Would you play the risky short-lease game?

The Government is overhauling leaseholds and big rewards are on offer for investors willing to take the plunge, writes Ruth Bloomfield

2021-02-13 -

There is a lot you can do with £130,000 – but can you buy a property in one of the priciest areas of central London? Dream on. Unless, of course, you are a riskamenable, cash-rich investor with a very steady nerve and plenty of patience.

The flat in question is a one-bedroom doer-upper on Rosary Gardens in South Kensington. This week it went under the hammer, selling for £ 127,000 after 14 bidders fought for it at an online sale by Auction House London.

There is a catch: only 11 months remain on the flat’s lease. Its new owner will either have to pay an unspecified sum to extend it, or hand it back to the freeholder.

Andrew Binstock, the auctioneer, said: “It just went crazy. We had a 20-minute bidding war, I was screaming for bids, and eventually it was whittled down to two people going crazy against each other.”

Its new owner now has a month to complete the sale. Then, by the end of the year, they need to negotiate an extension to the lease or forfeit it back to the freeholder. How much this could cost is a complete unknown, but they will not need to pay stamp duty on the sale and, once modernised, the flat should be worth close to £1m.

It is the lure of healthy profit margins that has long encouraged such investors to take a chance on a shortlease flat. And in future these should be much safer bets. At the start of January, the Government promised an overhaul of the leasehold system. Owners will have the automatic right to extend their leases to 990 years, the system of annual ground rent payments will be dismantled, and the cost of lease extensions will be reduced.

Crucially, it will no longer be the case that the shorter your lease, the more you have pay to extend it. “We get loads of short-lease properties to sell,” said Mr Binstock. “The trouble is, at the moment, that you are at the mercy of your freeholder who will be much more clued-up than you, and have much deeper pockets, and be able to bully you. The new system is great news for buyers, and very bad news for freeholders.” Even under the current system there are still some good reasons to buy a short- lease property: low entry costs, less stamp duty to pay, and limited competition from other buyers. The Government’s plans for reform add another incentive to the list. Buy now, at a price that will reflect the current cost of extending a lease, wait for the reforms to come into force, and then extend the lease at what Robert Jenrick, the Housing Secretary, has promised will be a lower cost. “If you believe that this is definitely, 100pc going to happen, then yes, it is a great idea,” said Mr Binstock.

Andrew Wishart, of consultants Capital Economics, predicted the value of leasehold flats would bounce once the new system was in place by “roughly the amount of the savings [of extending the lease], if not a little bit more”. But Jeremy Dharmasena, head of leasehold reform at estate agency Knight Frank, has argued that investors will start cottoning on to this idea immediately, upping the value of short-lease properties even before the change is made.

“Arguably the value of short-lease properties will be affected over the period until the law is changed, and beyond,” he said. “It is possible shortlease values will increase if buyers believe it will be much cheaper to obtain a lease extension in the future.”

As a result of a renewed interest in these properties, Alex Ingram-Hill, of agent John D Wood, predicts that good short- lease properties will become harder to find. “Many owners may decide to hold, in order to cash in on cheaper extensions and then sell,” he explained.

When the new system is in place, Claire Lamkin, of legal firm Blake Morgan, is confident that leaseholders’ lives – and finances – will be improved. “It starts to make ownership of leasehold properties as attractive as owning a freehold,” she said. “Demand for them should increase – pushing up the property price. But we will have to wait and see what happens in practice.”

Ms Lamkin’s caution is well placed because – before you rush out to find a cheap short-lease property – there are potential flies in the ointment. The first is that you will need to be a cash buyer. Mortgage companies are unlikely to lend on a property with a lease life less than 70 years, said Mr Binstock.

The second is time frame. Andrew Wells of estate agent Allsop was concerned that ministers “appear keen to court headlines rather than land on specific detail,” including exactly when all of this will happen, and how costs will look under the new system. “I believe it’s a good thing that aggressively increasing ground rents will be stopped,” he said.

“It will hopefully make flats easier to sell, and right now flats are having a hard time, with cladding, service charge and leasehold issues conspiring against them.” The Government’s proposals will certainly find powerful opposition, because they are a bodyblow to freeholders.

For investors prepared to wait on the reforms – and it would be wise to think in terms of years rather than months – Marc Goldberg of estate agency Marsh & Parsons, said it was inevitable that the value of their property would escalate.

