Why a common sense approach to ground rents is now critical

The Government has suggested that all future leases on flats might be set with ground rent at zero. The rise in ground rent values that has allowed the capitalisation of this asset class has indeed seen some very badly-behaved developers seeking to maximise the return on the sale of the freehold. However, whilst this market has developed hugely in the last 25 years it is not all bad news - particularly where complex tenure and physical structures call for a degree of responsible oversight by organisations who have their reputation to protect.

Enter the pension funds and large-scale investors who will ensure that covenants are consistently and fairly upheld, that insurance is placed and that health and safety compliance is paramount. These are valuable powers that are sometimes overlooked where those responsibilities are given to reluctant resident directors who are pressured to constantly cut corners and manage costs - at the price of good asset management.

Good institutional Landlords now dominate this sector having purchased many billions in ground rent assets in recent years. This is a good thing for leaseholders who know that in a crisis the landlord will ultimately step in and ensure that works are undertaken, insurance cover is at the right level, long term capital expenditure plans are in place and proper risk assessments are undertaken and acted upon.

Do away with ground rents and there is potential impact on the value of those investments and a shift that could see the return of small scale investors looking to take advantage not just of the rental income stream but of the peripheral income available through most leases.

Good asset management by institutional grade investors in this quality investment product adds value for all stakeholders - including leaseholders. It also adds a genuinely sophisticated and dynamic level of asset management and safety oversight. 

On increasingly complex developments with mixed tenures, including shared ownership and private rental, an overarching landlord strategy can be the glue that binds a community and creates a sense of place. In the new world of build to rent (where it is possible that units could in the future be retailed as long leases) institutional landlords will become the norm. Leasehold owners will rightly expect the same level of attention to quality and service that the build to rent revolution will routinely have to deliver in a highly competitive environment.

So, prevent the application of short term doubling clauses, set a universal review mechanism and index. Limit starting ground rent values to a percentage of the apartment values as agreed with a chartered surveyor and you have created a transparent approach that will actually enhance the value of a scheme and allow residents to purchase the freehold at a reasonable price if they choose to do so. 

Institutional investment in residential property is a good thing, it is transformative and should be encouraged.