Important new leasehold changes could affect property developers

Property developers who are dependent on payments from leases to bolster their operations could be adversely affected by leasehold changes which appeared in the Government’s Housing White Paper in February.

Currently, there are an estimated four million residential leasehold properties in the UK, including 1.4 million leasehold houses.

However, in line with the Housing White Paper, which was released on Wednesday 7 February 2018, Communities Secretary Sajid Javid has announced a ban on most new-build leasehold houses, in a bid to eliminate “unfair and abusive practices” which are believed to penalise homeowners.

Other changes include making it easier for homeowners to purchase freeholds and amending ground rents on new long leases for houses and flats to all be set at zero.

Experts have warned that these changes will inadvertently have a negative impact on property developers, many of whom are reliant on payments from leases to cover their own costs.

Tom Lee, Head of Structured Finance at Pure Commercial Finance, warned that there would be significantly “less income from annual ground rent fees” under the changes, which could weigh heavily on many developers.

However, he added that the changes could also “restrict lending, as many lenders will factor in the value of the freehold when calculating the overall Gross Development Value (GDV) of a development site” in order to “remain within their LTGDV covenants”.

He warned that while Mr Javid’s changes come as great news for homeowners, property developers would be hit hard.

Traditionally, many homebuilders have benefitted from being able to sell freeholds to investors in a bid to cover the costs of ever-rising building fees and land values, Mr Lee said.

He added that developers were currently able to do this without passing on costs to prospective homeowners – but that this “may no longer be possible” under the new rules.