Is the abolition of ground rents good for investors?.
Investing in UK property comes with a range of additional costs that investors must take into account like taxes, management fees, service charges and more. Of all these extra costs, the most contentious in recent years has been ground rent.
Currently, if you own a long lease on a property in the UK – as is often the case when buying a new property under a leasehold – you will normally have to pay an annual fee to the owner of the freehold. This is known as ground rent, and the amount will vary depending on the terms of the leasehold you have purchased.
Ground rent rates can be fixed or they can escalate, and the latter scenario created a situation where buyers were trapped in leaseholds where the cost was doubling every five or 10 years as part of the purchase agreement.
This created financial hardship for many new buyers, and in 2017 the Council for Mortgage Lenders Handbook was revised leading to some lenders refusing to lend on properties where the ground rent exceeded 0.1% of the value of the property. This made it harder to buy and sell properties, threatening to push owners into negative equity and signalling that ground rents were getting out of control.
Now, the government has acted to combat this problem and provide a solution. Ground rents are a cost that does not provide a service, making them unjustifiable, and so these charges will be banned on most new leases purchased after 30th June 2022.
The Leasehold Reform (Ground Rent) Bill 2022 is expected to lead to more transparent home ownership for leaseholders in the future. It will restrict ground rents on long leases of flats and houses to a token peppercorn rent each year – to all intents and purposes, the value of peppercorn rent is zero.
What does the ground rent abolition mean for property investors?
For those considering their next investment in UK property, the abolition of ground rents should be at the forefront of your mind.
The removal of ground rents on new leases should automatically move new-build properties to the top of your list due to the inherent benefits you will receive. As mentioned previously, the Act will apply only to new leases, meaning that all properties in new-build developments qualify and purchasing one of these will mean that you are exempt from paying ground rents in the future.
Crucially, it is important to note that the legislation will not apply retrospectively to existing properties with leases that are already signed and in effect. The government notes that some existing freeholders are changing existing agreements to remove ground rent stipulations in light of the new law, but this cannot be guaranteed as it relies on the goodwill of freeholders – something that has not traditionally been forthcoming.
In effect, this creates a two-tier market. On the one hand, you will have new properties with effectively zero ground rent costs, and on the other, you will have existing properties which will continue to have ground rents which could cost you hundreds or even thousands of pounds a year.
Furthermore, as all new properties will have ground rent costs removed, selling an existing property which does require these payments will only become more difficult. By purchasing an existing property rather than a new build, not only will you potentially pay more during your ownership period thanks to ground rent, but you are also more likely to lose out when you come to sell it, cutting into your potential capital appreciation.
One of the main strengths of UK buy to let investment is its dual income stream – monthly rental income and capital appreciation upon sale. By purchasing an existing home with ground rent costs rather than a new build without it, you are in danger of creating an inverse, negative version of that for yourself.
Existing properties which are already operating as investments will continue to have some advantages over buying new-build or off-plan. For example, there is a degree of security in buying a property that is already complete and tenanted.
However, the abolition of ground rents on new-build properties is good for investors overall and acts as yet another incentive to buy a new property. The benefits are clear, and the Leasehold Reform (Ground Rent) Bill 2022 offers investors a way to cut their costs and increase their profits by investing in new-build property.
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