September 22, 2019

Government will cave in to retirement house builders over ground rents, says Times

What does this say about setting new in wider market to zero?

The government is poised to exclude retirement house builders from the much delayed ban on ground rents.

Headed by leading retirement builder McCarthy and Stone and Churchill Retirement (which is privately owned by the McCarthy family), have been lobbying hard for an exclusion.

Their argument is that the ground rents – which are high in retirement housing – pay the developer for the communal areas of lounge, kitchen and laundry.

The retirement house builders have declined to state that buildings which do not have communal facilities should therefore have zero ground rents, although they have been invited to do so by LKP.

Retirement home builders fight off leasehold ban

The government is poised to exempt retirement home builders from a ban on charging ground rent after some of Britain’s biggest providers said it would dent the supply of much-needed new homes for older people.The property industry has been on tenterhooks since the end of 2017 when the government fi

McCarthy and Stone argues that without ground rents the cost of the flats would be £15,000 to £20,000 more than at present.

It is to be hoped that government has not been persuaded by any notional pricing models dreamed up by the retirement housing lobbyists.

The Times says share in McCarthy and Stone have fallen by a fifth since 2017.

Spencer McCarthy of Churchill Retirement is quoted claiming land have fallen by a third.

Rather more important than the threat of an end to ground rents is the stalled housing market, which has markedly reduced the number of pensioners seeking to downsize.

On the other hand, the Times quoted Phily Bayliss, head of later living at Legal and General which owns a couple of upscale retirement village providers, said:

“The idea that we are going to keep in a feudal system of ground rents to prop up the housebuilder-developer model just doesn’t seem appropriate.”

Sebastian O’Kelly, of the Leasehold Knowledge Partnership, was quoted:

“We would rather that ground rents disappear and there could be a separate charge if there are communal areas.”

At least this would mean that the charge could not be made if the communal areas disappeared.

The cave in by the government is shame, as last summer the retirement house builders were convinced that the game was up with ground rents.

The old retirement volume house building model – kicking out small flats; loading the lease with income streams; flogging the freehold to speculators like Vincent Tchenguiz (who nominally owns the old McCarthy and Stone freehold book) – is undergoing a significant revision.

McCarthy and Stone is building up its management arm. It holds the management via a headlease and the communal services are becoming more sophisticated.

As the businesses move on to long term management the need for ground rents via a lease disappear.

Indeed, LKP has made the case to McCarthy and Stone that selling on the freehold to assets the company holds on to for the long term may well prove short-sighted and an impediment in the longer term.

In short, LKP felt that the retirement house builders heart was not in the fight for ground rents and that the volume house builders are all moving on to a retirement community operator model.
The Association of Retirement Community Operators (ARCO) has long argued against the case for ground rents, but supports substantial exit fees instead to pay the fluctuating costs of running these businesses.

If the government is making an exception to retirement ground rents, we cannot be optimistic for a measure to make ground rents in the wider housing market set to zero, as ex-Communities Secretary Sajid Javid promised more than two years ago.

Nonetheless, the government had repeated that it supports a peppercorn ground rent model.

We hope that this means zero, but it might mean nominal ground rents. In which case, the leasehold game beloved of developers and freehold speculators here and offshore will still have legs.

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