Any doubt as to the incentive to sustain leasehold over commonhold is perfectly summarised in an innocent Savills Spotlight Research report in May 2012 titled Spotlight Ground Rents Spring 2012 headlined “Ground rents are set to become an attractive investment in a growing market”. Three quotes are of particular note:
“Secure income stream: “the leaseholder is incentivised to pay under the threat of losing their property if they fail to do so…”
“In the event of a leaseholder default, the leaseholder’s mortgagee will typically pay to avoid forfeiting their security and should there be further default, the freeholder has the right to forfeit the lease and gain vacant possession of the property. Default is therefore extremely rare.”
“Ancillary income There is frequently the opportunity to collect income in addition to that produced directly by the ground rents, through lease extensions, administration fees/consents, and insurance commissions.”
In other words, ground rents are an ‘attractive investment’, otherwise to be read as a nice captive yield. Leaseholders are like sheep left to graze until the lawful fleecing season arrives twice yearly (not counting the lease extension season).
What is an onerous ground rent anyway?
The industry will claim that RPI indexing is the only fair way to go. Lenders are pushing this as a face value better deal than doubling. Nationwide led the field limiting ground rents to 0.1% of lease value when new, with reviews higher than 15 yearly and based on RPI indexing… Nationwide steps in to protect homeowners from unfair leasehold practices.
However, the thing to realise is that RPI indexing is no assured protection to the leaseholder. Your home will devalue as the term falls no matter what RPI indices may say.
Consider the theoretical relative value of any freehold to its leasehold as a leasehold property’s combined value increases with RPI of say 2.5%:-
Note 1: If lease sells new for £100K (95%), freehold is worth £5263 (5%) = total value £105,263. Market value assumed to index at 2.5% pa.
Notice that 50 years into the lease term, at an average 2.5% RPI, the market value of the freehold increased by 15 multiples of its start value. The value of the leasehold increased only by 2.8 multiples. And bear in mind leases are not guaranteed to sell at prices protected by RPI in local markets. RPI indexing benefits the freeholder investor.