Effect of new lease term trends on home valuations

annetheman

I hope someone who has a good understand of marriage value/lease extensions and freehold buying/selling can help?

Since we heard the big 5 builders are setting all new ground rents to zero, it is likely they will also follow Barratt and also make all new lease terms 999 years.

If this becomes a 'thing', I wondered what effect retrospectively applying £0 ground rents on existing leases might be?

In this scenario:

Simon owns a 90 year lease on a flat valued at £200,000. The ground rent is £150 per annum and increases with RPI every year. He was planning to extend the lease term by agreement with his freeholder.
What happens to the value of his flat and his costs for extending the lease if 
a) freeholder decides to amend the lease to reduce ground rent to £0 at no cost to Simon other than legal prep fees?
b) freeholder decides to agree a lease extension to 999 years with normal costs and no change to his ground rent?

I've been told that in a) the value of the flat would decrease.
In b) the value of the flat would increase, akin to owning a share of the freehold.

Is this true?

anselld

(a) Is extremely unlikely despite the current publicity, however it could surely not reduce the value of the flat.  Elimination of ground rent must increase the value somewhat.

(b) The financial difference between 90 years and 999 years is not huge.  If anything a very long lease tied to RPI would be less attractive.   Buyers of a 999 lease would be expecting peppercorn rent.

NameUnavailable

anselld said:

(a) Is extremely unlikely despite the current publicity, however it could surely not reduce the value of the flat.  Elimination of ground rent must increase the value somewhat.

(b) The financial difference between 90 years and 999 years is not huge.  If anything a very long lease tied to RPI would be less attractive.   Buyers of a 999 lease would be expecting peppercorn rent.

Agree that a) would be a positive although it may not increase the value much if at all, it certainly won't affect it adversely, why on earth would it?

As for b) a longer lease is always going to add value. If you buy a flat with a 90 year lease and live there for say 5 years you will find it harder to sell unless you pay to extend the lease. Live there for 11 years and suddently you're looking at a significantly higher cost to extend! If you had a 999 year lease you're never going to need to extend it.

Anyway, my understanding of the leashold reforms that are being discussed is that they will only apply going forward, i.e. any existing ground rents etc. will continue as they are (until a leaseholder requests to extend the lease).

annetheman

Ah, I may have misunderstood but I believe the answer to this is:
it may not increase the value much if at all, it certainly won't affect it adversely, why on earth would it?
I think the value of the freehold would decrease, if a) happens (and potentially with b?)... But does that not mean then that the value of the flat itself also is reduced?

davidmcn

annetheman said:

Ah, I may have misunderstood but I believe the answer to this is:
it may not increase the value much if at all, it certainly won't affect it adversely, why on earth would it?
I think the value of the freehold would decrease, if a) happens (and potentially with b?)... But does that not mean then that the value of the flat itself also is reduced?

No. By "the flat" you mean the leasehold interest, not the freehold interest. They operate inversely, if you shift the balance between leaseholder and freeholder.

princeofpounds

a) No, removing ground rent would increase the value of the flat. By how much depends on the level and escalation built into the ground rent, and for some ground rents it may not even be worth the legal fees.

b) Extending the lease but otherwise maintaining the terms would also increase the value of the property. Again, it may not be worth the value of the legal fees in some cases.

As nameunavailable says, there are currently no plans to make any systematic retrospective changes. A couple of large developers have done so on developments where they have made some sales but are still marketing, I presume to prevent bad PR at those specific sites.

For a 300k house outside London with no ground rent, a statutory extension from 90 years costs 3-4k, from 999 year 1k. So you can see there isn't a huge difference in value between a 90 and 999 year lease.

A statutory extension on a similar property, 90 year lease but with 250 quid ground rent, would cost 6-8k. So again not a huge deal, although of course it would be bigger again with an escalation clause.

annetheman

Resurrecting this due to an interesting comment by macroeconomist Claus Vistesen:

"Leasehold activists need to think carefully about what they're doing here. The transition is great, but any shift in legislation has to cover ALL leaseholders, otherwise the values of existing leases will drop like a stone, and the market will tank even harder than it already is"

This is in response to this LKP article advising people not to buy new leases with ground rents, thanks to the trend trickling down across developers to remove them from new leases.
So there is definitely a camp of people who believe that removing ground rent would decrease the value of existing leases, which I agreed with but see posters above did not. He expands:

"The monetary value of the ground rent is not the issue, but rather the potential conditions, pitfalls etc that come with it, especially as the ground rent goes above a certain level rendering more general tenant law applicable  [£250pa/£1,000 outside/inside London issue]. In short, in advising people not to buy existing products, they're throwing existing leaseholders under the bus."

Thoughts on this most welcome! As it happens, I'm proceeding with my purchase, lease as-yet unsigned with ground rent review every 10 years aligned with RPI at the time.