build costs in the area, land value and discount, and the cost of buying the home in the event of pre-emption being invoked. The equity share is always calculated in advance of any plot being advertised for sale and varies based on the above factors, although typically it is 25 to 40 per cent.
A worked example of how the equity share is set at Beauly would be:
Obtaining mortgage finance for self build projects can be difficult and the equity share sometimes makes things even more difficult – so, although the exact retained equity share calculation comes out at 33 per cent the Trust usually pegs the share back a few percentage points to give lenders slightly more comfort in terms of loan to value ratios. In the Beauly case the retained equity share was therefore set at 30 per cent and most households came in under budget (so they were in positive equity).
If the home above were to be sold ten years later at, say, £300,000, the seller would get 70 per cent (£210,000) and the Trust would retain 30 per cent of the equity (£90,000). The Trust never realises the equity in cash terms, and this is a fundamental aspect of the Rural Housing Burden. The fact that the home will never be sold outright protects the original landowner’s interest in ensuring a discount exists in perpetuity.
Upon any future re-sale the Trust has the legal right to buy back the home and sell it again to another local household who would have been otherwise unable to afford to buy or build a home for themselves locally. This is called a pre-emption right and is held by the Rural Housing Burden in the title to the property (in this case, the HSCHT). Usually the Trust chooses not to exercise the right and chooses instead to facilitate a direct sale between the owner and a new purchaser. In this situation the Trust has 42 days to identify a suitable candidate from its waiting lists. This avoids the additional legal costs that would be incurred if the Trust bought the property back and then sold it on.
New purchasers can offer more than the equity is worth and the seller can also accept less, but if the Trust choses to exercise its right of pre-emption and buy back the property this must be at 70 per cent of the market price (£210,000 in the above example).
The conditions of the Rural Housing Burden stay with the Title forever, meaning that any purchaser has to accept that the home will never be worth more than its discounted value. This has the effect of suppressing speculation on Trust homes, but allowing some benefit to be accrued by the seller at the point of re-sale.
Purchasing plots at Beauly
HSCHT was able to offer further assistance to some households purchasing plots at Beauly. For example, one was able to access a Rural Home Ownership Grant, while another opted to participate in a Rent-To-Buy scheme. The other eight required no further subsidy at all, although some opted for a deferred payment on the cost of the plot to help their cash flow. This is something the HSCHT is normally able to accommodate.
OTHER FINANCIAL ASSISTANCE FACILITATED BY THE HSCHT
The Trust is able to act as a broker for other forms of assistance for households wishing to build an affordable home. The initiatives can be used independently but are often combined with the provision of serviced plots and include the following:
Rural Home Ownership Grant (RHOG)
The RHOG is a mortgage finance gap-filler. For example, if a household can only raise £80,000 in mortgage finance but the home costs £150,000, they can apply for a RHOG to cover the difference. The finance comes from the Scottish Government which effectively takes a second charge behind the bank if any additional lending is required and the grant must be repaid in full if the property is sold within ten years. Further information is available in the Rural Home Ownership Grant (RHOG) brochure, via the Scottish Government’s website: http://www.gov.scot/Topics/Built-Environment/Housing/BuyingSelling/lift/rhogbrochure
The Rent-To-Buy scheme allows residents to rent a new home for five years while saving up for a deposit, and returns a cash-back “loyalty” sum to the tenant at the end of the period if they then purchase the property. This sum is used for the deposit necessary to secure a traditional mortgage. For further information see the Rent-To-Buy section of the HSCHT website: http://www.hscht.co.uk/rent-to-buy.html
Deferred Plot Payment
The HSCHT permits households to defer payment for the plot until completion. This can make a self-build project more affordable and can help facilitate mortgage finance.
The price of most of the plots was around £30,000 and each came with detailed planning for a three-bedroom house of around 100 sq m. This de-risked the process from the point of view of lenders as it demonstrates that something of value could be built on the site.
The Trust has developed a flexible house-type based on a Scottish ‘crofting vernacular’ that can be adapted to provide a two-bed, three-bed or four-bed dwelling. The detailed planning permission is also flexible and in Scotland the final number of bedrooms is dealt with through building regulations.
