Given that many properties are directly or indirectly owned by pension funds, getting leasehold reform wrong risks destabilising the property markets, transferring value to foreign investors and undermining the UK’s attractiveness, says Natalie Chambers
The government’s rhetoric on harnessing institutional capital as a driver for economic growth is welcome. In the coming months, the government will face its first true test of this vision from an unexpected policy area: leasehold reform.
Currently, many residential freeholds are either directly or indirectly funded by major financial institutions, including regulated UK pension funds. These institutions promote strict stewardship principles which ensure not only the responsible allocation, management and oversight of capital to create long-term value for their investors but also benefits for the leaseholders of the properties in which they invest.
Since assuming office, Labour’s more measured approach has been a refreshing change from the previous government. The housing minister, Matthew Pennycook, has acknowledged the complexities of leasehold reform while announcing a whole-of-parliament approach in consulting and implementing reform.
While this new approach is welcome, it is imperative that Labour learns from the mistakes of its predecessors.
As the Leasehold and Freehold Reform Act 2024 progressed through parliament last year, the previous government consulted on retrospectively capping existing ground rents. This threatened an unprecedented, unjustified interference with the long-standing legitimate property rights of investors.
A damaging signal
This risked destabilising the residential property system, threatening the security and safety of leaseholders as well as jeopardising the attractiveness of the UK to investors. These proposals sent a damaging signal to institutional investors, beyond just those invested in the sector, who rely on the sanctity of English contract law and see the UK as a stable destination for deploying capital. If the government were to adopt a policy that would significantly reduce or restrict the level of existing ground rents payable now or the levels contractually payable in the future, it would directly contradict their ‘open for business’ rhetoric and commitment to fostering a business-friendly environment.
Ultimately, it was working people’s future pensions that were at risk. Any decision to cap ground rents would have had a seismic impact on those pension funds invested in these assets, significantly reducing the value of their investments and their ability to invest further in the UK economy.
Non-UK based landlords and buy-to-let investors make up the majority of leaseholders – exceeding 80 per cent in some parts of England – meaning that in many cases, the previous government would have been transferring value from pensioners to wealthy overseas property investors.
Any decision to cap ground rents would have had a seismic impact on those pension funds invested in these assets, significantly reducing the value of their investments and their ability to invest further in the UK economy
There is little doubt this would have led to a large compensation bill – a sum estimated by the prior government to run into the many billions of pounds. This would have had a profound impact on taxpayers at a time when public finances are under severe strain.
Of course, I recognise that the leasehold system – and the leaseholders and freeholders who participate in it – would benefit from smart reform. The sector has underpinned the UK’s residential property market for centuries – and like any valued system, it must evolve.
But we must get reform right. That is why, as Director of the Residential Freehold Association (RFA), I maintain the view that responsible and considered legislation developed in close consultation with all stakeholders which respects the legitimate rights of freehold property owners, is the most effective way of maintaining a well-functioning housing market.
As the industry trade body representing c.1m leasehold properties, we remain committed to working collaboratively with the government and industry to implement beneficial change. This should include, for example, the regulation of managing agents to improve transparency and accuracy in service charge statements, a measure RFA members – who are all professional freeholders – have advocated for since the publication of Lord Best’s ROPA report in 2019.
With careful planning, balanced legislation, and a collaborative approach, we can create a more transparent framework that meets the needs of leaseholders but also respects the property rights and legitimate investments of industry stakeholders.
One thing is certain – Labour’s next steps on leasehold reform will be critical, not only in improving the sector, but also in safeguarding its goal of attracting greater institutional investment into UK markets.
Natalie Chambers is director of the Residential Freehold Association