Freehold or Leasehold - Which is the better investment?

Freehold or LEASEHOLD?

We’re often asked about the differences between freehold and leasehold properties and which makes the better investment. Many international clients are 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 fully responsible for the upkeep of the entire building.
You do not to seek permission from a freeholder (which is you!) or other leaseholders before carrying out an extension or structural work. Although you will still likely need planning permission from your local council.

Leasehold

You own the property 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 (known as ‘covenants’) which the leaseholder must follow.
Ground rent is payable to the landlord on an annual basis.
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.

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.
A ‘share of freehold’ usually indicates 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 of the freehold compared to a leasehold 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 as it is in everyone’s interests to grant a long lease on all properties.

Is Freehold or Leasehold a Better Investment?

All things being equal, a freehold property’s simpler legal status makes it more desirable. From an investment perspective, another major benefit of freeholds is the ability to add value to the property through later building work. Such work is often either prohibited in leaseholds or requires the freeholder’s consent. In reality though, all things are never equal and each property has to be judged on its own merits.

Since the

However freeholds are not automatically the better investment and it depends on the merits of an individual property. For example, the majority of flats in central London are leasehold. Even after factoring in service charge and ground rent payments, the average London investor buying a leasehold 20 years ago would have comfortably outperformed most freeholds elsewhere in the UK. Some experienced investors even specialise in buying undervalued leasehold properties with short leases and extending the lease after two years to achieve strong capital growth returns.

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, asking price, local planning conditions, investment potential of the wider area etc. all influence the valuation.

In London, buyers should expect to pay a premium for a freehold. This means buying a leasehold may allow a buyer’s budget to stretch to a more expensive London neighbourhood.

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.
the annual service charge/ground rent – ground rent above £250 a year can indicate other legal 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. The freehold owner is often the local council in London.

As a buying agent, we always try to establish the basic facts of the lease. Unfortunately the English legal system does not require the vendor/estate agent to provide key legal documents when a property is listed for sale – although some groups are campaigning to change this. This means information sometimes has to be taken in good faith before the sale is in the hands of solicitors. It is paramount that you hire a competent solicitor to fully review the lease during the conveyancing process and identify any issues. Conveyancing leasehold purchases costs more than freeholds as a more inquiries and searches need to be made. 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. The recent leasehold scandal on new build homes could have been avoided if solicitors had reviewed leases with greater scrutiny. As with most advice we give clients, it pays to remember the estate agent is working in the vendor’s interests, not yours!

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

Freehold or Leasehold?