We anticipate that the Leasehold Reform (Ground Rent) Act 2022 – now law but not yet in force – will be triggered and brought into force within the next six months. Effectively, this abolishes the ability to charge ground rents where developers are selling flats or houses on long leases.
Currently, ground rents have a capital value, and the ability to sell these in a completed development is valuable to developers. Their abolition might also have adverse consequences – there may be less incentive for property management of, and investment in completed developments where landlords are not receiving any ground rent.
It is an unpredictable landscape to navigate. We may see a flurry of deals to sell ground rents off before the legislation is brought in given that yields may start to move out. Alternatively, yields may actually move in, given the short window for creating leases with ground rents.
It is possible, with the build-to-rent (BTR) market still attracting record amounts of investment, that developers/housebuilders might move to a hybrid model that is part BTR, part homes for sale. This hybrid model would require a different and refreshed funding structure – typically, a housebuilder funds in phases through working capital and receipts from earlier phases.
Development of BTR is different and tends to run on a forward-funding model, which is attractive to developers as a funder funds the actual construction and other costs. The profit is typically ‘locked in’ until practical completion of the wider scheme; in other words, until any affordable housing that must be ready before occupation of private units is available.
Increasingly, BTR developers are looking to operate their schemes with economies of scale to keep the gross-to-net ratio on receipts at an attractive level. It will be interesting to see how the sales/rental markets continue to become more sophisticated and adapt to new challenges – be these ground rent abolition, inflationary pressure or the planning system.
Helen Streeton is head of build-to-rent at law firm Forsters