March 12th, 2018. Tom Rowlands
What Do the New Leasehold Changes Mean for Property Developers?
Recent governmental changes mean there will be big changes for developers who currently rely on payments from leases. Here our commercial finance brokers outline the changes and what they could mean for property investors.
A Shake-Up and Crackdown on ‘Unfair’ Leasehold Practices
On February 7th 2018, the UK Government released the Housing White Paper which set out its priorities for housing and how they can help increase its supply. This will be done by planning for the right homes in the right places, building homes faster, diversifying the market, and helping people now.
To deliver a fairer and more transparent system for homeowners, Communities Secretary Sajid Javid has announced a ban on leaseholds for almost all new build houses. It is hoped this will ‘cut out unfair and abusive practices within the leasehold system’.
‘It’s unacceptable for home buyers to be exploited through unnecessary leaseholds, unjustifiable charges and onerous ground rent terms.
It’s clear from the overwhelming response from the public that real action is needed to end these feudal practices. That’s why the measures this government is now putting in place will help create a system that actually works for consumers.’
There are more than 4.2 million residential leasehold dwellings in England, 1.4million being leasehold houses, and these changes will prevent this number rapidly growing by preventing the sale of new build leaseholds unless necessary.
Further changes will include ground rents on new long leases for houses and flats being set to zero, and it will become easier and cheaper for leaseholders to buy-out their freehold. Better support on routes to redress will also be provided alongside a wider internal review of advice services.
Please note: These changes are for England only.
How Will the Leasehold Changes Affect Developers?
This announcement comes as great news to homeowners, however there are multiple drawbacks for developers.
Not only will there be less income from annual ground rent fees, but the changes could restrict lending as many lenders will factor in the value of the freehold when calculating the overall GDV of a development site. This allows them to lend more whilst remaining within their LTGDV covenants.
Previously, builders could also sell the freehold to investors in order to cover the cost of rising building fees and land values, without having to pass the extra costs on to prospective homebuyers. This may no longer be possible.
Overall, these changes could create a two-tier housing market which would make new-build freehold houses more attractive than similar existing leasehold properties.
We spoke to Lee Mogridge, Regional Director (Wales) at Lambert Smith Hampton, to get his thoughts. He said:
“Issues regarding leasehold tenures are well documented and can be complicated for reasons of service charges and each development situation will differ. The Government, particularly in Wales, are desperately trying to promote sustainable buildings and are promoting the development and use of Communal/District heating systems may well require a leasehold structure to ensure service charge compliance for cost recovery, so if the Government is trying to promote “freehold only” tenures they may well be causing themselves a problem in recovery with this concept.
“The structure of leaseholds therefore can sometimes be necessary; however, the structure can be adapted to the benefit of the leaseholder – firstly by increasing their duration, secondly by reducing rental payments (if demanded), and finally by setting up a freehold structure which gives the leaseholder a share in the top interest. By doing this any service charge liability could be easily recovered.
“Developers who set up freehold companies which take responsibility for service charge management and insuring the buildings, as well as collecting rents (some with geared uplifts) clearly benefit as they will take management fees and commissions out of the companies which are ultimately paid for by the tenants.
“If the Government effectively abolishes the leasehold system, the developer will need to recover their loss in value and the only ways that it can do this will be to either decrease the price it pays for development land or more likely, increase the sale prices of the properties to compensate.”
Our Head of Structured Finance, Tom Lee, has added:
“On recent valuations for development projects, I have noticed that some surveyors are not allowing a value for the freehold. This does have a small impact on value, so the quicker this uncertainty is clarified the better for everyone.”
The government will be writing to major developers regarding ‘necessary redress’ and will work with the Law Commission to make purchasing freeholds easier. But ahead of this, what are your thoughts on this announcement?
Let us know your thoughts by tweeting @PureCommFinance or get in touch with our specialist commercial finance property brokers to discuss what effects this could have on your current or upcoming projects and their funding.
Article By Tom Rowlands
March 12th, 2018
Tom joined Pure Property Finance in 2017 after a career as a Client Wealth Manager, where he spent just under 3 years advising on financial and tax planning. Tom specialises in bridging finance and property development funding, having completed deals ranging from a simple £30K property purchase through to £2m+ mixed-use developments.See more articles by Tom