How will property developers lose out to the new leasehold changes?

Back in February, the British Government released the Housing White Paper which aimed to help increase the housing supply and set out new priorities for housing. There are three main ways in which the Government will help with this; ensuring that the right homes are built in the right places, buildings will hopefully be completed at a quicker pace, and diversifying the market.

Of course, this is great news to homeowners but perhaps not so good for property developers as they may be losing out to the new changes.

 Sajid Javid, the Communities Secretary, has announced a ban on leaseholds for the majority of new build houses in hope of creating a fairer system. He has previously said:

“It’s unacceptable for home buyers to be exploited through unnecessary leaseholds, unjustifiable charges and onerous ground rent terms.

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 “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.”

leasehold-changes England currently has over 4 million residential leasehold dwellings and 1.4 million of these are leasehold houses. The new leasehold changes will prevent this number from rising and will hopefully prevent the sale of new build leaseholds unless necessary. These changes currently only apply to England.

Leaseholders should start finding it easier and cheaper to buy-out their freehold as changes will include ground rents on new long leases and flats being set to zero.

Pure Commercial Finance, specialist commercial finance property brokers, discuss how the new changes will really affect property developers.

How will the new leasehold changes affect property developers?

 First, property developers will be receiving less income from the annual ground rent fees. A lot of developers rely on this income.

Also, the new changes could potentially restrict lending as a lot of lenders will consider the value of the freehold when calculating the overall GDC of a development site. This will allow them to lend more whilst remaining within their LTGDV covenants.

Tom Lee, Head of Structured Finance at Pure Commercial Finance also predicts that it may no longer be possible for builders to sell freeholds to investors to cover the cost of rising building fees, without having to pass the extra add-on cost to potential homebuyers.

He has previously stated:

“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.”

Overall, these new changes could create a double-tiered housing market which would make new-build freehold houses a lot more desirable than similar existing leasehold properties.

Pure Commercial Finance spoke to Lee Mogridge, Regional Director (Wales) at Lambert Smith Hampton, to see if he had anything to add to this. 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.

“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.”

What next?

These changes kicked in on February 7th 2018, and the government will be writing to developers regarding ‘necessary redress’. They will work with the Law Commission to make purchasing freeholds easier.

If you need to speak to any specialist commercial finance property brokers to discuss how this may affect you, or any upcoming projects, Pure Commercial Finance is happy to help.

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