A Housing Forum Good Practice Guide 26 Sustainable Leasehold and Long-term Asset Management long-term income stream and how to optimise that by the setting of the ground rent. A ground rent is created when a freehold piece of land or a building is sold on a long lease. A building can be either sold as a single house or divided into flats. Ground rents were originally the result of leases sold by the owners of landed estates to speculative builders in the early 1900s, but are now also a feature of Victorian house conversions, apartment blocks and modern estates. Ground rents can also be reversionary investments. Most landlords would know them if they have invested in flat-schemes in cities. The individual leases provide an annual payment, known as ground rent, which in turn provides a source of income to the freeholder. It is this accumulative long-term income stream that attracts investors. The investment value of the ground rent income stream can be 1-2% of the gross development value of the apartment scheme and the payment is usually made annually. Ground rents are a product of the freehold/leasehold structure in English law. The ground rent is an annual payment to the landlord in consideration of the grant of a long lease, with the landlord ultimately benefitting from the reversion at expiry. Long leases are drafted by housebuilders on disposal of flats, or in some cases houses. Over the past 30 years housebuilders have become increasingly aware of the investment value that can be created by drafting their leases in a manner that secures a ring-fenced income stream for future freehold owners. This is particularly the case over the last 10 to 15 years as leases have been optimised in terms of the rent review clauses, notice fees and other provisions in order to maximise freehold sales receipts for the developer. The market has always existed but was considered specialist. There is a greater awareness of the value of ground rents as a long-term investment, particularly among investors like housing associations or councils which manage large diversified portfolios. The key to setting ground rent is in the successful drafting of the lease, regular communication with leaseholders and effective collection. Failure to fully recover the costs of leaseholder works will mean the rented stock is cross-subsidising the leasehold stock and this cannot be allowed to happen. Two reports showing the importance of ground rents Managing leasehold services following outcomes of the Right to Buy which allows for a commercial return Like local authorities, housing associations will have to offer the Right to Buy to their tenants, and this will increase the number of leaseholders significantly. A very different mind-set is required when managing housing stock with a view to allowing a commercial return. Whether that return is called surplus, margin or profit, the point is that long-term stock management and maintenance of leaseholder housing must be paid for by the leaseholders. Failure to fully recover the costs of leaseholder works will mean the rented stock is cross-subsidising the leasehold stock and this cannot be The Evolving Residential Ground rent market, spring 2013 (CBRE) http://www.cbre.eu/ portal/res rep.show report?report id=2854 Ground rents uncovered (Savills) http://www.groundrents incomefund.com/wp-content/ uploads/2012/10/SavillsResearch-Ground-RentsUncovered-WinterSpring-2010.pdf
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