Freehold versus Leasehold

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Freehold Versus Leasehold

We’re often asked about the difference between freehold and leasehold property and which makes the better investment. International clients are often unfamiliar with the freehold/leasehold system but it can be equally confusing for domestic buyers!

Firstly, let’s look at the main features of freehold and leasehold properties.

FREEHOLD

  • You own the property and the underlying land outright.
    This means you are responsible for the upkeep of the entire building.
  • You do not need to seek permission from the freeholder (which is you!) or other leaseholders before carrying out an extension or structural work. However you will still need planning permission for some works.

LEASEHOLD

  • You own the property (typically your flat) for the time stated in the lease – if the lease is not extended and expires the property returns to the freehold owner – also known as the landlord.
  • The lease will set out rules both the leaseholder and freeholder must follow.  Some are more restrictive than others.
  • Ground rent is payable to the landlord on an annual basis. As of 30th June 2022, this only applies to existing leases and not new ones.
  • Leaseholders typically have to pay a service charge to the freeholder.
  • The freehold owner is responsible for maintenance of communal areas, the overall condition of the building and insurance. These are usually covered by the service charge.
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SHARE OF FREEHOLD

Finally, some flats are sold with a ‘Share of Freehold’. This has elements of both tenures as the buyer becomes both a freeholder and leaseholder. The freehold is split between all owners in a building. You own your flat and a share of the land and building. Unlike an outright freehold, there is still a lease in place which must be followed. Owning a Share Freehold can have its advantages. All freeholders usually have a personal stake in the upkeep of the building and little incentive to levy unreasonably high service charges. Extending a lease is generally more straight-forward. It is typically in everyone’s interests to grant long lease extensions on all properties for a nominal amount. With that said, we have seen many Shares of Freehold with communal areas in far worse condition than the average leasehold.

Is Freehold or Leasehold a better investment? 

All things being equal, a freehold property’s simpler legal status makes it more desirable. In reality though, all things are never equal and each property has to be judged on its own merits. 

Location, not the form of tenure, is usually the main determiner of value. For instance, a leasehold flat purchased 30 years ago in central London would have comfortably outperformed most freeholds in the UK, even after factoring in service charge and ground rent payments. 

When carrying out our Buying Service, a property’s tenure is just one of many factors we look at to determine whether it represents value.

The condition of the property, sold price comparables, the local planning environment, investment potential of the wider area etc. all influence our recommended offer level. 

When viewing leasehold properties, at the very least try to establish the following details.

 

  • the number of years remaining on the lease – this can range from 1 to 999. Leases with 90 years or fewer remaining require particular attention. 

  • the annual service charge – it’s often a cause of concern if it’s too low or high. Does the seller know of any other significant one off costs about to be levied against the leaseholders? 

  • the annual ground rent – ground rent above £250 a year in the UK or £1,000 in London can lead to other issues.

  • any restrictive covenants the vendor is aware of. For example, not being allowed to keep pets or having to pay the landlord a subletting fee if you wish to rent out the property. Of course, a vendor may not willingly disclose this information but this will only waste everyone’s time.

  • the identity of the freehold owner – estate agent’s may not always know this but should be able to find out from the vendor. In London, the freeholder is sometimes the local council.  

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As a buying agent, we always try to establish the basic facts of the lease.  Unfortunately due to the buying process in England, some issues are only discoverable during conveyancing.  Information sometimes has to be taken in good faith before the sale is in a solicitor’s hands. It is paramount that you hire a competent solicitor to fully review the lease during the conveyancing process and identify any issues. We recommend clients choose their own solicitor or one we work with on a non-commission basis and avoid any recommended by a developer or estate agent. Recently a client bought a high value new build property. Before exchange, our recommended solicitor successfully removed a doubling ground rent clause which could have negatively impacted capital growth prospects. 

If you are considering buying a central London property, either leasehold or freehold, contact us today for a free consultation.

How to Value a Property

A London Buying Agent's Guide on Property Valuation

How to value a Property

As a buying agent, one of our main roles is helping clients pay a fair price for a property. This is especially important in central London where every percentage negotiated off a sale can represent tens of thousands of pounds saved.

To some extent pricing a property correctly is an art for both the buyer and seller. A good selling agent knows how to price a property to sell quickly or even better to start a bidding war. Bad ones simply overprice a property to win a listing – only for it to then sit unloved on Rightmove for months and months.

