On 21st December 2017, I emailed my subscribers to notify them of the government’s intention to ban ground rents. This unexpected announcement by Sajid Javid, Secretary of State for Communities and Local Government, sent shockwaves through the freehold buying community … and raised cheers from the #leaseholdscandal brigade, who had been calling for leasehold reform in the wake to the “Taylor Wimpey Leasehold Houses” debacle.
Whilst support for leasehold reform has been gaining momentum since the Grenfell disaster last summer – no one expected politicians to actually do something whilst Brexit is demanding so much attention. But Sajid Javid seems different from your average Minister – he does what he says.
Having said that, the surprise announcement did not include a timetable for reform. It said there is an intention to ban ground rents – but didn’t say when. Nor did it say whether existing leases will continue unchanged – which would create a ‘two tier market’ of flats with ground rent and flats without. It’s all a bit unsatisfactory and raises more questions than it answers.
The government’s long-term objective is clear. Ban ground rents and thus create a level playing field for Commonhold – the alternative form of tenure which was introduced in 2004 and never took off. If ground rents on new developments are banned, the value of the freehold is virtually wiped out – thus making commonhold a viable alternative.
So, where does this leave us now?
Well, the new year brought a tsunami of reaction from freehold buyers and developers alike. Buyers hurriedly instructed their solicitors to abort purchases where they hadn’t yet exchanged. Developers panicked as they saw a chunk of their bottom line profit evaporate through no fault of their own. And both sides emailed and called wanting me to wave a magic wand of some sort. It’s been trying!
It will take a while for the dust to settle, but things a starting to clear a little … and we’re seeing two distinct camps form.
Firstly, there are the large pension fund and bank backed institutional buyers. These guys have aborted everything they can. They are nervously quivering as their numbers don’t add up anymore and everything they paid 35YP for last year no longer makes any sense – particularly if existing ground rents are retrospectively banned too. They have effectively closed their doors until the government passes the new legislation. Job losses are looming large.
Secondly, there are the old established family firms, the orthodox Jewish landlords and those who have worked with freeholds for generations. Unlike the financial guys, these chaps understand the leasehold world thoroughly. They’ve seen property cycles come and go – they’ve seen boom and bust – and they’ve been frustrated in recent years by the crazy high multiples that others have been paying. This has meant they’ve not been able to buy at the levels that have made sense for years – and consequently their cash reserves have grown. These guys see an opportunity.
As I said, it will take a while for the dust to settle. At present the market is flooded with aborted deals – in addition to those developments that were coming to market anyway. There’s an over-supply … and much of the demand has gone. That’s causing a correction in the market and prices are falling. And alongside that, the few buyers that are active – are very active. They’re overloaded at the moment and consequently they’ve got very little patience. If a seller is not proactive and pushing their sale forward – the buyers are dumping them, putting the file to the bottom of the pile and starting on the next one. There’s no time for time wasters!
These are interesting times. The biggest change to property law in a century is coming along. That will be good and it is to be welcomed. It would just be nice to know when it’s all going to happen.
Meanwhile, I’m dusting off my Commonhold ebook. I suspect it will start selling again soon