Facilitating affordable plots
If you can acquire the land at a low cost, and the plot servicing work is straight-forward it is possible to provide plots at well below market rates
Securing future affordability
There are a number of ways homes built on discounted land can be secured as affordable housing into the future. In Scotland the ‘Rural Housing Burden’ provides a good solution; in England and Wales exception site policies can be used. See our Briefing Note on affordable housing and exception sites
Households at Beauly were free to speak to the planners to agree variations – such as an additional window, slight increase in size or material variation - and they could re-submit for detailed planning if they wanted a different design. The existing detailed permission can be helpful to households with limited financial resources, as it saves them incurring additional planning or design fees. Most households at Beauly chose to vary the detailed permission, and this is the norm on the majority of HSCHT schemes.
Build budgets were restricted to £110,000, based on the Trust’s working knowledge of the area. This gave a total budget of £140,000 (£30,000 for the plot plus £110,000 for the build) for a home valued at £210,000 on the local open market (the other £70,000 represents the Trust’s 30 per cent equity share).
Anecdotally, most households at Beauly were on budget and some came in at a lot less. The Trust does not require a final reckoning to be made on the costs at the end of the build, as the equity share has already been set.
Households usually access bridging finance up to wind and watertight stage, when they transfer to a normal self-build staged-payment mortgage. Upon completion the household can take out a standard mortgage on the home.
ENABLING ROLE OF THE HSCHT
The HSCHT maintains a close working relationship with the communities and households it supports - from an initial housing needs assessment right through to the completion of the homes.
Affordable Housing Needs Survey and Eligibility
An initial Affordable Housing Needs Survey – usually conducted according to the Trust’s own methodology and in collaboration with local community leaders – establishes what kind of land the Trust can buy and from whom. The survey will also identify the size of homes that should be provided, their tenure, and what procurement route will be best (for example self build, or contractor built).
A community group, sometimes with the support of a local landowner, usually pays for this assessment. The survey usually involves a personally delivered door-to-door form that is completed and returned to community leaders, followed by a two or three day ‘surgery’ in the village hall. The surgeries allow the Trust to understand in more detail the household sizes that are required, typical incomes, and wider issues such as employment and skills or resource shortages in the area.
The survey informs a site-specific allocations policy. This might include giving preferential treatment to people with key jobs that are required in the area, or to families with young children so that the local school remains open.
Interested households are then invited to submit a ‘note of interest form’ that details their background and income. The HSCHT then assesses the applicants’ income and their employment situation (plus any benefit payments or family gifts they may have) to check if they can secure a mortgage. This analysis might identify if the process is financially too risky for them, or if they could afford to buy land or a home in the open market. Critically, the HSCHT will not allocate an opportunity to a household that cannot afford to deliver their project.
Build budgets are set early in the process to ensure applicants are realistic about what can be achieved. The Trust also assesses the self-builders’ plans and build programme, advises if the quotes from contractors seem reasonable or not and, if required, is involved in conversations with lenders. The HSCHT does not set a time limit for constructing the homes but finds that most people complete within two years.
Skills and Resources
HSCHT had a team of 12 people (at the time of writing), although historically it has delivered its programme with a team of four or five. The Trust typically delivers around 120 homes per year, including contractor-built homes for sale or rent as well as the serviced plots.
The team includes: -
- One business development officer
- Two community development officers
- Two construction and development officers
- Two marketing people
- One project officer - who coordinates financial arrangements with the Scottish Government , such as applications for grants and loans towards affordable housing projects
- Two administrators
- An IT technician
- And an accountant
Helping people to stick to tight budgets
Provide guidance to households on low incomes to ensure they have realistic construction budgets, and be prepared to support them if they need help securing a mortgage. With help most people can deliver a home on budget
The NaCSBA Research & Development Programme is funded by the Nationwide Foundation and aims to promote the self-build and custom build sector as an affordable route into housing for a greater number of people in the UK.
For further information, please visit:www.nacsba.org.uk or www.selfbuildportal.org.uk