How historic leasehold powers could unlock value for housing providers

Search for additional value

 

Key questions we are now regularly asked by housing providers are: can registered providers find additional value from their stock to help meet these costs, and is it possible to convert future expenditure into measurable and realisable value?

 

It might sound frivolous to suggest, but the answer to both questions may lie in the past. And it comes from a rather unexpected quarter: leasehold.

 

The Leasehold Reform, Housing and Urban Development Act (LRHUDA) 1993 and its predecessor, the Leasehold Reform Act (LRA) 1967, are two historic pieces of legislation often overlooked by the sector.

 

These acts have been subject to numerous amendments, but they offer housing providers the opportunity for greater loan security and ultimate ownership of their homes – and arguably present one of the very best investment returns for their money. Let me explain how.

 

Leasehold solution

 

Leasehold is a common tenure in England and Wales and it has been widely granted across both the social housing sector and the private housing market. Government figures from 2023-24 indicate that an estimated two million private homes and 277,000 in the social sector are subject to leasehold tenures.

 

The LRA and the subsequent LRHUDA are both complex but significant pieces of legislation.

 

These two acts confer to qualifying long leaseholders of both flats and houses the right to either acquire the freehold of their house, or the right for an individual long leaseholder (over 21 years) to acquire a 90-year lease extension to their flat.

 

In addition, there is a right for a group of qualifying leaseholders to collectively acquire the freehold of a block of flats. In all instances, a premium is payable to the freeholder.

 

The valuation methodology depends on the act being utilised, and the actual premium due will ultimately depend on the value of the property, the ground rent payable and the length of the current lease.

 

The statutory process is implemented by the service of a notice on the freeholder to exercise the long leaseholder’s right to enfranchise.

 

Agreeable freeholders (typically councils) may come to a voluntary agreement, therefore avoiding the requirement and cost of notices being served. These powers will remain in place and are unaffected by the Renters’ Rights Act that comes into force in May in England.

Potential benefits

 

The benefits of this approach are plentiful. While the freeholder receives a premium to compensate them for their loss of ground rent and their distant reversionary value, the lessee receives either an extended lease or a freehold acquisition.

 

It is, however, the additional benefits for the long lessee that should be considered. These include at their best: absolute ownership of the asset, a reduction in the ground rent to a peppercorn rent, a potential loss of head rent and, from a valuation perspective, an immediate uplift in property value.

 

Valuation impact

 

During a loan security review, short-lease properties are often excluded from a portfolio on account of their lease length. A completed lease extension or freehold acquisition may therefore enable previously uncharged stock to be charged, and consequently facilitate borrowing that was previously unavailable.

 

There may also be the ability to increase the value of those properties valued on a market value subject to tenancy (MV-ST) basis by adopting the new extended term or freehold value.

 

Premium calculations

 

So, what might the premium payable to the freeholder look like? The premium payable for freehold acquisitions (houses) is based on three bases of valuation. For our purposes we will focus on the approach taken for lower-value housing, typically social housing.

 

For lower-value houses, the premium is calculated based on the land value which, albeit linked to the capital value, is significantly lower. The premiums payable for these valuations can therefore be very small.

 

For flats, too, the investment returns are rewarding and tenant improvements are disregarded as part of the calculation.

 

The return on investment for actual money expended is therefore exceptional and is arguably one the best investment decisions that a housing provider can achieve.

 

Having completed the process, the asset value of the property (house or flat) must increase, the ability to charge may materialise and the future of the asset will be preserved.

 

Savills is currently supporting a large housing provider to agree numerous lease extensions at premiums between £5,000 and £20,000 for flat leases between 65 and 85 years. This has increased the value of the properties by around £7,500 each and made them available for charging as loan security.

 

Other factors

 

There are, of course, other additional costs, including valuation, negotiation and legal/transfer fees. But if the process is carried out at scale (ie for large housing estates), the costs are insignificant and do not detract from already healthy returns.

 

Further reforms to the leasehold sector are long overdue through the Leasehold and Freehold Reform Act 2024. Though the act is yet to be fully implemented, the proposed changes around buying a freehold and securing a long lease extension will make it fairer, cheaper and more transparent for long leaseholders.

 

If you think your housing provider could benefit from leasehold powers, there is no need to wait; the time to act is now.

 

Julian Lawrence-Smith, associate director of affordable housing valuations, Savills