Leasehold reform could drive long-term investment out of the property market – The Property Chronicle
Select your region of interest:

Real estate, alternative real assets and other diversions

Leasehold reform could drive long-term investment out of the property market

Residential Investor

The housing sector has potential to unlock a vast amount of political capital for the new Government. With new-found support for the Prime Minister across the country, the housing sector can support Government by delivering a new generation of homes and making home ownership more accessible. Alongside progressive policymaking, the Government needs the backing of institutional investors who can provide long-term capital, often from pension funds. However, there is a current danger that some of the reforms the Government are pursuing – such as those in the residential leasehold sector – increase the risk of driving long-term investment away from the market.

Housing Secretary, Robert Jenrick MP, has committed to reforming the leasehold sector, including eliminating ground rents on all future leases, as well as introducing a new regime to manage building and fire safety standards. Thereis a consistent view amongst investors that some limited abuses by developers, specifically in relation to escalating ground rent clauses and the granting of long leases on new build houses, has undermined the benefits of the leasehold model of ownership. But it should be noted that proactive and voluntary endeavours by responsible freeholders to support existing leaseholders with unfair terms have been in motion for over a year. Unfortunately, the Government’s recent rhetoric continues to alarm investors.  

A ground rent is a key term of the lease and fundamental in the role of delivering capital to large pension funds. It is an investable asset precisely because the interest of patient capital is aligned with the long-term stewardship of the buildings. Fundamentally, with smart regulation and reasonable limits on ground rents to ensure they are affordable, the Government can use them to encourage investment in the housing sector.  

The Government is clear about prescribing increased responsibilities to regulatedinstitutionalinvestors, suchasprofessional freeholders, but is planning to remove ground rents as a financial incentive on all future leases. Instead, the Government is suggesting costs are wrapped up in a service charge, or that a commonhold structure is introduced, which means complicated management obligations will lie with unqualified residents. 

The Government needs to recognise that a commonhold structure is potentially risky for residents, and service charges are non-investable assets. Service charges will likely lead to increased costs for consumers and will cause an array of complexities when it comes to investment, meaning institutional investors could retreat from the market, alongside any long-term interest in apartment buildings. This will open up the market to less scrupulous parties to take on a stewardship role, who have little expertise, little necessary recourses and could even be less incentivised because of the legal implications. As policymakers pursue reforms in relation to building and fire safety, the role of a professional freeholder is of paramount importance.  

Around 63leading organisations, including housebuilders, developers, The Royal Institute of Chartered Surveyors, ARMA, IRPM and HBFhave signed up to a voluntary 14-point pledge that has been designed to end the practice of onerous leaseholds. The pledge is the first step to establishing a legally enforceable Code of Practice that makes sure future ground rents are capped at 0.1% of the sale price of flats increasing by inflation going forward. This can be made mandatory under section 87 of the 1993 Leasehold Reform Housing and Urban Development Act.

Subscribe to our print magazine now!