How Leasehold Should Work

Leasehold is a unique feature of the English and Welsh property markets and up to a point it makes a certain degree of sense. For example, the fabric of a block of flats may need to be managed as a single entity, even though each of the flats themselves may have a different owner. For similar reasons there may be some logic to having a leasehold arrangement for terraced and even semi-detached homes. Currently in the UK, however, even detached homes are being sold on a leasehold basis. What’s more, the manner in which some leaseholds are being run is so archaic and feudal that it would be fair to call it a national scandal.

The history of leasehold

Although the basic leasehold system dates back, literally, hundreds of years to the Medieval feudal system, the modern concept of leasehold effectively started in the 1920s. It basically allowed landowners to rent out their land for very long periods, thus guaranteeing themselves an income from it regardless of changing circumstances. It really took off in the 1950s as the population grew and housing developments increasingly focused on flats, which could contain more housing units in less ground space. In the 1960s, however, the shortcomings of modern leasehold began to become apparent as elderly tenants started facing eviction as their leaseholds came to an end. Since then the problems with leasehold have only been getting worse.

Leasehold in 2017

The National Leasehold Survey 2016 revealed that 57% of leaseholders agreed with the statement “I regret purchasing a leasehold property”. In other words, less than half of leaseholders surveyed are happy with their situation. Looking at stories featured in the press, much of this discontent seems to stem from home builders selling on freeholds to third parties, who then increase ground rent charges in a way which is completely unrelated to either inflation or the cost of the services they provide (if any). Some home owners have complained that the freehold to their properties was sold on without their knowledge or that when they tried to buy the freehold, they were quoted a completely unrealistic price for it. Some home owners have even been advised that their leasehold situation effectively makes their homes impossible to sell as mortgage lenders will not lend against homes with what they perceive to be excessive rent review clauses. Others have complained that even minor changes to their homes trigger extortionate fees from their freeholders. While the push towards creating more new-build homes is desirable for many reasons, it does mean that more people are going to find themselves dealing with leaseholds for the first time and that means that the scope for discontent is even higher than it is now – a fact, which has been noticed by parliament with housing minister Gavin Barwell calling the current leasehold system a “widespread problem that needs addressing”.

Looking North for alternatives

In Scotland, leasehold properties are the very occasional exception rather than the rule. The issues surrounding management of the fabric of buildings such as flats and other communal areas such as gardens are addressed by means of what are called Deeds of Conditions. Often, these deeds of conditions will involve the use of what is known as “factoring services” to carry out maintenance duties. Although this system is still far from perfect in that home owners can be left dissatisfied with the way the factoring company performs its services (or not as the case might be), it does resolve a number of the issues related to the leasehold system in England and Wales. It is also entirely possible that the Scottish government will heed calls to review the way the factoring system operates to address some of the concerns raised.

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It’s Not Grim Up North

Data from peer-to-peer lender Kuflink shows that rental yields in the North of England and Scotland have been comfortably beating rental yields in London at 4.3% and 3.2% respectively. While this is, of course, interesting news for (potential) buy-to-let investors, it’s still useful market intelligence for those who prefer to avoid the politics of buy-to-let and invest in the property market through other channels, for example property development.

Takeaway point 1 – There’s a difference between price and value

London and the South East is an expensive place and hence landlords are likely to be able to charge higher rents than they would for equivalent properties in other parts of the country. The flip side of this, however, is that buying the rental property is likely to have cost them more than an equivalent property in another part of the country. There are still plenty of reasons why the Thames Valley area could be a good place to invest in property in some way, but it’s worth remembering that there is strong demand for property in other parts of the UK as well and hence opportunities for investors.

Takeaway point 2 – It’s always worth looking out for up-and-coming areas

According to Kuflink, Manchester and Salford provided rental yields of 6.7% and 6.6% respectively whereas Cambridge was a mere 2.7%. The data did not analyse why this was so, but one very feasible explanation is that Manchester and its neighbour Salford have both been in a process of regeneration over recent years, with the BBC making news itself by moving some of its production to Salford back in 2012. The availability of work attracts people to an area, particularly young adults, for whom renting is likely to be the most appropriate option, even if they have the funds to buy. The combination of relatively low house prices (compared to London) and increased demand for rental properties makes for good rental yield. It also offers good opportunities for other forms of property investment since many of the people who arrive as renters will ultimately settle down and buy property in the area. Cambridge, by contrast, is a mature market. As a University town, it has a pretty much guaranteed market for rental properties and as a research centre it also has a demand for property to buy, but there is nothing new about any of this and so the opportunity to invest at the start of an upward trend is really long gone. The North of England and Scotland have both been benefitting from improved infrastructure (particularly transport links and broadband internet) and as they are outside the “city” zone, they have less reason to be concerned about the prospect of some financial service roles being moved out of the UK due to Brexit.

