Following increasing scrutiny on unfair ground rent multipliers and one large developer saying that they now only want cash buyers for their properties, is this the beginning of the end for freehold sales?
For many years, property developers have been setting ground rents that double after a given period, often every 5 or 10 years, in order to achieve a high sales price for the freehold. This obviously boosts the profits from each site but for an owner of a flat it soon becomes uneconomical to own the property.
The Mortgage Works, a leading mortgage lender, has announced the following criteria for all new build properties:
- Minimum acceptable lease term on new build properties (including office conversions) is 125 years for flats and 250 years for houses.
- Maximum starting ground rent on all new build properties with a leasehold tenure is limited to 0.1% of the property value.
- Ground rent must be reasonable at all times during the lease term. For example, ground rent escalation should be linked to RPI (Retail Price Index) or a similar index, and unreasonable multipliers of ground rent will not be permitted, for example doubling every 5, 10 or 15 years.
If further lenders decide to take up this policy then it really does spell the end for the unfair multipliers seen in recent years. If developers want to make the same profits that they have been achieving then it is likely that they will have to up the prices of their properties.
The short term view of some developers to just avoid mortgage buyers will not last if they want to sell their properties. If the properties were just trophy assets in central London you may be able to get a sufficient level of interest to make this work. However outside of London and well know university towns this strategy is going to hold up sales.
The moral here is that developers need to work with buyers and not swim against the tide.