It looks set that the proposed leasehold reforms will have significant implications for the various stakeholders, and are poised to alter the landscape of the UK property market. But just how significant will these changes be, who will be the big winners, and on the flipside, who might lose out?
The reforms biggest losers will be freeholders or landlords. One of the major blows will come from the abolition of Marriage Value, a key element in any lease extension premium for leases of less than 80 years. A twist of fate, or an unintended consequence, some experts predict that overseas investors with short leases could benefit significantly. Unintended or not, the savings derived are massive. As an example, assume a flat with a 40-year lease in Mayfair, Knightsbridge or Chelsea, worth in the region of £2 million with a long lease. Under the current rules, in round numbers, the flat owner would typically be expecting to pay £600,000 for their lease extension. Remove marriage value and the cost to extend drops by 50%!
The theory for the reformers is that removing marriage value will provide a wind fall to all leaseholders, by making it cheaper to extend their lease. Having said that, one has to question how the general market will react to the reforms, especially when considered with the intent of increasing a homeowner’s stake and influence in the buildings they live in. The problem for many is where buildings, some high rise, are plagued by under investment in repairs and have underlying defects. Other associated complexities for resident groups could include securing affordable building insurance for these property types.
Add to this power shift, the government’s commitment to remove ground rents. If abolished Freehold landlords would no longer have an income. Then, how quickly can we expect the grim tidings as Freeholders fail and become insolvent. Who will take over these failed assets, or more importantly, who will want to? Many buildings are management-intensive, complex holdings that could have their value plummet to all but zero. They even have the potential of becoming liabilities.
When it comes to the extent of proposed reforms, the Tories don’t want to be out manoeuvred by Labour, who are committed to doing ‘even more’ by way of empowering flat owners if they take control of number 10. By dismantling the Freeholder status, new or added risks could emerge that might just tip the market. Post reform, would it be a surprise to see buyers adopt a wait and see approach to buying certain property types. One can differentiate the level of risk on running costs between owning flats in high-rise buildings, compared to traditional 2 or 3 storey conversions, or older brick-built mansion blocks.
With united bipartisan support, the reform neigh sayers are all but ignored. They are shouting from the rafters, highlighting the unrealistic expectation and economic damage of reform, but with no effective audience, change looks like it is on its way. The once accepted leasehold system, seen as a secure store of value, and method of home ownership, has become toxic. As a result, the entire Freeholder Landlord sector looks set for a public flogging, and having their assets removed by the state and handed over to their flat owning tenants. Ultimately, time will tell if the reforms are well-designed and that they prioritize fairness, transparency, and a smooth transition for all stakeholders as promised.