“If it becomes cheaper to extend a lease and the ground rent outgoings are to be removed, there will be a positive impact on the value of the property,” said Goldberg. “Access to mortgages may also become more accessible for shorter leasehold properties, and if so, this will increase demand for these properties.”

‘Demand for leasehold should increase, pushing up the price’

As the end of the stamp duty holiday nears, Britain’s red- hot property market is starting to polarise. In some places demand is higher than ever, with homes snapped up in days; in others it is cooling. Analysts have predicted a drop in demand after the tax break ends on March 31.

Using research by PropCast, a data company, we located the top five counties across England for sellers, where the market is still racing.

BRISTOL

Bristol is the most in-demand property market in England. Here, three quarters of homes currently on the market are already under offer or sold subject to contract.

Demand has soared since July 2020, when just 55pc of such properties were under offer. Particularly indemand postcodes include BS41, a stretch on the city outskirts extending from Clifton Suspension Bridge to the village of Chew Magna. More central areas such as Bedminster, Cotham, Redland and Clifton also recorded high levels of demand.

James Toogood of Knight Frank, the estate agent, said: “The great thing about Bristol is no matter where you are, you are never going to be far from green space. That’s why, unlike other [urban] places, the city’s market has been doing just as well as the surrounding countryside.”

He added that the only part of the market that had struggled recently was for smaller flats.

“We do expect there will be a natural cooling period after the stamp duty holiday,” Mr Toogood said. “But even now we are still processing a good number of sales that won’t complete in time. Buyers and sellers are aware and still want to proceed.”

While the number of buyer inquiries in Bristol has jumped by almost 90pc compared with the five- year average, instructions are only up by 23pc, according to Knight Frank.

This frenetic demand and the supply imbalance are reflected in house prices, which rose by almost 4pc in 2020, according to Zoopla, the property website.

SUFFOLK

Two thirds of homes currently for sale in Suffolk have already found buyers. Properties in CO8, by Dedham Vale Area of Outstanding Natural Beauty, as well as IP18, covering the coastal town of Southwold, and IP5, just outside of Ipswich, were most in demand.

Sharnie Rogers of Strutt & Parker, another agent, said the area from Stour Valley to Dedham Vale was popular for its villages such as Stoke-by-Nayland, Polstead and Lower Raydon.

“Some homes sell in a matter of days. These tend to be good plots with half an acre and above of land, with country or coastal views,” she added.

Values are have been rising quickly. In Ipswich the average price jumped by 3.2pc to £192,400 in the 12 months to December, Zoopla figures show.

SOUTH YORKSHIRE

Propcast’s research found that Sheffield and its surroundings have become a seller’s market. Overall, 65pc of properties currently for sale in South Yorkshire are under offer or subject to contract, making the county as a whole high on the list. But in Sheffield’s most popular postcodes among buyers – S14, S17 and S8, in the south and south-west of the city – more than 80pc are.

Buyers in Sheffield benefit from low property prices and proximity of the Peak District National Park. The average property price rose 5pc in 2020 to £1.5m

‘Buyers and sellers know they won’t meet the stamp duty deadline but still want to proceed’

£143,800. In particularly sought-after areas, house prices have been pushed up by 10 and 15pc, said Luke Williams of Purplebricks, the estate agency.

He added that the affluent S10 and S11 postcodes in the west of the city are desirable too, with buyers drawn by the excellent schools in the area.

Mr Williams reported a large number of homes in these postcodes selling for more than the asking price. One threebedroom detached house in S11, which is within walking distance of the Peak District, recently sold for £ 590,000, £65,000 above its asking price.

“While these sought- after areas won’t be affected when the stamp duty holiday ends, the overall market will be,” Mr Williams said.

NORTHAMPTONSHIRE

Buyer inquiries have risen across all parts of the county since last summer, said Ian Simons of Winkworth, the property agent. Currently 65pc of properties on the market have found buyers – up from 45pc last July.

The main seller’s markets are in medium-sized towns, including Daventry, Wellingborough and Corby.

“They offer good value for money per square foot and Daventry and Wellingborough have direct train links into London, so it’s possible to commute,” Mr Simons added.