So how exactly to value a property you are considering making an offer on? Broadly speaking you need to be looking at a mix of quantitive and qualitative information which all informs the price. The below is by no means an exhaustive list but is a good starting point. 

The Numbers 

  • The Asking Price. Has it been set by the vendor or the agent? Does it come with any incentives such as ‘SDLT Paid by Developer’ indicated a distressed vendor?
  • Number of days on the market. Have there been any price reductions? How many and when? 
  • Annual Service Charge.  Also ground rent/insurance payments etc. Do they seem reasonable? Is there evidence of the money being spent on the building?
  • Years Remaining on the Lease. Be especially careful if it’s approaching 80. Read more about freehold and leasehold properties here
  • Price Per Square Foot. Price per square foot is an excellent starting point but can be misleading on its own. For instance, in central London the price per square foot is higher for detached homes (reflecting their scarcity) so you need to make sure you’re only reviewing ppsf data for the type of property you’re looking at.  Also, ask yourself if the total square footage represents practical living space or is 10%-15% taken up by corridors, oversized staircases or cramped eaves areas? Lateral apartments are becoming increasingly popular in London due to their efficient use of space.
  • Gross/Net Rental Yields. Always try to work off net rental yields and assume any estimates from a selling agent are gross yields and may be optimistic. Are the figures in line with the local market? Are more development coming onto the market nearby which threaten to saturate the market and change your projected yields?
  • Medium and Short-Term Market Data. By what percentage have properties in the local area risen or fallen over the past 5 years? What about the last two months? If the recent direction of travel is negative then factor this into your offer. 
  • Macro-economic Factors. What are current interest rates and has the Bank of England given hints about their future direction?
  • Recent Sold Data and Market Comparables. Be careful not base your offer on a single sold price in the same building a few months ago – a previous buyer could well have overpaid and you don’t want to follow their example! The more comparatives you have the better.

Everything Else 

There are literally hundreds of other factors we consider when performing due diligence but here are 5 points many buyers overlook before making an offer. 

  • What is the vendor’s position? Is it a cash-strapped developer or is the sale a result of debt or divorce? Getting the inside track on the circumstances of the sale can make all the difference. Even if the agent isn’t forthcoming there are often clues around the house for the eagle-eyed.
  • Is the layout practical? Are the bedrooms at least 3m wide? Can the living room be furnished without a sofa blocking the door? Be extra vigilant when viewing unfurnished properties which may draw attention away from small/awkward room sizes. Can you comfortably get a wardrobe and a king-size bed in the second bedroom?
  • What is the local planning environment like? Does it look likely that the property could be extended and are there planning permission precedents on the same street? Are any major developments/infrastructure projects due to start nearby and will they have a positive or adverse effect?
  • What is the condition of the neighbouring properties. Generally speaking, buying the best house on a street can be a risky move if you are not confident the surrounding area will improve quickly. 
  • Local High Street. Are there a lot of vacant units, charity shops and bookmakers or are there nice independent cafes and restaurants? Buying into an area whilst its local high street is showing early signs of positive change is usually a good thing.

These are just some examples and there are literally hundreds of factors which may influence a property’s value. As buying agents we also consider the condition of the communal areas, the tenure, crime statistics, transport links, natural light, external condition , ceiling heights, schools, whether the property is north/south facing, flight overpaths etc. to name just a few! 

The Personal Factor 

This final point shouldn’t be overlooked. Part of a property’s value is always subjective. If we are working with clients looking to invest, they are often better able to go along with our colder analysis of a property’s pros and cons. However, sometimes people fall in love with a property or find one which meets every one of their unique criteria (e.g. large Georgian Terrace with sash windows,  South facing garden, wine cellar). Whilst finding a property which is a perfect fit is always great news, in this situation a buying agent’s detached input can stop buyers going overboard and significantly overpaying.

To summarise, when valuing a property, data is an excellent starting point but don’t let it be your master. You can never do enough due diligence but understand there is no such thing as a perfect property or you be left empty-handed. 

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If you are looking to buy or rent in London, contact us today for a no obligation consultation. 

Perrygate is not a financial advisor and anyone considering purchasing UK property must undertake their own due diligence. The opinions expressed in this and other articles are the personal opinions of staff at Perrygate and are not investment advice. The value of an investment may go up or down. Please see our Terms of Use  for more information.