The Government have recently announced their proposed means of altering the leasehold housing sector within the UK which introduces some significant variations which are intended to be enacted into legislation via Parliament.
Phil Winckles [Head of Consultancy] discusses some of the key issues with Julie Ward [Head of Property Management] and Debra Beach [Head of Keppie Massie Residential].
The results follow the Governments consultation in seeking to tackle unfair practices in the leasehold market. The consultation followed well publicised cases principally relating to unreasonable ground rent provisions, lease terms and/or charges. Whilst the number of properties affected by “unfair” leasehold terms is unknown, it is reported that in 2016-17 an estimated 4.3 million leasehold dwellings were sold in England which equates to 18% if the English housing stock. Of this sum approximately 2.9 million properties were flats and 1.4 million were houses. The changes will therefore have a significant impact upon the market.
- All new houses will be sold on a freehold basis (subject to a select number of exceptions including shared ownership, community lead development, retirement properties, equity release, National Trust and excepted sites on Crown Land)
- Any new grounds on flats and houses will be capped at a peppercorn (with a select number of exceptions including shared ownership, community lead development, retirement properties, equity release)
- A reform of existing freeholder practices giving the similar rights to rights to leaseholders in respect of the right to manage
- The changes will be brought into effect as soon as the legislation comes into force. There is no transition period.
- The Government have pledged to undertake a review on the introduction of mandatory qualification for all property agents
- A review and consideration of what fees can be changed and whether these should be capped or banned
- A review and introduction of guidance on the use of restrictive covenants and administration charges within new build properties
- Reviewing Right to Manage legislation to make it easier for leasehold to take over management of their building, extended leases or purchase the freehold interest.
At this stage there is no clear indication as to when the legislation will pass through Parliament however the Governments response has provided a retrospective effect on any leasehold land acquired after 21 December 2017
At this stage it is unclear when the legislation will pass through Parliament although the Government has made a clear commitment to reform. We anticipate that the changes will have a significant to the residential market with key issues including the following.
- The loss of the ability to charge a ground rent within new developments will undoubtedly impact pricing of new build properties (particularly flats where such charges are most common). The ability for developers to “recover” the lost ground rent value through increasing the sale price of individual flats is not guaranteed (particularly for smaller flats and those in lower value areas) where the value of the ground rent income per flat can still often be equivalent to £5,000 to £7,000. This uncertainty increases development risk and, if the sale price of individual flats can’t be recovered, it will impact development viability and result in a reduction in land values.
- Whilst having a retroactive date for new developments will restrict the ability for developers to land bank schemes, the developer will need to acquire the freehold interest in the site prior to selling the houses. At the current time no measures have been proposed as to the mechanisms for developers to acquire the freehold, and there is therefore a potential for a ransom scenario to appear.
- The changes proposed under the management reforms are, on the whole welcomed, however the legislation could result in the ownership and management of apartment blocks moving away from professional landlords (who are currently attracted to such properties by the ground rent income streams).
- The proposals provide limited assistance to existing leaseholders who are subject to onerous leases. Indeed, if anything by imposing tighter controls on new developments it could make these properties even less marketable.
- The effect that the changes will have on the marketability and value of existing freehold ground rent investments is unknown. Over recent years, given uncertainty with the wider market, yields have compressed to extremely low levels. Whilst the abolition of new ground rent investments coming to the market could compress yields further, proposed changes to the enfranchisement process adds significant uncertainty to this occurring.
- For freehold properties within estates which include common areas or amenities, the proposals should help resolve a number of the recent publicised issues over unreasonable management practices
For further information on any of the topics highlighted within this article please contact us.