“There will be a lull after March. But demand is outstripping supply and I’ll be really surprised if we see prices fall. We’ve told buyers they’ll probably miss the stamp duty holiday and it hasn’t put them off.”

NORFOLK

The strongest seller’s markets in Norfolk are clustered along its northern coast, around Little Walsingham and Blakeney nature reserve. In NR22, NR23 and NR24 between 78 and 85pc of properties for sale are under offer or subject to contract – compared with the county average of 64pc.

Tim Stephens of Humberts, an agent in the area, said: “Most buyers are looking for homes that are within 20 minutes of the coast, where they feel they are paying less of a premium than on the seafront.”

Prices in Norfolk increased around 5pc in 2020. He added that the current lockdown had deterred some buyers and sellers, especially older people or those needing to shield. The second home market has also been hit because of travel restrictions.

“But if the first lockdown is anything to go by, we should see a further spike in demand and more homes coming to market as measures are eased again. This should prevent a fallout as furlough and the stamp duty holiday come to an end,” Mr Stephens said. £1.35m

AGENT Carter Jonas

The Georgian farmhouse is in a village outside the town centre. It has six bedrooms and some outhouses that could be a home office.

ICHEVRON

In 2009, this oil company was voted the 25th best place to work in America. Since then it has made investors 110pc. nvestors should target companies rated highly by employees to give their portfolios an edge, according to new research.

Fund group Mobius Capital Partners found that shares in American companies that scored the highest ratings on Glassdoor, an employee review website, delivered higher returns than the US stock market as a whole.

Shares in listed companies that featured among Glassdoor’s inaugural top 50 of America’s “best places to work” for 2009 went on to deliver returns of 582pc over the next 12 years, beating the 316pc return from the S&P 500 index of US shares.

Glassdoor’s own research published in 2015 showed the strong performance of shares in the companies that featured high in its inaugural rankings, and Mobius checked to see if the trend had persisted.

The fund group also examined the performance of the companies that had ranked highest in Glassdoor’s top 50 of 2014 and found the same trend.

The shares went on to deliver returns of 162pc over the following seven years, beating the 103pc from

APPLE

The 19th best place to work in 2009, shares in the iPhone maker have delivered a 54-fold return over 12 years. the American stock market. Glassdoor’s own research published last year, meanwhile, found shares in the companies that featured on its list each year beat the stock market in nine of the 11 years from 2009 to 2019.

Usman Ali, from Mobius Capital Partners, said investors could profit by targeting companies that treated employees well because this was reflected in higher profits.

“It is called the ‘ service profit chain’. If you have satisfied employees, you improve staff retention and productivity. This creates value and satisfaction for customers, which brings loyalty, revenue growth and profitability,” he said.

Companies that scored highly in the 2014 rankings included big technology

NIKE

The sportswear firm was the 22nd best place to work in 2009. Investors have enjoyed more than a 13-fold return since then. firms such as Twitter and Facebook, the Google owner Alphabet and Apple.

“A lot of these tech companies tend to be better at attracting the best people through the perks and high compensation they offer,” said Mr Ali.

“Traditionally, top students wanted to join investment banks, but now they want to join tech companies.”

Technology companies also feature high in Glassdoor’s 2021 top employers list, published last month.

Nvidia, the semiconductor maker, HubSpot, the software developer, Alphabet and Microsoft all feature in the top 10, alongside Delta Air Lines and Lululemon, the sportswear brand.

Investors are increasingly focusing on companies’ culture and their environmental, social and governance practices, as more savers want their money to have a positive impact.

Carlos Hardenberg, co- manager of the Mobius investment trust, said: “Investing was once all about chasing every additional dollar, but new generations of savers have redefined their goals.”

He said that a focus on companies’ culture should not be solely the preserve of ethical investors. “There is huge statistical evidence that the worst investments can be described as companies that had severe shortcomings when it came to culture,” Mr Hardenberg said.

“You have to have a thorough understanding of these ‘soft’ factors driving the success or failure of businesses.”

However, Mr Ali acknowledged that the fundamentals of investing, such as understanding a company’s balance sheet and the valuation of its shares, came before assessing its treatment of employees.

Corporate culture “would not be a starting point” in investment decisions but could give investors an edge. “It is definitely something to think about in your research,” he said.

He added that the approach could be applied across different stocks, irrespective of which part of the economy they operated in.

