It should come as not surprise that those earning their living from the leasehold sector look to defend the status quo in their replies to the government consultation on “Tackling unfair practises in the leasehold market”. However, when forced to accept that the worst excesses do in fact exist, many now point the finger of blame at someone else.
Last year, the lenders started taking action to stop the lending on the worst sorts of lease terms. They had no choice. They knew a new group of potentially toxic assets were being created with 10-year doubling ground rents.
The rest of the sector had known what was going on for over a decade, but chose to stay silent. Now, suddenly, they all agree that these onerous lease terms must be stopped!
There have been many submissions to the consultation from those who assert their expertise in various aspects of the leasehold world. Many of these “experts” warn that the government needs to consider the “unintended consequences” of any change. Each submission seems more than happy to acknowledge the fault in others, but none suggests their particular part of the sector is to blame.
We will cover a number of the submissions in another article. This piece looks at the view from the perspective of an employee of Allsop’s, a well known company in the leasehold sector. The author is Paul Winstanley who works as a surveyor valuer in this well know firm of property consultants and auctioneers.
As background, readers might remember it was a representative of Allsop’s, Gary Murphy, who stood on the platform provided by the Leasehold Advisory Service in 2010 and explained how buying ground rent reversions was a wonderful investment opportunity for landlords.
In addition to the ground rent incomes, he explained, landlords could charge for their time; they could control the management of the building; and they could make up to a 100% commission on building insurance, thereby doubling its cost to the leaseholders.
He also explained that the law did not require that landlords disclose these commissions to their leaseholders. Mr Murphy is also vice chair of the RICS auctioneering group.
This kind of talk in 2010 might have been seen as inappropriate, even in a sector trade event. But this was no trade meeting. The talk was given at the annual conference (at £364 per ticket) organised by the government-funded Leasehold Advisory Service.
This was in the days when LEASE was fully funded by the government, but long before they were instructed by housing minister Gavin Barwell last year to be “firmly on the side of the leaseholder”.
Some may ask why a govenment-funded service should be helping to promote such a questionable practice.
The Leasehold Knowledge Partnership was the only organisation to question this conduct, while others including the Master of the Roles and the government’s own leasehold officials looked the other way. We were told simply that neither the Leasehold Advisory Service nor the government were responsible for what speakers say at the events run by LEASE.
Now it emerges that Allsop’s employee Paul Winstanley has produced this article in response to the government consultation “Tackling unfair practises in the leasehold market”.
Be careful what you wish for: the unintended consequences of political intervention in the ground rent market – The Property Chronicle
I, like most people, detest seeing people get ripped off, especially so in the residential property industry. While I am proud to be part of an industry who, through organisations such as the BPF and ULI, genuinely wants to raise standards, promote best practice and help solve our nation’s housing crisis, the market is, admittedly, far from perfect.
The tone purports to be dispassionate and professional, but the article should be seen as written by someone whose livelihood depends on advising about the income streams available in the leasehold sector. Mr Winstanley is described on the Allsop’s web site as a “highly regarded analyst” and a “recognised authority in the UK on the valuation of residential properties subject to tenancies”, aka the leasehold sector.
He advises on ground rents and the financial instruments linked to residential assets i.e. the buying, selling and financing of ground rent assets. His article appears here:
The Leasehold Knowledge Partnership offers the following analysis of his article:
This terms is now used, and seems to have come from usage in the US. Mr Winstanley actually means both houses and flats in terms of the issues mentioned in the article. These “apartment owners” are, according to Mr Winstanley, supposedly benefiting from the fact that institutional investors with a “reputational risk to manage” are now big players in the ground rent market.
He does not name these investors who are supposedly so concerned about their reputational image. To the best of our knowledge, none of the larger institutional investors felt their moral compass should dissuade them from buying into the market. Nor did they say no to the doubling ground rent leases that the government now deems to be unfair.
The one caveat Mr Winstanley offers is that, somehow, the ground rents, including those sold by Allsop’s in their auctions over many years, should now be “reasonable”. The definition of reasonable appears to be that they follow an RPI rather than a doubling formula.
Mr Winstanley is also pleased to refer to what he asserts is the benefit to the leaseholder of a “discount” between rent reviews.
By this he means that, in the intervening years between reviews, there is no increase in ground rent.
What he does not mention is why he continues to use the misleading term “owner”, even though he will be well aware that under the law leaseholders are tenants.
Tenants who must seek permission from the landlord to do many things in their own home. He will also be well aware that one of the additional income streams available to landlords is the ability in some leases to charge for even making a request for permission.
The article fails to make clear that RPI leases and a range of other lease clauses can also be unfair and onerous.
It fails to mention that the starting rates of ground rents have now risen well beyond those which the market deemed fair some years ago, and they continue to increase despite falling rates of inflation.
Mr Winstanley promotes the sector’s long-held argument that somehow ground rents are needed to make an ever-growing proportion of new development viable.
He offers no evidence for this claim.
Statements made to the All Party Parliamentary Group on leasehold reform by some dcontradict Mr Winstanley’s argument. The CEO of the developer Gleeson Homes dismissed the ground rent income stream argument saying: “anyone who says they need ground rents to make a site viable should not be building homes”.
Gleeson Homes has one of the lowest average sales prices per unit. it doesn’t feel it needs to make any money from ground rent sales. The Berkeley Group on the other hand probably have the highest sales price per unit of any of the larger developers. However, on top of this, they it makes millions by selling on ground rents (8 per cent of revenues).
Mr Winstanley suggests that the need for ground rents is particularly justified both in the north of England and, in the last 10 years, almost anywhere outside London and the South East. He offers no evidence to support this.
