Savills Research | The Residential Property Focus May 2009
Leasehold property
Time to act on enfranchisement?
The time could be right to consider lease extension for owners of long leasehold
interests, according to Lucian Cook.
O
ne of the overlooked casualties of leaseholders are prepared to trade off bring a surge in enfranchisement activity,
the housing market downturn the lack of immediate profit against the but many will at least want to see house
has been enfranchisement prospect of future price growth. In a falling prices bottom out before making a
activity. Owners of long leasehold or static market, however, this becomes decision to extend their lease by 90 years.
interests in residential property have been increasingly difficult. Even then, unless there is a shift in the
much less inclined to use their statutory For many the inclination will be to ‘do perception of the value of leaseholds,
rights to extend their lease by 90 years. nothing’. However, because of the wasting especially those with a short remaining
This is due to several reasons. nature of the leasehold interest, the costs term, the issue of extracting value remains.
The first, and most potent reason, of enfranchisement will rise on a much
is that the most usual trigger point for steeper curve than house prices when Costs of enfranchisement
enfranchisement, namely the sale/purchase values start rising again. For example, while Our analysis indicates that in order for
of leasehold property, has been reduced we forecast that prices in prime central the leaseholder to cover all costs of
as turnover levels across the residential London are due to return to their peak at enfranchisement and make a notional
property market have plummeted. the end of 2013, we predict that the costs 10% profit on that cost, the value of an
Secondly, many owners of leasehold of enfranchisement will return to their 2007 interest with 40 years left to run may need
interests will have delayed the decision to levels some 18 months earlier. to fall by 5%. This figure increases to 10%
extend their lease since the cost of doing in the case of a leasehold with 30 years
so is intrinsically linked to the underlying Time to act outstanding.
freehold value of the property. This makes For an individual holding a long leasehold In these circumstances, while there
it cheaper to enfranchise tomorrow rather interest in a flat with a freehold value are theoretically very good reasons for a
than today in a period of falling prices. of £500,000 and with 40 years of their bounce in enfranchisement activity this
Finally, in 2005, legal precedent lease remaining in 2007, the costs of year, it is likely to be less than logic would
provided a prescriptive formula for the enfranchisement would have been dictate, unless the perception of the value
calculation of the costs of enfranchisement. £118,000, a figure which would fall to of leasehold interests is adjusted. n
This precedent means it has become £89,000 in 2009, but would increase to
increasingly difficult to justify the costs £144,000 in 2013.
of enfranchisement by reference to the All of which means that 2009 is likely
increase in the value of a leaseholders to be the cheapest year in which to
interest in their property. In a rising market enfranchise. This fact should, theoretically,
Graph 3.1 Costs of Enfranchisement Graph 3.2 Cost v Uplift in Value
£500k central London flat (£100 ground rent) £500k central London flat (£100 ground rent)
2007 2008 2009 2010 2011 2012 2013
2007 - Uplift in Leaseholders Interest
2007 - Costs of Enfranchisement
300,000 250,000
250,000
200,000
200,000
150,000
150,000
100,000
100,000
50,000
50,000
0
20 30 40 50 60 70 80
0
20 24 28 32 36 40 44 48 52 56 60 64 68 72 76 80
Years remaining in 2007
Years remaining
Source: Savills Source: Savills
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