Mccarthy & Stone and Berkeley face hit from leasehold rule changes

THE Government’s plan to change leasehold rules for new-build homes could hit Mccarthy & Stone, the retirement specialist, and London developer Berkeley.

A consultation launched yesterday reveals the Government intends to prohibit the sale of new-build leasehold houses and to only allow nominal peppercorn ground rents on all new leasehold properties such as flats.

Unlike many other developers, Mccarthy & Stone sells the vast majority of its homes on a leasehold basis, with a ground rent of between £400 and £600 per year, increasing with the retail prices index (RPI). Last year it made 4pc of its revenue by selling off freeholds to investors. The company’s shares sank 3.9pc to 172p yesterday on news of the proposed changes. Last year, Berkeley made £51m from the sale of ground rent assets, equivalent to 9.6pc of its pre-tax profit, although this was due to the disposal of its historical ground rent asset portfolios. In 2017, it is likely to make up 3pc of pre-tax profits.

Stephen Barter, KPMG UK’S chairman of real estate advisory, said that any government changes needed to be “carefully targeted”. He added: “Low bond yields have significantly increased investors’ appetite for the secure annuity qualities of freehold ground rent investments, which have become considerably more valuable.

“Housebuilders have found this an attractive way to make additional profit at the end of the development period by selling on the stub freehold interest, subject to the ground rent income.” The share prices of most housebuilders were largely flat after the announcement, reflecting how they have largely moved away from selling leaseholds.

The Home Builders Federation has estimated that 15pc of new-build houses sold last year were leasehold, but that this proportion is expected to drop sharply in the next three years. Leasehold reform has been in the pipeline for some time, after revelations that some housebuilders sold their homes with ground rent that “doubled” after 10 years, increasing exponentially, rendering them unsellable.

Earlier this year, Taylor Wimpey put aside £130m to convert those leases into standard ones. The Government also indicated it wanted to ban Help to Buy loans from being used for leasehold homes. This could be an issue for Persimmon, which sells almost half of its homes using this scheme.