The UK government’s plans to reform leasehold agreements are poised to bring significant changes to the property market.
Before delving into the impact of the reforms, it’s important to understand the concept of ‘marriage value’. This term refers to the increase in a property’s value that occurs when a lease is extended. Currently, if a property’s leasehold is extended, its value generally goes up, a principle known as the ‘marriage value’.
Government’s Proposal: Extending Lease Terms
A key proposal from the government, as mentioned in the King’s Speech on November 7, is to standardize the extension of leases to 990 years. This is a significant change from the current practice, where leaseholds are often much shorter.
The Study’s Findings
A study conducted by Bayes Business School and Knight Frank predicts that these changes could lead to a 9.9% increase in the cost of properties with short leaseholds. Dr. Mark Andrew from Bayes Business School explains that the extension of lease lengths and the abolition of the marriage value could significantly raise the cost of purchasing a leasehold property.
National Impact on Leasehold Market
If all short leaseholds are extended, as the proposal suggests, the study forecasts a cumulative national price increase of 3.2% in the leasehold market. This projected rise has broader implications for housing affordability and the government’s levelling up agenda.
Regional Variations
The impact of these reforms will vary regionally. The most significant effects are expected in areas with either a large stock of short leaseholds, like the West Midlands, or in regions with expensive leasehold properties, such as the South East and London.
Implications for Investors and Leaseholders
The financial benefits of these reforms are not limited to owner-occupiers. Investors in the private-rented sector, particularly those holding short leasehold stock, are likely to be among the largest beneficiaries. This could lead to changes in housing supply within the private rented sector, especially if investors choose to sell their properties to realize these gains.
Potential Challenges and Concerns
Legal and Affordability Issues
While the intention to simplify the leasehold enfranchisement process and make it less expensive for leaseholders is commendable, there are concerns about unforeseen consequences, especially in terms of affordability and market pricing. Dr. James Culley from Knight Frank highlights the complexity of the current process and the potential legal and homeowner affordability issues that might arise from these reforms.
Impact on Pension Funds and Contracts
Jeremy Dharmasena from Knight Frank raises another important point regarding the retroactive capping of ground rents. Such a move could significantly affect pension funds and existing contracts due to a potential loss of rental income. Additionally, the abolition of marriage value and the reduction in premiums might decrease Stamp Duty Land Tax revenue, affecting the broader economy.