UK Markets closed

Grounds for concern over firms that snap up freeholds

Isabelle Fraser
Companies buy freeholds from developers and can easily set the terms of the lease - © 2015 Bloomberg Finance LP

He lives in a 16th-century moated manor house in Norfolk, with a 4,500 acre estate full of grey partridges and a penchant for collecting Old Masters. Earlier this year he was reported to have sold a prized collection of drawings by artists such as Michelangelo, Rubens and Goya to the Getty Museum for $100m.

Such is the life of Luca Rinaldo Contardo Padulli di Vighignolo, a reclusive Italian count who founded hedge fund Camomille Associates and runs a growing property empire.

He also, indirectly, owns the freehold of Iain Hadwin’s three-bedroom semi-detached house in Warrington. Hadwin, a project lead at pharmadrug company Bristol Myers Squibb, was forced to pay his freeholder £330 to ask for permission to add an orangery to the house he owns.

The count is one of a number of people who are ground rent tycoons, making a fortune from homeowners. These are largely unknown companies which saw the opportunity to snap up freeholds of the estimated 4.3m leasehold homes, and earn a steady income from ground rent, lease extensions and other mechanisms.

According to Companies House records, Padulli is the sole director of Albanwise, a company that owns investment properties and farmland. It has significant control over Wallace Partnership Group, which in turn owns more than 75pc of shares in Wallace Estates, the company to which Mr Hadwin pays £180 annually in ground rent.

Part of Michelangelo's 'Study of a Mourning Woman' which was sold by Padulli to the Getty Museum

Data from the Land Registry revealed that the company owns 23,181 deeds, the third highest of any other UK business, suggesting that it has an extensive freehold business.

It is almost impossible to know the extent or the number of these businesses, which operate within networks of companies and offshore trusts. Louie Burns, who runs Leasehold Solutions which advises consumers on lease extensions, has been carrying out painstaking research into this web of companies for nine years. He has traced £2 trillion worth of freeholds, equal to about 20pc of total ownership. But this is just a fraction, he says. “It’s like a hidden world. It’s very difficult to do any kind of meaningful research.”

He has found more than 6,000 freehold companies, many of which are linked. Of these, about 200 are "significant". It is also difficult to learn their size, value or income as the property ownership is often shifted between structures, says Burns.

The average ground rent paid is £371, according to Direct Line, as leases have been increasingly drawn up which raise the amount from a peppercorn rate. These companies’ income also comes from a raft of charges in the form of lease extensions, service charges, licences and commissions – such as with Mr Hadwin’s orangery in Warrington. “That becomes a huge amount,” says Burns. “Every little thing you do they can charge you for it.”

ground rent average

Alok Sharma, the housing minister, told the House of Commons earlier this year that £3.5bn of service charges are collected each year, while leaseholders were also being overcharged for repairs to their home by managing agents connected to the freeholder.

In one example, “a group of leaseholders were charged 10 times the market rate to have a new fire escape fitted, with the £30,000 contract for the work being handed to the owner's brother". 

This chaotic situation arose from the original aristocratic freeholders. In London, they include the great family estates such as Grosvenor, Portman and Cadogan. These companies own the freehold s of properties across 1,300 acres of prime central London.

After the Second World War, as planning laws were relaxed to enable rebuilding, private investors stepped in. One company, Freshwater, was founded by Osias Freshwater, who fled from Poland to the UK before the Second World War. 

In the Eighties, there was another boom as buyers were increasingly able to dictate the shape of the lease. 

Grosvenor Square, where the freehold is owned by the Grosvenor Estate Credit: Alamy

“Freeholds were crack cocaine of investment, with low risk and high return,” says Burns.

In recent years this has ballooned as housebuilders create a new revenue stream by selling the freeholds off to investors. In 2015, 43pc of new build homes were leaseholds in England and Wales , up from 22pc in 1996. 

Savills estimated that in 2016 £250m of ground rent capital value was created by new homes.

The entrepreneur Vincent Tchenguiz has built up a ground rents portfolio called Project MacDonald, which is said to hold around 300,000 residential freeholds worth some £4bn. In 2014 he sold part of it in a £240m deal to Long Harbour, a fund manager which invests in ground rents and is run by the half-brother of Samantha Cameron, William Waldorf Astor IV. It owns the freeholds of about 160,000 properties, worth £1.4bn.

The current system of land ownership is a hodge-podge of ad hoc changes. It means that some archaic rules still exist, particularly in areas in the North West of England.

One example is the system of doubling ground rents, a scandal which has recently come to light.

Freeholds were crack cocaine of investment, with low risk and high return

Louie Burns, Leasehold Solutions

Described by Sajid Javid, the Communities Secretary, as a “feudal” practice, it means the sum payable to the freeholder doubles every 10 or 25 years, rendering them unsellable with lenders such as Nationwide refusing to give mortgages for them. In one flat in Islington, for example, the ground rent starts at £250 per year, and was set to double every 25 years. By the end of its lease, in 999 years, that yearly total would be £68,719,476,736,000.

While most ground rents rise with inflation, it is thought that 100,000 properties are affected by these spiralling ground rents. The scandal prompted the Government to act with its consultation into the whole leasehold system, potentially scrapping ground rent and and revamping the property management sector.

Taylor Wimpey, one of the housebuilders that sold many of its homes with doubling leases, apologised and set aside £130m to fix the situation with the current freeholders.

However, it has also caused disquiet among investors in what was viewed as a safe bet with guaranteed income. 

ground rents investment fund

The listed Ground Rent Income Fund offers a 3.5 to 4pc inflation-linked yield, but it said its net asset value could be hit as some of its properties have doubling leases. Its share price has fallen 15pc since March. Institutional investors such as Aviva, Standard Life, PGIM and M&G all have ground rent funds.

Some have suggested that legislation curbing ground rents and ending the creation of leaseholds might drive investment into other classes like build-to-rent. 

Guy Stebbings, a partner in residential capital markets at Knight Frank, was more positive, saying funds that even funds where ground rent is linked to inflation “continue to attract very strong interest ffrom   investors.”.

With such a secure income, that may still be the case for now, but the Government’s fighting words on the issue suggest that any reforms to the chaotic leasehold system could topple this well-entrenched system.