London, Dec. 07, 2023 (GLOBE NEWSWIRE) -- The UK Government’s proposed plans for leasehold reform face a major early stumbling block as analysis shows plans to retrospectively introduce a cap on ground rents could cost the taxpayer over £31bn in compensation, according to the Residential Freehold Association.

The costs, equivalent to a 1% increase in income tax for the next five years, would result from the compensation that investors will be entitled to and will seek from the Government. These investors include pension holders, charities and other institutions that receive ground rent income from their legitimate investments in freeholds.

The proposals will not only hit public finances, but will also drive professional freeholders from the market, creating “zombie buildings”, where there is no freeholder present. The absence of professional freeholders will likely create a greater safety risk for residents, given there will be no steward with institutional experience to oversee the remediation of complex building safety issues in many cases, and in the case of an emergencies residents will not have the support of a freeholder during evacuation of unsafe buildings.

The Government’s own research suggests a majority of leaseholders are unlikely to favour the long-term consequences of the Government’s proposals, given such a move will do nothing to reduce service charges for the maintenance and management of buildings. Independent polling, commissioned by the Residential Freehold Association, has also found that only 18% of current leaseholders would be comfortable assuming the legal obligations for managing their building – and just 21% of people would be confident that agreement could be reached on building management and maintenance issues in complex blocks between residents.

Mick Platt, Director of the Residential Freehold Association, said:

“It’s astonishing to see a Government consulting on the retrospective interference with the legitimate rights of property owners in this way and it sets an alarming precedent for UK plc.

“Mr Gove’s department has gone way beyond any reasonable attempt to reform the leasehold system and has consistently ignored calls for regulation. Instead, they have proposed a raid on investors that would hit the public finances and leave leaseholders in the lurch.

“Spending over £31bn to reduce consumer choice and leave millions of residents with management responsibilities they do not want would be a thundering own goal. The Government has ignored extensive research, including its own, which shows there is simply no desire from a majority of residents, or the public at large, for the policy proposals they are pursuing.

“The Government must respect the rights of property owners and ensure any leasehold reform is proportionate and delivers tangible benefits to leaseholders – from managing service charge levels to no new leasehold houses – instead of running a horse and cart through a huge area of investment in the UK economy.”

The Government’s own estimate in its outline for a consultation on capping ground rents is that the average ground rent per year is £298 per annum. The Government’s data shows there are 4.98 million leasehold properties in England and Wales of which the government estimates 86% pay a ground rent. Using a typical valuation methodology, the present value of this investment is £31.9bn. If the Government retrospectively remove this contractual income investors will be entitled to and will seek compensation from the Government.

A high proportion of the UK’s overall ground rent assets are used by pension schemes and insurance institutions to match or fund Defined Benefit (DB) pension liabilities. This accounts for around £15 billion of total ground rent investment. The asset class has been considered as low risk and it underpins significant levels of long dated pension liabilities. Any disruption, such as changes to contractual payments and reduction in enfranchisement compensation due, will have an impact on the millions of people who have invested in those pension funds that have historically relied on ground rents for stable returns on their investment. In some cases, these investments are held by overseas pension funds, undermining bilateral trade agreements and damaging inward investment to the UK.

The analysis comes just days after the Global Investment Summit where Rishi Sunak announced £30bn of new investment in the UK from world-leading investors, the same sum the Government will be driving out of the UK through its leasehold reform proposals.

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