By Michael Epstein
Remember the days of the funfair? It wasn’t complete without candyfloss. That huge mound on a stick that completely disappeared into nothingness when we tried to eat it.
Of course, that is because candyfloss is basically sugar, corn syrup , flavouring and colouring. All this is spun at a very high speed which adds air and appears to bulk it out. Which is why so shortly after it is made it begins to degrade to its constituent parts.
And so it is with property. Naturally each property has its value, which can go up or down according to circumstances.
But leasehold has allowed an artificially created value on property that goes well beyond the notional value of the property.
We can all understand the concept of buying a home on a mortgage.
Suppose we buy a home for £300,000 with a mortgage of £270,000 pounds? That is a loan to value ratio of 90%.
Now, let us assume that instead of a normal home buyer you are a property speculator.
Imagine as a property speculator you have created a leasehold on the freehold property that you have purchased.
You have immediately increased the value of the asset, because you can add the amount of ground rent income you will receive to the value of the property.
So now you have borrowed £270,000 pounds against a valuation of £377,500 pounds(a 62% loan to valuation) – and that is assuming a period of 50 years, whereas the Tchenguiz business model was based over an astonishing 150-year term! Even today, the parts of his portfolio that have been sold off have loans secured on them over an 85-year period.
Of course, there are many other income streams generated by speculators in freeholds, such as management fees, permission fees, insurance commissions and administrative fees etc.
So all in all, it is a very profitable way to make money (especially while interest rates are so low).
But what if it happened that the business model adopted by the freeholders were ended?
What if they could not double ground rents? They could not rack up enormous, totally unwarranted commissions for building insurance? They could not charge outrageous administration charges? They were made to set up development “Right To Manage” or Residents Management Companies, so that leaseholders were no longer forced to use the freeholder’s connected management company? What is they were forced to sell freeholds to the leaseholder at around 10 times the ground rent, as has happened in Scotland and Northern Ireland?
The froth that is the “extra speculative value” put on properties disappears much like the candyfloss.
The warning signs for developers and speculators are set to “Danger”.
Naturally, they are going to fight tooth and nail to preserve their cosy schemes for as long as possible, but ultimately they will fail.
Selling leasehold houses which should have been freehold, was the final straw that broke the camel’s back.
As is typical in so many situations, they got greedy and they got arrogant. They thought they were untouchable.
They are NOT!