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New research outlines ground rent risks for Housing Associations

New research by Network Homes published today identifies particular risks for housing associations from the onerous ground rents seen in the leasehold market in the last ten years.

The research also proposes a method of calculating ground rents fair to both freeholder and leaseholder, in response to the government’s consultation on unfair leasehold practices.

Network’s paper ‘Ground rents: Do the risks outweigh the rewards?’ argues that:

  • If the government returns ground rents on new leasehold homes to a peppercorn, the impact on new housing supply is likely to be minimal
  • If ground rents are not on a peppercorn basis, any increase should be linked to inflation. This will ensure they remain fair over the long-term to the leaseholder, while also removing downside risk for the freeholder
  • Housing associations holding head leases are subject to many of the same risks as individual leaseholders, and should be treated as such in any government change
  • Initial ground rents for new properties, if not at peppercorn, should be set at less than 0.1% of the property valuation

Ground rents generally fall into three categories – fixed rate, increasing in line with RPI inflation, or doubling at specified intervals. It is only ‘doubling’ ground rents which lead to potentially onerous terms. Network Homes’ research shows that ground rents which double every 15 years or more frequently will almost certainly become onerous over time. Ground rents which double every 25 years or less frequently will generally track long-term average inflation.

Simon Graham, Network Homes’ Director of Strategy & External Affairs, said “Housing associations have tended to build up ground rent portfolios almost by accident because of the way they’ve built and acquired homes. Off the shelf and S.106 deals with developers often come with ground rents already stipulated. Direct development of flats for market sale, and acquisitions from local authorities, other housing associations and private landlords may all have added to ground rent portfolios.

“The initial ground rent, type of increase and frequency of increase can be different on every deal. Managing these complex portfolios correctly can be an administrative headache and requires a strong policy and good oversight. Where the housing association is the Head Lessee – for example through an off the shelf deal of 100 mixed tenure apartments - it is effectively responsible to the freeholder for all the ground rent payments of any sub-lessees. All of this brings potential financial risk.

“At the same time, housing associations building directly for sale to help cross-subsidise affordable rent homes are likely to have created valuable ground rent portfolios as the investment market in ground rents has developed in recent years. Any government action to curb the market will impact on the book value of those portfolios.”

Network Homes supports the government’s proposals to reform the leasehold market. It believes any impact on the home building market will be limited and short-lived.

Network would also like to see the government propose voluntary agreements between freeholders and leaseholders to help change the terms of onerous ground rents in existing leases.

Download the paper here