11 Nov Leasehold Rather Than Freehold Property
When Is It Better To Buy A Leasehold Rather Than Freehold Property?
Are you looking for your first home, your next home, or a buy-to-let property investment? One of the first decisions you will have to take is whether you’re going down the leasehold or freehold route. Unfortunately, leasehold ownership has experienced some bad PR recently, culminating in the leasehold scandal of 2017, which has put many would-be buyers off the idea of being accountable to a long residential lease agreement.
But take a step back from the negative media coverage and you’ll find that lease ownership can work perfectly well and has done so for many decades and for millions of homeowners. In fact, there are many circumstances in which it makes complete sense to own a property in this way. It all depends on your personal situation, financial goals and plans for the future.
What is leasehold ownership?
Freehold and leasehold are the two main types of property ownership in the UK. With a freehold property, you own the building and the ground it stands on. Nearly all houses are bought and sold with a freehold title.
By contrast, nearly all flats and maisonettes are sold on a leasehold basis. What you actually own is the right to occupy the property according to the terms of the lease while the freeholder retains ownership of the building itself as well as the ground it stands on.
Long residential leases are granted for a specified period of time, often 99 years, 125 years or in many cases 999 years. According to recent government statistics, there are about 4.8 million leasehold properties in the UK, which accounts for about a fifth of our overall housing stock. Leasehold properties are bought and sold freely on the open market.
However, technically speaking, a leasehold property is a decreasing asset. Over time, the number of years left to run on the lease will reduce, and this is reflected in the value of the property. Leaving aside any capital growth that may be gained from price rises in the housing market, it is not rocket science to understand that selling a flat with a short lease is going to achieve a lower sale price than selling a comparable property that has a long lease.
And yet, there is no shortage of buyers for leasehold properties in the UK. On the contrary, they represent an attractive investment opportunity for millions of property hunters up and down the country, whether for their own use or as a buy-to-let. We’ve highlighted four reasons that make a leasehold property the better purchase.
1.Lower prices and central locations
The vast majority of leasehold properties are flats and maisonettes. Perhaps not surprisingly, last year’s new-build sales in London consisted of 99.6% leasehold contracts. And with apartments generally being smaller and cheaper than houses, they are a popular option for first-time buyers and those on a tight budget.
What’s more, whether new build developments, purpose-built blocks of flats, period conversions or traditional mansion blocks, these properties are more likely to be found in urban environments. For buyers looking to move to town centre locations, buying a flat could be an affordable way to make this possible.
2.Statutory lease extensions
The original lease will have been granted for a set number of years. As mentioned above, this makes a leasehold property a wasting asset, in theory at least. In practice, it is possible to extend the lease. Thanks to the Leasehold Reform, Housing & Urban Development Act 1993, owners of leasehold property (subject to qualifying criteria) have the statutory right to add a 90-year extension to the remaining years. What’s more, there is further legislation in progress to overhaul the lease extension process including introducing a statutory 990-year lease extension!
There is a strict legal process to follow, and a premium payable to the freeholder, all of which requires professional help. As one expert points out, “while it’s desirable that you try to reach an agreement with your landlord, it’s also important that you make sure you’re getting the best value and aren’t paying over the odds for your lease extension.” Extending your lease is the most effective solution to secure your position for life and ensure that the value of your asset is protected.
3.Worry-free property ownership
As a leaseholder, your only concern is the interior of your flat or maisonette. The freehold owner or managing agent is responsible for the maintenance and upkeep of the building and any communal areas including gardens, car parking, lifts, security systems etc. The same goes for any additional shared facilities or amenities for tenants that the building may have, such as swimming pools, fitness suites or children’s play areas.
To cover these works and other relevant freeholder costs, each leasehold owner pays an annual service charge. Assuming that the property is well managed and has a reserve fund in place to pay for capital expenditures such as a new roof, window replacements etc, there’s no need for you to worry about building repair work.
In the event that the building is not well managed or that the service charge does not represent good value for money, leaseholders can act together and exercise their Right To Manage (RTM), taking control away from the freeholder and managing the building themselves. If at least half of the leaseholders in the building agree, together you can also exercise your right to Collective Enfranchisement and buy the freehold.
4. Good BTL investment potential
Last but by no means least, leasehold flats are popular investment purchases for prospective landlords looking for affordable rental property. According to recent figures, two-bedroom flats have shown the highest tenant demand, and city centre flats are performing particularly strongly in the rental market.
With leasehold property (flats) generally costing less than freehold (houses), this means a reasonable property in a great urban location with high rental demand may well be within budget. This is surely the best position to be in to enjoy a solid return on your investment, both in terms of ongoing rental income and long-term capital growth.