Takeaway point 3 – Quality matters

The fact that in the UK there is always a strong demand for housing is hardly a secret and a quick scan of a newspaper website will probably reveal plenty of articles about landlords and home builders taking advantage of desperate renters or buyers. While there is certainly an element of truth in this, the simple fact is that the fundamentals of business also apply to the property market, even though it generally moves at a slower pace. Companies (or individuals) who supply shoddy goods and/or poor customer service may make a quick short-term profit, but over the long term they tend to get found out and weeded out. Because of this, anyone looking to make meaningful, long-term returns from property, whether that’s as a landlord or as an investor in property development, is well advised to be very selective about their purchases and only put money into high-quality builds.

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New Build Concerns

Cowboy builders have long been fodder for the press (as well as various industry bodies and occasionally the police), but a quick look at press headlines about new build properties (and by extension, the companies which build them), could leave some home buyers with serious concerns about buying one.

What the headlines say

Some headlines point to developments which do have serious flaws in workmanship ranging from structural issues to problems with facilities such as heating or windows to more significant cosmetic flaws such as badly applied plaster. In many cases, however, the issues with new builds ultimately boil down to a mismatch between the buyer’s expectations and the reality of what they have been sold, which may have been brought about by some degree of misrepresentation. For example, a purchase contract may specify the exact dimensions of a room, but if the buyer takes a trip around a show home to help them to translate these figures into practical terms, the unwary may well find themselves caught out by the use of cut-down versions of standard household furniture, which gives the impression that the rooms are more spacious than the actually are. In fact space and the way it is used is a key issue with many new build homes.

The reality

The UK needs more new build homes. In addition to a growing population, existing low-grade housing needs to be removed and updated to meet modern requirements. This means that home builders know that there is generally an eager market waiting for any new development and, once that is sold, plenty more home buyers desperate for them to complete their next project. It’s therefore an unfortunate fact of life that some builders will look to maximise their profits by completing developments as quickly as possible and to the minimum acceptable standard. They may further resort to “tricks of the trade” to mislead buyers into thinking they are getting a higher-quality property than is actually the case.

Making a successful new build purchase


Understand the law

At present time, property is excluded from the Sale of Goods Act. Instead, there is an industry watchdog called the National House Building Council (NHBC). If the home owner identifies a defect within the first two years after purchase, the builder will be obliged to rectify it. After this period, structural issues will be covered for a further 8 years (making 10 years in total).

Check the credentials of your developer

In addition to speaking to the developers themselves, see what other people are saying about them. Go on to relevant internet forums and see where their name has come up in threads and what has been said about them. Be aware that even the best developers can trigger some complaints, but overall the comments should be far more positive than negative. Ask around the neighbourhood to see if you can find anyone who has already bought a property in the development which interests you. See what they have to say about their experience. If you can’t find anyone in person, try heading back online and seeing what you can learn there. Look up previous developments by that developer and either visit them in person or head back to the net to see what kind of reputation they have and how people feel about living in them now. Remember to be clear about the difference between issues which may have been caused by the developer (e.g. misrepresenting the amount of available space) and issues outside of their control (such as general changes in the local area). Check the developer’s promotional material against outside sources. For example, you could use a design tool such as SketchUp to see whether standard-size furniture will fit in a room in the same way as you saw in the show home. In other words, do thorough research on your developer before you commit to a purchase so that you can be confident that you are buying into the best that new build homes have to offer.

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King’s Lynn update – May16

The team are delighted to report the acquisition of a new site in Kings Lynn Norfolk.  The site is a 6 Acre high profile site within very easy walking distance to the Town Centre and train station. It has outline planning permission for 98 homes, the team are progressing with appointed architect to progress and submit for full planning later in the year.  A pre-application meeting with the planning officer has already taken place, the outcomes of which have been worked into the site plan.

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