In previous times, the demand for residential property with 80 years or less remaining on the leasehold was generally low. However, current market conditions favour a new breed of savvy buyers, seeking alternate methods of approaching the market who wish to benefit from continued Brexit-related uncertainty.
Leasehold property is a depreciating asset, so the less time left on the lease, the less a property is worth. However to a certain demographic (for example retirees, or those awaiting an inheritance or trust fund), these properties with a short term remaining can often prove to be advantageous from a tax perspective.
Stamp Duty Land Tax, Inheritance Tax, and Capital Gains Tax can all be reduced as a result of the diminished capital values associated with the purchase of a property on a short leasehold term.
However, this never used to be common knowledge among your average buyer. That’s why these properties only appealed to those with knowledge and experience of the financial and legal complexities surrounding the process of extending a lease, or acquiring the freehold of a property.
Under the terms set out under the Leasehold Reform Act 1967 (LRA 1967) and Leasehold Reform Housing and Urban Development Act 1993 (LRHUDA 1993), leasehold tenants have far greater protection and statutory rights to either extend their lease, or acquire the freehold from the landlord, a process known as enfranchisement.
You used to have to legally own a property for a minimum of two years before serving notice on the landlord of your intention to extend the lease of a flat (or buy the freehold of a house). But savvy vendors can bypass this two-year rule by serving on behalf of an incoming buyer, assigning the notice to the new owner on completion.
The PCL residential market may look a different place in a few years’ time, and if there is a significant uplift in confidence and values post-Brexit, buyers would be wise to capitalise on these current short leasehold opportunities
There is currently an abundance of short lease properties on the market, so this presents the opportunity for cash rich buyers to get a foothold into the best areas of Prime Central London, while minimising their financial exposure by allowing them to decide if, and when, to commit to a lease extension. A note of caution though; they need to be cash rich because short lease properties are virtually unmortgageable.
You can see why this appeals now; the UK’s scheduled exit date from the European Union is a week away, but we still don’t know what this will mean; will we leave the EU with a ‘deal’, will we ‘crash out’ of the EU with no deal or will Brexit be delayed? As a consequence, the residential markets in Prime Central London are continuing to be subdued, dominated by political and economic uncertainty. This has resulted in heightened caution from purchasers and tenants, coupled with increasing price sensitivity across both prime sales and rental markets, creating an unsurprising lack of urgency.
Evidently, this sentiment is holding back the market at present. It is also clear that where committed sellers have adequately adjusted their expectations down from 2014 levels, those properties are selling and the market is fairly active.
The PCL residential market may look a different place in a few years’ time, and if there is a significant uplift in confidence and values post-Brexit, buyers would be wise to capitalise on these current short leasehold opportunities. Weak markets can strengthen a leaseholder’s position when negotiating the eventual cost of the premium for a new lease. As ever, timing is everything.