“If you are looking at British banks, for example, the same analysis will apply,” he said.

“A top employee working for one bank could be poached by another bank with a better culture.”

‘Once, it was all about chasing every last dollar, now it is about investing for good’

Anew “war bond”- style Covid recovery fund could spark interest among Britain’s savers as the Government looks to use public cash to fill the financial black hole.

Speculation that the Treasury could introduce long- dated bonds sold directly to citizens, much like previous administrations in times of crises, has gathered momentum in recent weeks.

Lord Field of Birkenhead mooted the idea in this newspaper, calling on the Government to issue bonds to pay for tutoring for children whose schools had closed due to the lockdowns.

The Government has already borrowed from savers to help fund its fight against Covid. Last year it ordered state- owned National Savings & Investments to raise £35bn.

Despite a deadline of April this year, an influx of demand meant NS&I took in the money by September. However, it has since cut rates dramatically, causing savers to withdraw cash from the institution. There has also been a backlash over a series of customer service failings by the bank.

Justin Urquhart Stewart of Seven Investment Management said the public would have an appetite for a dedicated bond designed to aid the country’s financial recovery.

He said: “The Government doesn’t want to give away a whole load of money in interest payments when rates are so low, but they could introduce a bond that paid a small coupon linked to inflation or with a loyalty bonus.

“Compared with the huge amount of international financing the Government has to do it would be relatively small, but for getting people engaged in the recovery and encouraging longer-term investing, it’s a very simple mechanism.”

The British Government has a long history of turning to the public to bolster its finances in times of crisis.

Income tax was famously introduced as a temporary measure in 1799 by then prime minister William Pitt the Younger to help pay for the war with revolutionary France.

Although it’s difficult to predict what shape a Covid bond might take, there are some historical examples to draw

‘If people saved during the recovery that would keep inflation down and interest rates low’

on, and clues as to why the Government might resist setting a higher interest rate to attract borrowers.

In 1914 the Government introduced its first “War Loan” at 3.5pc interest, the first interest-bearing war bond of its kind in Britain. In 1917 it issued a further bond paying a coupon of 5pc.

An advertisement at the time read: “If you cannot fight, you can help your country by investing all you can in 5pc Exchequer Bonds … Unlike the soldier, the investor runs no risk.”

Britain eventually raised more than £2bn from these bonds from roughly three million bondholders.

In 1932, at the height of the Great Depression, the Government could not sustain the bonds’ coupon at 5pc, so most were converted by the thenchancellor Neville Chamberlain into perpetual bonds that paid a rate of 3.5pc. The Treasury finally paid out the outstanding £1.9bn of debt from these bonds in March 2015.

At the time, the 3.5pc bond was by far the most widely held of any UK government bond with more than 120,000 holders, or 60pc of all Government bond holdings.

Today the state can borrow much more cheaply on the international markets than by paying a competitive interest rate to retail savers. But, according to Natacha Postel-Vinay, assistant professor at the Department of Economic History at the London School of Economics, the Government may look to a Covid bond as a way of controlling inflation once the economy begins to recover.

Throughout last year households saved a collective £150bn, more than ever before, as successive lockdowns curbed spending, according to the Bank of England.

Ms Postel-Vinay said there was a worry that if consumer spending rapidly increased after lockdown, this could lead to spiralling inflation.

She said that a Covid bond could be a way to incentivise people to slow the rate of money flowing from savings accounts into the economy, thereby limiting inflation.

Ms Postel-Vinay said: “The timing would have to be important. If people saved during the recovery, that would keep inflation down, which would keep interest rates low, which means that the Government’s debt repayments would end up being cheaper than what they would be had inflation picked up.”

Ms Postel-Vinay added that a huge advertising campaign would be required to sell enough bonds to have the desired effect.

Campaigns of this kind were famously launched in both world wars. The Government also had to issue a huge advertising drive in the 1930s when it changed the rate on its 5pc bonds.

Ms Postel-Vinay said: “We would possibly need something similar today, but in 2021 people might be less receptive to that sort of campaign – some people may see it as propaganda.”

A Treasury spokesman said the Government had no immediate plans to issue Covid bonds but said it “remained open to the introduction of new debt instruments if they offer value for money, enjoy strong and sustained demand and are consistent with our wider fiscal objectives”.