This is the first in a regular series focusing on the “so what?” of emerging real estate risk issues for the residential mortgage market. At Countrywide Surveying Services we translate policy changes into implications for valuation and mortgageability, what is changing, who it affects and how the market can respond.
The UK government has now published the draft Commonhold and Leasehold Reform Bill for pre-legislative scrutiny. This represents an important step towards modernizing condominium ownership by strengthening community ownership, supporting existing tenants, and reforming elements of lease enforcement.
Is Commonhold about to become a lot more common?
A central theme is to reinvigorate commonhold so that it works for a wider range of developments, including larger and mixed-use developments, and to make it easier for existing leaseholders to switch to Commonhold if they choose. The government is signaling a move away from leasehold as the standard tenancy for new apartments once a viable alternative to common ownership is in place (with details subject to consultation and secondary legislation).
Why this is important: For lenders and valuers, a better functioning ownership model can reduce the valuation range inherent in leasehold, where not only the characteristics of the physical asset influence the value, but also the associated leasehold terms. From a valuation perspective, early adoption of commonhold could pose new short-term challenges, especially when resale markets reflect old leasehold shares. But in the medium term, a simpler and fairer ownership model, provided there is an appropriate framework to ensure effective management of blocks, has the potential to reduce “rent discounts” and increase buyer confidence.
The Bill proposes that ground rents on most existing long-term residential leases be capped at £250 per annum, with the limit moving to a peppercorn (effectively zero) after 40 years; with the government aiming to implement this by 2028, subject to parliamentary process. This means a positive change for the mortgage market: the amount of the ground rent and escalation clauses are a recurring cause of sales delays, tightened legal supervision and, in some cases, the limited willingness of lenders. It will be interesting to see if buyer and lender sentiment improves ahead of the timetable as the direction of travel becomes clearer.
The comeback moment of the flat market?
From a value perspective, apartments have underperformed other property types in recent years. This has been driven by a combination of shifts in affordability, post-pandemic space preferences and the layering of leasehold-related frictions (including land rent concerns, service charge pressures and building safety issues).
If the bill proceeds broadly as proposed, we expect the flat market to improve by removing elements that have suppressed demand, reduced lender appetite and eroded liquidity for certain leasehold stocks.
Overall, the draft bill strikes a fair balance between reducing income streams for freeholders and investors and delivering tangible benefits to leaseholders. We expect buyer sentiment to improve as land rental risk decreases and the market gains clarity. After implementation, we also expect greater availability of mortgage financing, as lenders revise their policies regarding land interest rate ceilings. All things considered, this could be the boost the flat market desperately needs.
Matthew Ison is associate director of technical services at Countrywide Surveying Services