The below is his speech:
This is the second invitation I have had today. Not such an agreeable one as addressing a gathering of the FPRA, I hasten to add.
It was a former colleague on the Spectator inviting me to comment on whether I thought Boris Johnson would “rat us out” as he put it on reforming leasehold if he returned as PM after the election.
Leaving aside the important issue of whether he wins the election – about which my guess is as good as anyone’s, but I’m not putting money on it – it was a good occasion to consider just what the Conservatives might do in our sector if they get in again.
It is a bit of an open question.
And far more difficult to answer than with the Labour party. It has a coherent and detailed policy to reform leasehold, drawing on the work of the Leasehold Knowledge Partnership, the 177-MPs in the All Party Parliamentary Group of which LKP is the secretariat, and the Communities Select Committee, which published a damning report earlier this year.
John Healey and his deputy Sarah Jones clearly understand this issue, and are pretty serious about wanting to put it right. The same can be said about the London mayor’s office, and it is excellent that the knowledgeable deputy mayor James Murray is standing in the safe Labour seat of Ealing North.
Left to themselves, I have no doubt that they would do a pretty comprehensive and intelligent reform of the leasehold system.
Realistically, however, a Labour government or more likely a Labour coalition is likely to have a few other priorities in mind. Leaving aside its ambitious social programme, and its consequences on what remains of the economy, there would very likely have to be two referenda to sort out: confronting Brexit and offering Scotland another shot at independence.
It is a nice thought that SNP MPs help vote away England’s ridiculous feudal leasehold land tenure laws before they return back over the northern border. But I am not sure that I would bet on that either. They are going to have other concerns, such as making Scotland a successful small democracy under the umbrella of the European Union.
So, while the leasehold offer from Labour is better thought out and more attractive than anything we have seen from the Conservatives, land tenure reform – which after all were so central to the upheavals in France in 1789 and Russia in 1917 – is more likely to be part of a Five-Year Great Leap Forward, rather than Years One or Two.
Now let’s look at the Conservatives.
The government has promised to set new ground rents to zero and ban leasehold houses in most cases. But it has announced this three times so far without delivering.
Conservative commitment to reforming leasehold is wobbly: Sajid Javid is the most committed to ending its abuses, audibly reminding the prime minister of zero new ground rents at the last PMQs.
On the other hand, James Brokenshire, when he was Communities Secretary, rowed back on new zero ground rents by considering £10pa ground rents, which keeps the whole business of speculative assets in people’s homes alive.
Ground rents are the sole legitimate income for a residential freehold owner, on which you can borrow. Strip them out, and it will be very difficult to borrow to buy them and impossible to leverage up income streams for the next 125, 250 or 999 years to borrow more.
The financier Vincent Tchenguiz understood that the income streams of a building were far more valuable than the asset itself – although he exaggerated that, too – and on the basis of his residential freehold assets made himself one of the most powerful businessmen in the country: bidding for Sainsbury’s before the property crash.
As a result of considerable pressure – media exposure and influential discussion – James Brokenshire reconsidered his wobbling and publicly endorsed new zero ground rents.
Robert Jenrick, who took over in the summer, also backs them.
But what the Conservatives seem reluctant to do is commit to wholescale reform of leasehold: something they certainly did not run away from in the 1980s and 1990s.
They have already given a willing ear to exempting retirement house builders from a ban on new ground rents – even though the sale of the historic McCarthy and Stone freeholds to financier Mr Tchenguiz has not been free of controversy.
There are also the complex Law Commission reports – delayed for the election – on lease enfranchisement (meaning lease extension and purchase of freehold), which is a hugely controversial and remunerative aspect of the leasehold system; making commonhold work and right to manage reforms.
Rather than wait for these to be considered by government – which will be deluged with lobbyists urging the freeholder-friendly status quo – the government should simply impose the ban on new ground rents (ideally not exempting the retirement housebuilders, who do not actually need them as they are now long-term management companies).
The leasehold houses racket we are much more mellow about and this aspect of leasehold has largely self-corrected as a result of our efforts.
Boris Johnson and lobbyists
Will Boris shaft us, as the Spectator journalist put it?
Well, there is a fair possiblity, I’m afraid. Or, better to say, that may be his first instinct.
It is difficult to have complete confidence in a leader aided by lobbyist and PR man Sir Lynton Crosby, one of whose commercial clients is the £1.7 billion secretive ground rent Long Harbour, run by David Cameron’s brother-in-law and future viscount, William Waldorf Astor.
Astor’s fund management – a trifling £4 million entity – is part owned by Li Kar-Shing’s giant Hutchison Whampoa group, or CK Hutchison Holdings as it is now known. (It owns Felixstowe container port, considerable commercial property and the Three mobile phone network.)
The beneficial owners of the £1.7bn freeholds are unknown, hiding behind nominee directors and often offshore.
Does Mr Kar-Shing, his company, his associates or his family invest in this fund? We have raised the question in Hong Kong and here in London but without response.
These assets are just some of the £150 billion of property assets in the UK that are owned secretly by offshore entities.
