In December 2017 Communities Secretary Sajid Javid announced that legislation will be promoted to:
- ban leasehold for almost all new houses;
- zero rate ground rent on new long leases;
- make it easier for existing leaseholders to buy-out their freehold; and
- enable better information to be made available about redress for those consumers facing the most onerous leasehold terms including high or escalating ground rent.
It is likely that there will be some exceptions to the new law, but these are to be confirmed. The retirement homes sector has been campaigning to be excluded from the provisions because it will affect the sector’s ability to deliver new homes.
What Does This Mean For Viability?
- The retirement sector is not alone in feeling the impact of this change. Some housebuilders' share prices dropped following the announcement. Department for Communities and Local Government statistics estimate there were 4.2 million residential leasehold dwellings in England in the private sector in 2015 to 2016 and of these 1.4 million were leasehold houses.
- Housebuilders have bought land on the assumption of receiving revenue from selling the income streams delivered by the freeholds of leasehold houses. A change in the law limiting ground rent will result in lower margins, resulting in less incentives for developers to build new homes.
- Some developers have suggested that this change will work against the government in achieving its aims to increase housing delivery. The Housebuilders Federation has said that it was important to make sure the changes "don’t threaten viability and as a result, supply".
- Political focus has also continued on affordable housing, particularly in London where the Mayor of London has been seen to take a strong stance insisting that housebuilders deliver increasing levels of affordable housing.
- Affordable housing delivery is often contingent on the out-put of a viability assessment. The proceeds from selling the income stream achieved from ground rent contributes to the “pot” which is available for affordable housing, and community infrastructure provided by s106 agreements. If this income stream is reduced by legislation, viability assessments will show that less money is available to deliver affordable housing, and the levels provided may reduce.
- It remains unclear the extent to which ground rent income streams will impact on affordable housing delivery. Often a viability assessment will show that a scheme is unable to viably deliver affordable housing and the Developer will make an offer to the local planning authority to deliver a limited amount of affordable housing. In these circumstances it is arguable that the reforms to ground rent levels will not make a difference to the level of affordable housing that is achieved. However the money to pay for affordable housing must come from somewhere, and if developer’s profits are being squeezed it is likely that their offers will become less generous than they have previously been.
- It could also be an issue for local authorities who have used a section 106 agreement to schedule a review of the viability of the development after planning permission has been granted. If the initial assessment took ground rent incomes into account, but the review does not this could result in a lower affordable housing requirement for the development. Local planning authorities often insulate themselves from this by insisting that viability reviews can only result in the upward revision of affordable housing provision. Arguments that upwards only reviews are unfair on developer’s will have more weight, if there is likely to be a significant change in the financial inputs to the development between the initial viability assessment and the review date.