COMMENT Ground rents have long been considered one of the lowest risk – and perhaps the dullest – long-term investments in the property sector. Despite the vanilla, cries for reform regularly move it firmly into the property spotlight. Last month the government outlined proposals for “the biggest reforms to English property law for 40 years”. The sector awaits its fate, but will this be any time soon?
Although historically low income producing per unit, ground rent payments are secured upon individual homes with the ultimate, but rarely invoked, sanction of forfeiture of lease for non-payment. Additional capital payments over time add to the attraction.
The scale of ground rent collection ranges from a handful of units by small investors to multimillion pound portfolios by property companies, pension funds and landed estates. Despite challenges presented over the years by, for example, lessees’ rights of pre-emption on sale, collective enfranchisement and the right of lessees to manage their own buildings, the trade and value of ground rents have largely been unaffected.
Much-needed reform
Over recent years, to maximise the value of their residual freehold interests, developers have granted leases on new-build homes which impose hefty payment obligations. These will often start from a higher base level, be subject to more frequent reviews and often double at every interval. Lenders have recognised the impact on affordability over time and UK Finance (formerly the Council of Mortgage Lenders) has advised gainst accepting such leases as mortgage security. As a result, many leaseholders have found that their properties are unsaleable.
Much lobbying forced the government to announce its intention – several years ago – to introduce reforms. On 7 January this year, the shape of this intended reform was finally brought further into focus. The government announced that, to make home ownership fairer and more secure, leaseholders will be given the right to extend their lease by a maximum of 990 years at zero ground rent. An online calculator will make it simpler for the 4.5m leaseholders in this country to find out how much it will cost them to buy their freehold or extend their lease. “Marriage value”, presently shared equally between freeholders and lessees on the extension of leases of flats and some houses with less than 80 years to run, will be abolished. A zero ground rent restriction will also apply to retirement leasehold properties.
Freeholders, particularly the London estates, institutions, property companies, and others with wide exposure to the sector, will want to make their case strongly. They are likely to accept that a pendulum swing in favour of leaseholders is inevitable but will oppose an outright value grab. Pension funds will point out that many savers invested in ground rent funds will suffer losses unless fair compensation is awarded for the diminution in the value of their investments.
Some lessees will wait until reforms are finalised before extending. Others will not have the option and will pay the statutory price now, or at least reach agreement with their landlords. If lease extensions become cheaper, then, logically, the value of short leasehold interests will rise. Impaired mortgageability will remain a barrier to sale though.
The effect on prices
So how do owners and practitioners value ground rents today? It won’t be easy. Allsop sells almost half of all London ground rents traded at auction and accurate pricing has always been key. Until the online calculator is unveiled, the market will decide. If auctioneers can persuade sellers to set reserves low enough to reflect the uncertainty, results will establish values over time.
Since January’s announcement, the market remains active. We have, however, experienced different emerging approaches to bidding. Some prefer to limit bid prices to multiples of ground rent income and ignore marriage value for now. Others are betting against the abolition of marriage value and are prepared to reflect that additional element in their bids.
Before freeholders panic, and new investors smell blood, we have to remember that reforms in this area have been on the cards since 2017. Recent announcements have amounted to little more than a press release. Whilst effective in courting headlines, they have changed nothing for the immediate future. A change in legislation is required before lease extensions become easier and cheaper, and that could take years. In the meantime, freeholders are likely to hold firm, leaving leaseholders to face a choice – pay the going rate or sit this out. The outcome and duration of this process are a long way from clear.
Gary Murphy is a consultant and auctioneer at Allsop
