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PrimeResi Quarterly Journal

The handbook of the luxury property industry

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PRQ8

Current issue: Winter 2016/7

Next issue: due for publication in April 2017

Understanding and Adding Value: A guide to freehold ground rents

With 50 years’ experience investing in freehold ground rents, the Regis Group has seen a significant shift in the prices paid for these often overlooked investments, particularly during the...

With 50 years’ experience investing in freehold ground rents, the Regis Group has seen a significant shift in the prices paid for these often overlooked investments, particularly during the last five years. The days of freehold acquisitions at yields of 15% + are long gone!

The group prides itself on being the only large property investor who invests and holds the asset for the benefit of the company, rather than for third parties such as REIT’s and funds. Consequently, Regis are able to place a higher value on the freeholds they buy and pay close attention to the asset’s ongoing in-house management.

Regis_editorial_image660px

Pricing

The main value driver in ground rents is the rent review and there are two factors to consider: firstly, the type of rent review and secondly, the frequency of the review. Put simply, the more frequent a review, the more valuable the freehold.

There are varying types of ground rent reviews:

  • RPI: Reviewing in line with inflation using the Retail Price Index
  • Doubling: The previous year’s rent doubles upon the date of review
  • Capital Value: Increasing in line with the market value of the unit
  • Stepped: Increasing by set amount as detailed in the lease, e.g. by £250 every 25 years

Ultimately investors are looking for an investment that is protected against inflation and therefore most of the publicly listed house builders grant leases with rent reviews to RPI every 5 or 10 years. RPI rent reviews are now seen as the industry standard, and hence attract the highest values.

Ways to sell

The sale of ground rents is not as simple as traditional residential conveyancing. The principal reason is that the vendor (freeholder) must first offer the sale of the freehold to the leaseholders using a prescribed form of notice pursuant to Section 5 of the Landlord and Tenant Act 1987 (as amended).

Freeholders often fall foul of this piece of Landlord and Tenant legislation by serving incorrect Notices, missing statutory deadlines or offering the freehold at a low value, thereby making the potential purchase of the freehold an attractive option for leaseholders.

Regis Group has decades of experience in this area and can provide advice and assistance in relation to adhering to the Section 5, “right of first refusal” provisions.

Regis Group are well positioned to advise on and are regularly involved in transactions in which the need to serve the Section 5 can be quite lawfully bypassed:

  • Forward sale by developers 

A forward sale of the ground rents can only happen when less than half of the units have exchanged or been sold.

The developer or freeholder is able to contract with an investor/purchaser before there is a majority of leaseholders in the block forming the prescribed number of qualifying leaseholders such that Section 5 Notices have to be served.

Once the sale of the ground rents has exchanged the remaining units can be sold and once complete the developer or vendor is able to serve a notice to complete on the investor and complete the sale within 5 days.

This benefits the developer/freeholder in three ways:

  1. They are guaranteed a price before the build actually starts.
  2. They can avoid the two month delay before receiving funds.
  3. They can complete as soon as the last unit has sold so limit any ongoing management liability of a block they no longer have any interest in.
  • Company purchase 

If the shares in a holding company are purchased then the legal owner of the freehold has not changed hands and therefore there is no requirement to serve Section 5 Notices on the leaseholders.

Legislation also allows the transfer of freeholds to a group company that has been linked to the parent company for more than two years and therefore a ground rent holding can be transferred out into an SPV (special purpose vehicle) and sold as one asset.

Regis Group has undertaken numerous company and portfolio purchases over the years. We possess a large acquisitions and legal team that is able to advise, value and progress purchases with speed and efficiency as per the case study below.

Case study

Regis Group company purchase of circa 600 units across 167 locations in Greater London:

The original owner company had been held in administration for over three years with limited active property management. Regis Group dealt simultaneously with several groups of solicitors, administrators, the managing agent and the residential selling agent. This complex purchase was completed with extensive attention to detail, despite having limited legal information disclosed. The portfolio has now been stabilized.

If you are looking to sell your ground rents, we’d like to make you an offer.

RegisGroup_Logo_NO_PLC_WEB_PurpleContact: Todd Harrison-Moore
Telephone: 0207 318 2285
Mobile: 07732 060 528
Email: thm@regisplc.com
Web: regisplc.com
 
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