The claim does not stack up. The Berkeley Group build mostly in London. Gleeson build mostly in the north of England. Mr Winstanley also fails to address the Land Registry data in the APPG report that show leasehold houses are often sold at higher prices, rather than at a discount, in areas where leasehold houses are “popular” with developers.
Mr Winstanley fails to consider the possibility that ground rent sales have been nothing more than an opportunity for developers to add to their profit margins. Not all developers have gone down this route, but those who have will inevitably welcome the Allsop’s view of the world.
But even should all of Mr Winstanley’s arguments hold true, he still needs to explain why is it that the rest of the world does not need these additional income streams to make house building viable.
Mr Winstanley attributes recent changes in the market to a set of acronyms, CIL, DSLT (he means SDLT?) , s106, etc.
He fails to mention that s106 has been around since 1990, long before the ground rent business exploded, and that the CIL (Community Infrastructure Levy) replaces large parts of the s106 rather than simply adding to it.
That leaves SDLT (Stamp Duty Land Tax) that came into force in 2003, long after ground rents had started to rise.
Mr Winstanley explains that landowners, who have seen downward pressures in the price they can obtain for selling their land to developers, are put in a marginally better position because of the existence of ground rents.
This marginal benefit somehow results in more landowners wanting to sell their land, which then allows more houses to be built, he asserts.
The housing market
In this final point, Mr Winstanley reaches the denouement of this carefully constructed, “dispassionate”, and supposedly objective argument.
It is apparently not good that we criticise developers and landlords for wanting to make a profit. We need to keep all parties motivated appropriately to keep the wheels turning, he suggests.
This is a ridiculous assertion. Nobody is suggesting that developers should not be allowed to make a profit. This seems nothing more than a self-serving homily.
Mr Winstanley concludes
“The role of a freeholder is to act as custodian over a block and its communal space (or housing estate with communal land or facilities), a role that is vital in my mind for collective long leaseholder enjoyment. This level of responsibility should not be underestimated and does, in my opinion, justify the existence of a ground rent payment to a reasonable upper limit.”
This is the sort of questionable logic that has been used for decades.
That the long leaseholder’s “enjoyment” is somehow gained from this third party freeholder profiting from him is a fiction.
In reality, the freeholder has no interest in the quality of the building until the end of the lease.
Since this lease may well be for 999 years, the freeholder’s interest for the vast bulk of this period is limited to the income streams that the law allows him to collect. Other countries have long disposed of this need for a third party “custodian” who controls the site with little or no regulation, and minimal financial investment.
Mr Winstanley then tells us clearly, there is a balance to be struck. He tells us he knows how hard the govenment have worked on their task. He explains we must all now work together to remove the weeds and let the flowers grow. He ends this crescendo of clichés and similes with the plea that our custodians of the leasehold tenants must continue to be allowed to be compensated fairly.
It is a pity that Mr Winstanley and the sector did not feel the need to mention the weeds publicly until they had already been exposed by LKP, and after the govenment had felt the need to crackdown on unfair terms in its consultation. It is a pity he only feels the need to identify the weeds already known to the government rather than point to the wide range of dubious flora and fauna in the leasehold garden.
Mr Winstanley poses the question: “Asking anyone to take this role for free is, in my view, unviable.”
That of course assumes that we continue to accept that England and Wales should remain unique in accepting that we somehow need a third party “custodian” of freeholds. Why should a site not pass to the people who own the properties (sorry leases) at the site, i.e. the ones who own 99% of the investment?
Why should those who live in these properties be beholden to a third party who is only looking to make a profit out of someone else’s home? Why should they be beholden to someone who can trade this as a financial instrument?
History makes more than clear that, while we have a few freeholders who take an ethical view, many more follow their fiduciary duty to their investors to maximise their income from the leaseholders. Many of these freeholders are based off shore, adding to the loss of income to the state.
The country would save a fortune if we didn’t have to spend so much on the surveyors, the lawyers, the auctioneers and others who make their money from the additional income streams available from the leasehold golden goose, which requires that the only person facing a diminishing asset is the person who invests the most.
With Allsop’s business earning some of its income from the ground rent market, it is perhaps unsurprising that they would produce this apologia.
The more observant readers will note a number of claims by Mr Winstanley mirror the words of other surveyors, including Savills employee and the chairman of the Leasehold Advisory Service Roger Southam. In his “chairman’s statement”, which was then rapidly removed from the LEASE web site he claimed:
“The elephant is the investment sale of ground rent provides additional income for the developer to make schemes viable in a lot of cases. There is rhetoric of profiteering and finger pointing but somewhere along the way we need to have an objective conversation about the whole development cycle and how it works in all facets to ensure that the right decisions are being made for the right reasons.”
Mr Winstanley may claim to be dispassionate, and Mr Southam objective, but others may reach an equally objective and dispassionate view that their opinion is nothing more than a self-serving justification of the industry that feeds them.
We have reported previously on the LKP website that both Savills and Allsop’s have promoted the benefits of buying into the ground rent market, in a less than dispassionate and objective way. Savills have pointed out how ground rents are an “attractive” investment, while Allsop’s say that it is an “oldie but a goodie”.
At some point someone in government should understand why the sector has allowed so much spurious data, so much misinformation and so much obfuscation to remain for so long. With all the claimed expertise there must have been a very good reason why nobody wanted anyone to know about the size, the structure and the abuses within the sector.
Maybe one day leaseholders will stop being replicated, and then they will no longer need to be the electric sheep that feed our dystopian leasehold world.