The Government's recently announced Your First Home scheme has already prompted comparisons with the former Help to Buy scheme. Whilst many of the finer details are yet to be confirmed, the proposal represents a renewed attempt to support first-time buyers whilst also providing a boost to the new-build housing sector.
What has been announced?
The Government has indicated that eligible first-time buyers purchasing a new-build property will be able to access a 20% government-backed equity loan and purchase with a deposit of just 2.5%. Like Help to Buy, the scheme will be limited to new-build homes and will include an initial interest-free period. However, unlike Help to Buy, the Government has indicated that developers participating in the scheme will be expected to contribute towards its costs.
The Government has also indicated that household income caps and local property price caps will apply, although the detail is yet to be confirmed.
What does this mean for developers?
Whilst the scheme is being promoted as support for first-time buyers, its impact is likely to be felt just as strongly by developers.
One of the challenges facing the residential development sector is not simply obtaining planning permission but maintaining sales rates which justify bringing forward further phases of development. By reducing the deposit barrier for buyers, the Government is seeking to increase the pool of potential buyers for new-build homes. If successful, this could improve sales momentum, increase confidence within the sector and encourage developers to commit to future projects.
For developers and landowners promoting residential sites, increased demand for new-build homes may also have a positive impact on development appraisals, cash flow and the viability of future schemes. Measures which support absorption rates and sales performance can be just as important as planning reforms when it comes to bringing sites forward for development.
Will developer contributions affect viability?
The requirement for developers to contribute towards the scheme is likely to be one of the most closely watched aspects of the proposals.
At present, there is little detail as to how that contribution will be calculated. However, developers already face a wide range of costs associated with bringing forward residential developments, including planning obligations, infrastructure contributions, biodiversity net gain requirements and rising construction costs.
The obvious question is whether the benefits of increased buyer demand will outweigh the costs of participation. For some schemes, the answer may be yes. For others, particularly where margins are already under pressure, any additional contribution may need to be considered carefully as part of the overall viability assessment.
As developers are expected to opt into the scheme, participation is likely to involve a commercial decision. Developers will need to assess whether the increased demand generated by the scheme is likely to justify the associated costs. On sites where first-time buyer demand is expected to be relatively weak, the scheme may provide a useful mechanism for improving sales rates and maintaining momentum. Conversely, in locations where demand is already strong, developers may conclude that the benefits of participation do not justify the additional expense.
What happens next?
For now, many of the most important details remain unknown. In particular, developers will be keen to understand how contributions will be calculated, where income and property value caps will be set, the repayment terms of the equity loan and when the scheme is expected to be implemented.
Until the Budget provides further clarity, it is difficult to assess the full impact of the scheme on either prospective buyers or the development sector. Whilst the headline proposals are encouraging for the new-build market, the real significance of the scheme will depend on the detail. Developers, landowners and prospective purchasers alike will therefore be watching closely for further announcements at the Budget.
How Ellisons can help
As further details of the Your First Home scheme emerge, developers and landowners will need to consider how participation could affect the viability, structuring and delivery of residential developments.
Ellisons’ Commercial Property team advises developers, landowners and investors across all stages of residential development, from site acquisition and development agreements through to disposals and the wider commercial considerations affecting a scheme.
If you are considering how the Your First Home scheme could impact an existing or future development, our team can help you understand the legal and commercial implications and support you in assessing the best approach for your project.
To discuss how the proposals may affect your development plans, please contact a member of our Commercial Property team at enquiries@ellisons.com
