Demystifying co-investment

Despite the extension of the Stamp Duty threshold for first time buyers, the capital barriers to home ownership are prohibitive for a whole generation of potential home buyers. 

Scant mortgage availability, large deposits and Stamp Duty now create unassailable barriers to entering the home market or moving up the housing ladder.

Here David Toplas, CEO of property investment specialist Mill Group, explains how co-investment could be the new path for home ownership for thousands of customers.

Basically, what is co-investment? How does it work?

It is a new model for home ownership that will regenerate the housing market.  It will help consumers to own their own homes, free up capital and increase the housing stock.  

The buyer acquires a share of between 25% and 50% of the property with a private investment fund – such as the Investors in Housing Fund - buying the rest. Unlike buy to let schemes or shared ownership home buyers will pay a monthly co-investment charge on the part of the initial purchase that they do not own.   The owner can also increase the percentage of the property owned at any time, which will see the monthly co-investment charge reduced accordingly.

How does it benefit the consumer?

Co-investment allows buyers to get the deposit they need to gain mortgage approval.   It provides a solution for the average buyer with household incomes of £60,000+ who have the income needed to get a mortgage but lack the funds for a deposit.

And how are investors benefiting?

It also presents an opportunity for private sector investors to gain access to the excellent returns that the residential investment market has represented for the last 30 years. Investors will have safer returns because they are investing in people who want to buy their own homes, look after the property and will eventually buy back the investment. There are none of the void periods which buy-to-let properties represent and they have no responsibility for upkeep.

It will also add liquidity to the market as co-investment and can be a vehicle for major landlords to convert assured shorthold tenancy agreements to part-sales.

Co-investment meets governmental objectives by encouraging investment in building new properties and provides prudent lending criteria and business expansion opportunities for the banks.

How many people do you think will use it?

There are over 3 million private renters in England of which 1.3 million are aged 25 – 44.  (sourced from a survey of English Housing 2008/9).  This means there is a huge market out there among renters alone, as this number doesn’t include the number of consumers already in properties who want to buy a bigger property.

What does the Government and housing market think about it?

The Times wrote of Mayor Boris Johnson’s support for co-investment in the residential market: “The Mayor of London has called on institutions to fund a shared-equity scheme to provide loans to more than one million people in London who cannot afford to buy a property.

“Despite the downturn in the housing market, there are 600,000 households in London that are not eligible for state help but could not afford a deposit, according to figures from the Greater London Authority (GLA).

“Under the Mayor’s plans, institutions would step in for the Government, which has been offering shared equity loans to first-time buyers but has not been able to provide enough funding to meet demand, particularly in the capital.”

And a report from Yolande Barnes, head of Savills stated: “This has the potential to be a more significant development in private housing finance than the buy-to-let mortgage. The number of mortgaged owner occupiers has been shrinking for the past ten years because of the high costs of housing market entry and this has only worsened since the credit crunch.”

“People who neither qualify for social housing nor are able to raise the equity for a deposit are the fastest growing housing segment in the UK. Most of them currently rent in the private sector but, with this type of new model, there is now another option for the deposit starved which helps towards their ultimate goal of outright owner-occupation.”

Where can we learn more about co-investment?

Visit Mill Group’s website, millgroup.co.uk.