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What does the new leasehold crackdown mean for property developers?

On 7 February 2018, the UK Government released the Housing White Paper setting out the new priorities for housing and how they can help increase its supply.

The main ways the Government will help with this are ensuring that the right homes are built in the right places, buildings are completed at a faster pace and diversifying the market. However, while this may come as great news to home owners, property developers will certainly be affected.

Communities Secretary, Sajid Javid, has announced a ban on leaseholds for almost all new build houses, to create a fairer system for homeowners by cutting out unfair and abusive practices within the leasehold system.

The changes apply to England only, where there are currently more than 4 million residential leasehold dwellings; 1.4 of these are leasehold houses. The new changes will prevent this number from rising by preventing the sale of new build leaseholds unless completely necessary.

It should also become easier and cheaper for leaseholders to buy-out their freehold as further changes will include ground rents on new long leases and flats will be set to zero.

How will the new leasehold changes affect developers?

Property developers will be affected in different ways. The main factor is that they could receive less income from the annual ground rent fees, so could lose quite a lot of their income from this.

Also, the new changes could potentially restrict lending as many lenders will factor in the value of the freehold when calculating the overall GDV of a site, which allows them to lend more whilst remaining within their LTGDV covenants.

A development property’s “Gross Development Value” (GDV) is its expected value

LTGDV = loan to gross development value

We also predict that it may no longer be possible for builders to sell freeholds to investors to cover the cost of rising building fees, without having to pass the extra add-on cost to potential homebuyers.

On recent valuations for development projects, we have noticed that some surveyors are not allowing a value for the freehold. This does have a small impact on value, so the quicker this uncertainty is clarified the better for everyone.

Overall, these new changes could create a double-tiered housing market which would make new-build freehold houses a lot more desirable than similar existing leasehold properties.

If the Government effectively abolishes the leasehold system, the developer will need to recover their loss in value. The only ways that it can do this will be to either decrease the price it pays for development land or, more likely, increase the sale prices of the properties to compensate.

What next?

These changes kicked in on 7 February 2018, and the government will be writing to developers regarding ‘necessary redress’. They will work with the Law Commission to make purchasing freeholds easier.

This article was written and contributed by Pure Commercial Finance, property brokers.

DISCLAIMER: This article should not be regarded as constituting legal advice in relation to particular circumstances; it is merely a general comment on the relevant topic. If specific advice is required in connection with any of the matters covered, please speak to Pure Commercial Finance directly.

Published on 19th April 2018
(Last updated 7th July 2023)