How a democracy survives with this level of secret property ownership is an open question. You do not need to be Jeremy Corbyn to be extremely concerned about this gaming of the capitalist system.
And then there are other fundamental concerns as well.
Leasehold may be brewing up a pensions concern as well as a housing one.
The High Court blocked in August the Goldman Sach’s founded pensions investor Rothesay Life from acquiring £12 billion of pension assets from Prudential.
Questions were raised about this by LKP, reported by the Financial Times two weeks ago.
We had expressed concern to the Pensions Regulatory Authority – for which our trustee Dean Buckner, a Bank of England economist, used to work – that it downplayed the “weak financial position” of Rothesay relative to Prudential by neglecting to flag its heavy dependence on “artificial capital”.
Insurers bolster their capital by a practice known as “Matching Adjustment, which means investment in higher yielding assets than “safe” 30-year UK government bonds and similar, which are core to pensions.
All insurers use Matching Adjustment to some degree.
Prudential had solvency capital of £35.7 billion at end 2018, says the FT, of which £2.1 billion “was created by matching adjustment”.
In contrast, Rothesay Life reported capital of only £3.9bn but matching adjustment increased this to £4.6bn, leaving its true capital position as negative £0.7bn”, according to LKP.
One of Rothesay Life’s most important investments has been a £1.7 billion loan to the Tchenguiz organisation secured against the ground rent income of his various freehold owning entities.
Fortunately, the structure of this organisation and debts – ultimately owned by the Tchenguiz Family Trust in the British Virgin Islands – are publicly available and verifiable data.
Dr Buckner was quoted in the FT saying that the Prudential Regulatory Authority was acting “on the side of powerful vested interests”. By not disclosing the full risk of Rothesay’s assets it was “playing fast and loose with the hard-earned life savings of ordinary working people”.
Kevin Dowd, a professor of finance at Durham university, was also a signatory to the LKP letter to the Prudential Regulatory Authority.
He told the FT: “Private equity firms are making a lot of money from a flawed business model that could have calamitous consequences down the road.”
In fairness, Rothesay Life disputes this analysis in the FT article:
The UK’s Prudential Regulation Authority has come under fire for playing “fast and loose” with pensions over its willingness to nod through transfers of savings from long-established insurers to newer specialist rivals. A group of pensions experts and policyholders has written to Sam Woods, the watchdog’s chief executive, questioning its handling of a recent case involving Prudential, the UK insurance company.
So, surely a potential pensions concern, in part with investments in a high risk ground rent loan, will make someone in government sit up and listen?
I am afraid I would not bet on this, either.
Cladding scandal just got much bigger
But there is something afoot in leasehold that is rather more pressing that ending incoherent land tenure and fretting over pension exposure.
The next Communities Secretary is facing an immediate headache.
It concerns combustible cladding following the Grenfell tragedy.
Around 300 privately owned apartment blocks around the country have some ACM (aluminium composite material) cladding: the same that was on Grenfell.
At first ministers – and less forgiveably their officials – expressed the hope that freeholders – “the buildings’ owners” – would do the decent thing and pay to remove and replace it.
None did so, as we warned government would be the case.
They were failing to understand the essential point: Mr Tchenguiz and others like him are not “the responsible long term owner” of a building. He simply owns the income streams.
Nor can the freeholders actually afford to pay.
At the 48-flat Northpoint in Bromley, the Tchenguiz organisation – actually Rothesay Life – gets £10,000 a year in ground rent. The cladding bill is £4 million.
Five freeholders – including Abacus Land of Long Harbour – went straight off to court to get a ruling that they would not have to pay. Leaseholders would, instead.
Some developers, for social responsibility reasons, have paid up. We pay tribute to Barratt for stepping in at Citiscape in Croydon, which it built 18 years ago.
To avoid the appalling prospect of leaseholders losing their homes to pay to remove cladding they did not put up, James Brokenshire raided his housing budget for £200 million and agreed to gift this money to the leaseholders.
It does not matter whether you are a homeowner or an investor, the Grenfell ACM cladding will be removed courtesy of taxpayers.
This was manageable with a relatively small amount of public money.
But now several thousand other private blocks have been identified as having combustible cladding. Not quite the same cladding as Grenfell, but no less lethal.
LKP is being deluged with leaseholders trying to sell their flats only to find buyers’ surveyors are reporting zero valuations.
This is now an issue way bigger than Grenfell cladding. It effects thousands of people. And the cost to put things right will cost a couple of billion or so.
This is too serious for a Brokenshire-style intervention, and the need for government action is immediate.
We believe the leasehold system will come under unprecedented scrutiny as a result.
The inevitable question will be: what is this third party freeholder / building owner actually for, when he takes no responsibility and pays absolutely nothing?
We suspect that this will galvanise government to change our broken system of land tenure.
Meanwhile, we must hope that there is not a leaseholder out there in a block with combustible cladding, doubling ground rent, in a Tchenguiz-owned site and with a pension with Rothesay Life.