David Cotterell FRICS, Director, Savills Housing & Healthcare Division, looks at how taking early and decisive action in managing leasehold assets can help housing associations steer clear of pitfalls.
Leasehold property presents a special problem for anyone concerned with owning or managing it. Recent headlines have highlighted leasehold’s role in exacerbating inequalities between freeholders and leaseholder homeowners, but from an estate management perspective, the potential hazards particular to leasehold are pervasive.
The problems stem from a combination of the high effectiveness of leasehold covenants in regulating a property’s use, and the fact that leaseholds are necessarily time-limited. The pressures on a leaseholder to manage their interest effectively will increase exponentially as a termination date approaches, but there are other considerations that can profoundly affect management decisions and strategy – particularly covenants concerning use and disposal of the leasehold.
Few other categories of property asset benefit from long-term planning as much as leaseholds do – and largely because the consequences of poor management can be very significant where the interests of the freeholder are affected to the degree that they begin to initiate action to enforce covenants.
A particular category of housing association-specific leaseholds expanded greatly in the wake of the Housing Act 1974, when the Housing Corporation was empowered to advance loans and grants to enable the development of leasehold land, but only where such leasehold assets had at least 60 years unexpired. Such leases can now have as little as 20 years remaining: far too short to provide value as loan security, and a time horizon within which action would greatly benefit from starting promptly.
Altogether, leaseholds in the housing sector number over 150,000 titles according to Savills Research, supporting potentially 750,000 homes, worth in excess of £30bn. The 50 largest housing association owners of leasehold property own more than 100,000 leasehold titles between them – supporting perhaps as many as 500,000 homes.
Early action on leaseholds pays dividends, but it is all too easy to postpone what can be the necessary complex and time-consuming work involved in dealing with them effectively. Nevertheless, informed and careful action can reap significant rewards.
In 2017, Savills was able to assist a housing association in acquiring the freehold underlying a leasehold estate of mixed housing in London. At the other end of the spectrum, we have also seen housing associations commit to very significant investment in a leasehold asset, where it is appreciated too late that remaining leasehold terms are too short for the full benefit of the investment to be realised.
A broad strategy that can assist, is to identify leasehold assets separately from freeholds, and to formulate a distinct management prescription for that group. We suggest that leaseholds having less than 100 years to run will require particular consideration. Leases still having more than 80 years to run may benefit from close consideration of statutory lease extension possibilities, while others (at any length of lease) may also give the right to freehold enfranchisement at a beneficial price. Alongside the statutory routes, the special relationship created by leaseholds demands a very careful approach to valuation and negotiation.
A first step may also be to identify the scale of value in issue, appraise the cost of available management alternatives, and then to apply resources and management in due proportion.