Insights

Are ground rents such a bad thing?

27/11/2019

As my colleague, Jamie Rhodes, recently noted one of the Government's proposals contained in its paper "Tackling unfair practices in the leasehold market" is to prevent newly developed houses from being sold on a leasehold basis.

The Government has responded to the well-publicised concerns that many home buyers are unaware of the implications of the multiplier ground rent provisions which in some cases could see their ground rent double every 10 years. In an article in the Guardian of 5 November 2016 it was reported that in some cases the effect on value was so adverse that purchasers of leasehold houses were unable to sell, refinance or enfranchise their properties.

Moreover, at Howard Kennedy we understand that in view of this criticism and impending legislation, very few developers in the market are now selling new-build leasehold properties with anything other than nominal ground rents.

However, the entitlement to receive ground rents is an attractive asset class to some institutional investors. In particular, grounds rents can offer stable, relatively low risk, inflation linked (or otherwise set to increase) long term investments, with a yield above those available from Government bonds. This can prove attractive to those institutions with long term liabilities by allowing them to match these assets to the liabilities, leading to advantageous valuations under Solvency II. Moreover, in the current environment of falling (and even negative) interest rates, ground rent portfolios are looking to be a very attractive asset class. A higher ground rent also enhances the value to the landlord of a lease extension or freehold enfranchisement.

It seems to me then that grounds rents do have value, but need to be properly explained, understood and valued in the context of a purchase. It is vital that buyers of leasehold properties (whether new or old, houses or flats) are properly advised on their ground rent obligations and their surveyor/valuer (and mortgagee's valuer) takes proper account of their impact on value. They should ask themselves the question, "compared to an equivalent freehold property, how much less am I willing to pay bearing in mind the ground rent?" If they do so, the value of ground rents can be properly unlocked and a purchase price agreed that is in the interests of all parties - buyer, developer and institutional investor.

It is also worth noting that in some cases leaseholders have a statutory right to enfranchisement, i.e. to acquire their landlord's interest. The premium they are required to pay to their landlord is affected by their ground rents. My colleagues, Amanda McNeil and Rob Boucher, are two of the UK's leading leasehold and enfranchisement lawyers in Howard Kennedy's leading enfranchisement practice and would be happy to take any enquiries in connection with this.

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Government should cap existing ground rents at 0.1pc of houses’ value, up to a maximum of £250 a year, the committee MPs recommended. The report also called for ground rents on new leases to be set at zero...

https://www.telegraph.co.uk/money/consumer-affairs/scrap-mis-sold-leaseholds-cap-ground-rents-mps-demand/
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