so after weeks of research finally found a flat which just about works in terms of location, yield, price etc. However the lease has a doubling ground rent clause every 20 years. currently £250 and will rise to £500 in 2034.
now I’m aware if leasehold reform government currently contemplating. however no guarantee it will become law. is it worth the risk? Will be good to know your thoughts.
£5 a week . not much .You can buy these out for a price
Dont mind the £250 currently. Trouble is it will go to £500 and then £1k, £2k… Ticking time bomb?
not as bad as some . The Gov do plan a reform , but when is the question.
I wouldn’t worry too much about it. Doubling every 20 years is only an effective increase of approximately 3.5% pa. Your rent is likely to be substantially higher in 20 years so impact of it in future is likely to be similar to now and you do have right to buy it out.
Run a mile from it. It will become unsaleable in the future. The ground rent will eventually exceed the value of the property and the then leaseholder will have to offer to surrender the lease.
Depending on your investment horizon, consider also the length of the lease, alongside the amount of the ground rent, from the point of view of how much it will cost to extend (anything <90yrs now would be relevant on eventual resale). Where the ground rent is not peppercorn - £250pa isn’t - (and absent any leasehold reform acts), low interest rates can make extending pricey.
yes but won’t the leasehold reform protect against the doubling ground rent? Also as far as I understand these provisions can be removed when the next lease extension is negotiated with the freeholder?
there is 92 years left on the lease. do by the time I get to extend, it will be circa 89 years. that’s still OK I suppose
I don’t think that any change in the law will be retrospective and as has been said, extending the lease is likely to be very expensive in order to extinguish that ground rent. I think that future buyers are likely to be very wary of a property like this and you may find it very difficult to sell for anything approaching its full market value.
‘Extending’ a lease is actually surrendering the prior and creating a successor. Terms can be negotiated then of course to suit both parties, but the freeholder will want compensation for sacrificed value on surrender. Calculation for that conventionally features the present value of aggregated future ground rents discounted at what is known as the deferment rate. This is where the redoubling every twenty years might alter the prospect from your point of view, since the less the deferment rate, the greater the present value.
As things stand at the moment, you would want to avoid tangling with ‘marriage value’, an additional cost element to extending when the lease drops below 80 years’ remaining (there is talk of abolishing the concept … but would abolition apply to existing leases ?). So, depending on when you’d want to sell will influence how a potential buyer would value the remaining economic life of the lease: if, say, in five years, unextended with 85ish years to run, it might look unattractive for their eventual selling up in, say, another five years further on. If you’d prefer to avoid that possibility by extending beforehand, you might find you’re facing an unanticipatedly costly outlay.
You have the figures - do the sums to check it fits your business plan ! The deferment rate has historically been around 4.5%, although - achtung! - that much was when we had interest rates and regular inflation (i.e. 10-15 years ago).
that’s useful Nicholas. thanks
is there a calculator which estimates the cost of extension including the ground rent squashing? all the ones I have seen online base the premium on lease extension only and the the ground rent removal element.
in this case purchase price is £175k, current ground rent £250, next doubling in 2034, then 20 years after, lease term remaining is 92 years. Upto £10k premium for a 90 year extension with ground rent at Nil is ok. anything above that makes the deal unfavourable.
I would imagine that online calculators apply statutory rules for obtaining a new 90-year lease; freeholder and leaseholder are at liberty to negotiate their own terms for extension, of course, but the underlying financial arithmetic should employ standard techniques in either case. New lease (=extended) replaces prior. Most important is that you understand from where/how the figures involved are obtained. Goes without saying, there are other expenses to factor in also (e.g. solicitors’ fees, survey …).
I’ll refrain from commenting on your particulars - I’m not qualified professionally to offer specific financial advice - except to say that it’s good to have a clear benchmark that suits your circumstances on which to base a decision.
The general principle behind working out the value today of future revenue streams involves discounted cash flow calculation (Google it!). If it were I, I’d feed the numbers into a spread & play with various deferment rates to grasp how sensitive present value is to the applied discount rates …
A propos, there’s this in the news today on the general topic of leaseholds and doubling ground rents:
Mortgage Lenders are starting to get very twitchy about lending on doubling ground rents. As are Equity Release companies too. I am sorry but my advice would be not to proceed with this purchase
Thanks for all the posts and sharing your thoughts. Consulted a leasehold extension surveyor today and now understand it will cost £18k circa for 90 year lease extension and changing ground rent to peppercorn. Turns out the prev owner let the lease drop below 80 and traded the doubling ground rent for a cheaper premium for extension leaving the next owner to bear the brunt.
Anyway, back to the drawing board. Unless of course the seller becomes realistic with their expectations.
In that case I would forget it
I think £18k is on the light side. I suspect nearer £25k given that ground rent situation.
I believe Colin3 has a very long barge-pole that he lends out in situations like this. My back of a fag packet calculation leads me to believe that David122 is closer to the mark on lease extension valuation. More if long term interest swap rates fall. Any leasehold reform is likely to be more focused on new leases. Freeholders will fight for compensation if their existing ‘investments’ are purposefully devalued by new legislation. Ever wondered why almost all freehold companies are privately held and mostly offshore? In my view, the reforms will lead to a situation no different to the generous compensation distributed to slave owner after the 1833 Abolition of Slavery Act. Guess who got to pay for that?
Well put Nilesh. Likely to be new builds not existing